Research articles for the 2021-01-20

Assessing the effectiveness of currency-differentiated tools: The case of reserve requirements
de Crescenzio, Annamaria ,Lepers, Etienne,Fannon, Zoe
This paper provides the first comprehensive analysis of benefits and side-effects of foreign-currency differentiated reserve requirements for a sample of 58 countries from 1999 to 2015. Departing from the existing literature on effectiveness which used binary variables to measure policy changes, the intensity of reserve requirement adjustments is captured by using the gap between foreign and local currency rates to isolate the impact of differentiation net of volume effects.The findings show that increasing the gap between FX and local currency-denominated reserve requirements is generally effective in reducing currency mismatch and dollarisation in banks' balance sheets, notably through a reduction in the share of banks' FX liabilities to total liabilities and in banks' net FX positions. The findings also show that a higher gap is associated with a broader reduction in capital inflows, in particular portfolio debt inflows and flows to non-banks. Little evidence of domestic or international circumvention, with risks shifting to other sectors or countries is visible.

Bandits in Matching Markets: Ideas and Proposals for Peer Lending
Soumajyoti Sarkar

Motivated by recent applications of sequential decision making in matching markets, in this paper we attempt at formulating and abstracting market designs for P2P lending. We describe a paradigm to set the stage for how peer to peer investments can be conceived from a matching market perspective, especially when both borrower and lender preferences are respected. We model these specialized markets as an optimization problem and consider different utilities for agents on both sides of the market while also understanding the impact of equitable allocations to borrowers. We devise a technique based on sequential decision making that allow the lenders to adjust their choices based on the dynamics of uncertainty from competition over time and that also impacts the rewards in return for their investments. Using simulated experiments we show the dynamics of the regret based on the optimal borrower-lender matching and find that the lender regret depends on the initial preferences set by the lenders which could affect their learning over decision making steps.

Circuit Breakers and the COVID-19 Crisis
Moise, Claudia E.
Designed to curb extraordinary volatility, (stock-level) circuit breakers lead to unnecessary trading halts, which have been prevalent during the recent COVID-19 crisis. More importantly, while created to accommodate the dissemination of fundamental information to market participants, most trading halts turn out to be illiquidity events. Furthermore, trading halts impede short-term price efficiency and lead to decreases in liquidity, with more pronounced result in smaller, less liquid securities. Finally, trading halts in (some of the) S&P500 constituents are associated with jumps in SPY (SPY is an ETF that tracks the S&P500), a finding that has further implications for risk management. The paper concludes by providing some guidance for improving the existing market mechanism design in dealing with rare events such as the COVID-19 crisis.

Common Ownership, Price Informativeness, and Corporate Investment
Jang, In Ji,Kang, Namho,Yezegel, Ari
Using financial institution mergers as exogenous shocks to common ownership, we find that stock prices of commonly held firms incorporate future earnings news more quickly and are less sensitive to noise traders. Our analyses show that the increase in price informativeness is due to: (1) increase in disclosure, (2) enhanced information production and diffusion, and (3) active trading by common owners. Further, we find that the investment sensitivity to Tobin’s Q for commonly held firms is higher, indicating that managers of such firms rely more on market prices for information. These results are robust to controlling for the financial crisis, and to alternative control groups. Our findings suggest that common ownership has a positive effect on information production and influences real corporate decision by improving price informativeness.

Contingent Convertible Obligations and Financial Stability
Zachary Feinstein,T. R. Hurd

This paper investigates whether a financial system can be made more stable if financial institutions share risk by exchanging contingent convertible (CoCo) debt obligations. The question is framed in a financial network model of debt and equity interlinkages with the addition of a variant of the CoCo that converts continuously when a bank's equity-debt ratio drops to a trigger level. The main theoretical result is a complete characterization of the clearing problem for the interbank debt and equity at the maturity of the obligations. We then introduce stylized networks to study when introducing contingent convertible bonds improves financial stability, as well as specific networks for which contingent convertible bonds do not provide uniformly improved system performance. To return to the main question, we examine the EU financial network at the time of the 2011 EBA stress test to do comparative statics to study the implications of CoCo debt on financial stability. It is found that by replacing all unsecured interbank debt by standardized CoCo interbank debt securities, systemic risk in the EU will decrease and bank shareholder value will increase.

Corporate Governance Indicators as Determinants of Bank Efficiency: The Case of the UK Listed Banks
Georgantopoulos, Andreas G.,Eriotis, Nikolaos,Chasiotis, Ioannis
This paper investigates the impact of a variety of corporate governance mechanisms on the performance of banks listed on the London Stock Exchange (LSE), by utilising data collected for 52 banking institutions for the period 2012 to 2017. Exhaustive results derived from multi-model applications document the superiority of GMM models to examine these relationships. Based on robust empirical findings, we support that increasing board size, especially the number of non-executive directors, and the frequency of board meetings up to a certain point could prove to be beneficial for the listed banks on the LSE. Moreover, our findings imply that simply complying with the Governance Code including independent board members or following the trend of gender diversity without proper evaluation of executives’ skills could damage bank efficiency. Finally, this study fails to discern significant links between the number of foreign directors and CEO-Chairman duality with the performance of UK banks.

Do Financial Resources Determine Cost Behavior?
Jankensgård, Håkan,Christie, Nick
According to previous research, firms prefer to temporarily maintain unutilized resources when business activity decreases, thereby reducing future ‘congestion costs’ that occur when revenue growth resumes. We argue that such optimizing behavior â€" referred to in the literature as sticky costs â€" is conditional on financial resources that support the increase in risk that results from maintaining additional costs. Using data from US manufacturing firms between 1984 and 2018, we find overwhelming support for the hypothesis. Across a range of tests, the most financially constrained firms have the least sticky costs. Firms that lack financial resources such as debt capacity and cash holdings essentially do not exhibit sticky cost behavior. Large firms with significant financial slack, in contrast, display cost stickiness that exceed the baselines results by a factor of three. While the latter finding is suggestive of poor cost discipline, our findings show that these firms are in fact associated with superior cost efficiency. Our results are consistent with the view that excessive adjustment to cost structure is an important component of financial distress.

Do Note Disclosures Influence Value-Relevance More When Managers Lose Financial Statement Placement Discretion? Evidence From ASU 2011â€"05
Cedergren, Matthew C.,Chen, Changling,Chen, Kai,Wang, Victor X.
We examine whether financial statement note disclosures play an enhanced role in value relevance when managers lose the ability to convey information via financial statement placement discretion. Specifically, we consider the setting of ASU 2011-05, which removed the option for firms to report other comprehensive income (OCI) in the statement of changes in stockholders’ equity. We report two main findings. First, using a larger sample and longer time period than early studies examining ASU 2011-05, we document that, relative to firms that were unaffected by the OCI reporting mandate, firms that changed OCI placement away from the statement of changes in stockholders’ equity exhibited greater increases in OCI value relevance after ASU 2011-05 became effective, in line with the FASB’s stated goal of raising the the prominence of items reported in OCI. Our findings contradict the seemingly puzzling findings of early studies, which documented an incremental decrease in OCI value relevance for these firms. Second, we find that this incremental positive effect for firms that changed OCI placement is enhanced when OCI-related note disclosures are more specific, contain more numerical information, are more readable, are more stable from year to year, and are shorter in length. Collectively, our findings suggest that financial statement placement and note disclosure characteristics interact in a manner such that when managers lose their ability to convey information via their financial statement placement choice, note disclosures become a relatively more important vehicle in the determination of value relevance.

Dynamic Importance Allocated Nested Simulation for Variable Annuity Risk Measurement
Dang, Ou,Feng, Mingbin,Hardy, Mary R.
involves projecting scenarios of key variables under the real world measure, while the inner stage is used to value payoffs under guarantees of varying complexity, under a risk neutral measure. The computational burdens in nested simulation often hinders its practicality. In this paper we propose and analyse an efficient simulation approach that dynamically allocates the inner simulations to the specific outer scenarios that are most likely to generate larger losses. These scenarios are identified using a proxy calculation that is used only to rank the outer scenarios, not to estimate the tail risk measure directly. As the proxy ranking will not generally provide a perfect match to the true ranking of outer scenarios, we calculate a measure based on concomitant order statistics to test whether further tail scenarios (by the proxy model) are required to ensure with given confidence that the true tail scenarios are captured. This procedure, which we call the Dynamic Importance Allocated Nested Simulation (DIANS) approach. The DIANS approach automatically adjusts for proxy calculations that are closer to, or farther away from the true valuations, and also signals when the proxy is not sufficiently accurate, which may be useful for ensuring that the valuation accuracy does not deteriorate over time as the proxy becomes outdated.

Employee Cash Profit-Sharing and Earnings Management
Kong, Dongmin,Qin, Ni,Yang, Wei,Zhang, Jian
This paper examines how a firm’s employment policy, particularly employee cash profit-sharing plans, affects its financial reporting. We find that firms with employee cash profit-sharing programs are more likely to engage in downward earnings management to reduce labor costs, especially with decreasing performance. This effect is more evident in firms with higher labor costs and human-capital reliant firms. Our findings are robust to a variety of model specifications and endogeneity problems.

Environmental Regulation, State Ownership, and Corporate Green Investment: Evidence from China’s 2015 Environmental Protection Law Revisions
Chemmanur, Thomas J.,Cheng, Bo,Wang, Zi-Tian,Yu, Qianqian
Exploiting changes in China’s Environmental Protection Law in 2015 as a plausibly exogenous shock to the stringency of pollution control, we evaluate the role that state ownership plays in improving environmental quality. Using a difference-in-differences methodology, we find a significant increase in pollution abatement investments made by state-owned-enterprises (SOEs) from the pre-revision period to the post-revision period, relative to those made by non-SOEs during the same timeframe. In analyzing four potential mechanisms, we find that the positive impact of state ownership on green investment is not driven by: (i) the environment-related government subsidies granted to SOEs; (ii) the effects of political promotion incentives of SOEs’ top management; and (iii) administrative intervention by their sponsoring government. Rather, our analysis suggests that SOEs undertake greater green investments due to their greater concern for local social welfare, as evidenced by the fact that SOEs that make larger amounts of charitable donations and those sponsored by local governments (as opposed to the central government) make greater green investments. Consistent with this, we also show that regions where SOEs have a greater economic influence improved their air quality to a greater extent after 2015 than regions where non-SEOs are more influential. Collectively, our results shed significant light on the importance of state ownership to firms’ responses to environmental regulation.

Ergodicity Economics in Plain English
Gadenne, Francois
Ergodicity economics (EE) applies a modern mathematical formalization to familiar financial concepts to reveal implications and consequences that were previously unseen. EE quantifies the differences and the trade-offs between the collective meaning and the individual meaning of financial methods. EE’s perspective opens up previously unseen distinctions for evidence-based recommendations. These distinctions enable the creation of previously unavailable recommendations for the explicit benefit of individual clients. This differentiating impact on economic theory, asset valuation, product development, and advisory best practices is developing rapidly.

Existence of continuous euclidean embeddings for a weak class of orders
Lawrence Carr

We prove that if $X$ is a topological space that admits Debreu's classical utility theorem (eg.\ $X$ is separable and connected, second countable, etc.), then order relations on $X$ satisfying milder completeness conditions can be continuously embedded in $\mathbb R^I$ for $I$ some index set. In the particular case where $X$ is a compact metric space, this closes a conjecture of Nishimura \& Ok (2015). We also show that when $\mathbb R^I$ is given a non-standard partial order coinciding with Pareto improvement, the analogous embedding theorem fails to hold in the continuous case.

Judging the Functioning of Equity Markets in 2020
Petitjean, Mikael
This paper is a concise review of the equity markets' reaction to the COVIDcrisis in 2020. Relative to other global institutions, equity markets performed remarkably well in 2020 and investors ought not to be ashamed of their reactions relative to consumers. It would be a terrible abuse of language to characterize 2020 as being financially irrational. The COVIDcrisis in 2020 was one of the most orderly crises ever. The damage and the reward across companies, sectors, and countries made a lot of sense. Although there are pockets of extremely high valuations in the tech sector, humility has always been a virtue when it came to valuing tech firms. While stocks are very expensive in absolute terms especially in the US, they are not relative to governmental bonds. But there is a big caveat to all this: the rise in the monetary supply since 2010 has been so incredible that markets have dived deep in unchartered waters. Central banks must find our way back to homeland.

Law-invariant functionals on general spaces of random variables
Fabio Bellini,Pablo Koch-Medina,Cosimo Munari,Gregor Svindland

We establish general versions of a variety of results for quasiconvex, lower-semicontinuous, and law-invariant functionals. Our results extend well-known results from the literature to a large class of spaces of random variables. We sometimes obtain sharper versions, even for the well-studied case of bounded random variables. Our approach builds on two fundamental structural results for law-invariant functionals: the equivalence of law invariance and Schur convexity, i.e., monotonicity with respect to the convex stochastic order, and the fact that a law-invariant functional is fully determined by its behaviour on bounded random variables. We show how to apply these results to provide a unifying perspective on the literature on law-invariant functionals, with special emphasis on quantile-based representations, including Kusuoka representations, dilatation monotonicity, and infimal convolutions.

Law-invariant functionals that collapse to the mean
Fabio Bellini,Pablo Koch-Medina,Cosimo Munari,Gregor Svindland

We discuss when law-invariant convex functionals "collapse to the mean". More precisely, we show that, in a large class of spaces of random variables and under mild semicontinuity assumptions, the expectation functional is, up to an affine transformation, the only law-invariant convex functional that is linear along the direction of a nonconstant random variable with nonzero expectation. This extends results obtained in the literature in a bounded setting and under additional assumptions on the functionals. We illustrate the implications of our general results for pricing rules and risk measures.

Measuring Corporate Bond Market Dislocations
Boyarchenko, Nina,Crump, Richard K.,Kovner, Anna,Shachar, Or
We measure dislocations in the market for corporate bonds in real time with the Corporate Bond Market Distress Index (CMDI), allowing for the aggregation of a broad set of measures of market functioning from primary and secondary bond markets into a single measure. The index quantifies dislocations from a preponderance-of-metrics perspective, ensuring that the measure of market distress is not driven by any one statistic. We document that the index correctly identifies periods of dislocations, is robust to alternative choices of the aggregation procedure, and provides differential predictive information for future real outcomes relative to common spread measures.

Modeling simultaneous supply and demand shocks in input-output networks
Anton Pichler,J. Doyne Farmer

Natural and anthropogenic disasters frequently affect both the supply and demand side of an economy. A striking recent example is the Covid-19 pandemic which has created severe industry-specific disruptions to economic output in most countries. Since firms are embedded in production networks, these direct shocks to supply and demand will propagate downstream and upstream. We show that existing input-output models which allow for binding demand and supply constraints yield infeasible solutions when applied to pandemic shocks of three major European countries (Germany, Italy, Spain). We then introduce a mathematical optimization procedure which is able to determine best-case feasible market allocations, giving a lower bound on total shock propagation. We find that even in this best-case scenario network effects substantially amplify the initial shocks. To obtain more realistic model predictions, we study the propagation of shocks bottom-up by imposing different rationing rules on firms if they are not able to satisfy incoming demand. Our results show that overall economic impacts depend strongly on the emergence of input bottlenecks, making the rationing assumption a key variable in predicting adverse economic impacts. We further establish that the magnitude of initial shocks and network density heavily influence model predictions.

Neural networks-based algorithms for stochastic control and PDEs in finance
Maximilien Germain,Huyên Pham,Xavier Warin

This paper presents machine learning techniques and deep reinforcement learningbased algorithms for the efficient resolution of nonlinear partial differential equations and dynamic optimization problems arising in investment decisions and derivative pricing in financial engineering. We survey recent results in the literature, present new developments, notably in the fully nonlinear case, and compare the different schemes illustrated by numerical tests on various financial applications. We conclude by highlighting some future research directions.

Olivia S. Mitchell, PhD: Calibrating Retirement Planning with Current Conditions
Mitchell, Olivia S.
In September 2020, Robert Powell, editor-in-chief of the Retirement Management Journal, Jason Fichtner, PhD, senior lecturer at the Johns Hopkins University; and Anna Rappaport, FSA, MAAA, chair of the Society of Actuaries Committee on Post-Retirement Needs and Risks, spoke with Mitchell about how longer lifespans and prolonged retirement periods are requiring adjustments to Social Security benefits, employee pension plans, and individual retirement savings.

On Monte-Carlo methods in convex stochastic optimization
Daniel Bartl,Shahar Mendelson

We develop a novel procedure for estimating the optimizer of general convex stochastic optimization problems of the form $\min_{x\in\mathcal{X}} \mathbf{E}[F(x,\xi)]$, when the given data is a finite independent sample selected according to $\xi$. The procedure is based on a median-of-means tournament, and is the first procedure that exhibits the optimal statistical performance in heavy tailed situations: we recover the asymptotic rates dictated by the central limit theorem in a non-asymptotic manner once the sample size exceeds some explicitly computable threshold. Additionally, our results apply in the high-dimensional setup, as the threshold sample size exhibits the optimal dependence on the dimension (up to a logarithmic factor). The general setting allows us to recover recent results on multivariate mean estimation and linear regression in heavy-tailed situations and to prove the first sharp, non-asymptotic results for the portfolio optimization problem.

One-dimensional game-theoretic differential equations
Rafał M. Łochowski,Nicolas Perkowski,David J. Prömel

We provide a very brief introduction to typical paths and the corresponding It\^o type integration. Relying on this robust It\^o integration, we prove an existence and uniqueness result for one-dimensional differential equations driven by typical paths with non-Lipschitz continuous coefficients in the spirit of Yamada--Watanabe as well as an approximation result in the spirit of Doss--Sussmann.

Policy choices can help keep 4G and 5G universal broadband affordable
Edward J Oughton,Niccolò Comini,Vivien Foster,Jim W Hall

In recognition of the transformative opportunities that broadband connectivity presents, the United Nations Broadband Commission has committed the international community to accelerate universal access across the developing world. However, the cost of meeting this objective, and the feasibility of doing so on a commercially viable basis, are not well understood. This paper compares the global cost-effectiveness of different infrastructure strategies for the developing world to achieve universal 4G or 5G mobile broadband. Utilizing remote sensing and geospatial infrastructure simulation, least-cost network designs are developed for eight representative low and middle-income countries (Malawi, Uganda, Kenya, Senegal, Pakistan, Albania, Peru and Mexico), the results from which form the basis for aggregation to the global level. To provide at least 2 Mbps per user, 4G is often the cheapest option, whereas a minimum 10 Mbps per user is cheapest with 5G non-standalone (NSA). The cost of meeting the UN Broadband Commission target of a minimum 10 Mbps per user is estimated at USD 1.4 trillion using 5G NSA, equating to approximately 0.5% of annual GDP for the developing world over the next decade. However, by creating a favorable regulatory environment, governments can bring down these costs by as much as three quarters to USD 0.5 trillion (approximately 0.2% of annual GDP) - and avoid the need for public subsidy. Providing governments make judicious choices, adopting fiscal and regulatory regimes conducive to lowering costs, broadband universal service may be within reach of most developing countries over the next decade.

Political Bias in the Media’s Coverage of Firms’ Earnings Announcements
Rees, Lynn L.,Twedt, Brady J.
This study examines whether firms’ political activism induces bias in the media’s coverage of earnings announcements and how such coverage impacts markets. We infer firm political ideology based on employee political contributions, and identify firm and manager characteristics associated with distinct ideologies. We find that media outlets negatively slant their coverage of earnings announcements when the political leanings of the outlet are incongruent with the political ideology of the firm. Consistent with slanted coverage affecting market outcomes, we provide evidence that the price reaction to good (bad) earnings news is decreasing (increasing) in the percent of incongruent media outlets covering the earnings announcement. In addition, trading volume and returns volatility are decreasing for good earnings news with the percent of incongruent media outlets. Our results suggest that the prevalent bias across some media outlets in their coverage of political news also affects their coverage of corporate financial events.

Predictability of Bull and Bear Markets: A New Look at Forecasting Stock Market Regimes (and Returns) in the Us
Haase, Felix,Neuenkirch, Matthias
The empirical literature of stock market predictability mainly suffers from model uncertainty and parameter instability. To meet this challenge, we propose a novel approach that combines the documented merits of diffusion indices, regime-switching models, and forecast combination to predict the dynamics in the S&P 500. First, we aggregate the weekly information of 115 popular macroeconomic and financial variables through an interaction of principal component analysis and shrinkage methods. Second, we estimate one-step Markov-switching models with time-varying transition probabilities using the diffusion indices as predictors. Third, we pool the forecasts in clusters to hedge against model risk and to evaluate the usefulness of different specifications. Our results show that we can adequately predict regime dynamics. Our forecasts provide a statistical improvement over several benchmarks and generate economic value by boosting returns, improving the certainty equivalent return, and reducing tail risk. Using the same approach for return forecasts, however, does not lead to a consistent outperformance of the historical average.

Profit Taxation and Bank Risk Taking
Kogler, Michael
How can tax policy improve financial stability? Recent studies suggest large stability gains from eliminating the debt bias in corporate taxation. It is well known that this reform reduces bank leverage. This paper analyzes a novel, complementary channel: risk taking. We model banks’ portfolio choice under moral hazard and emphasize the ‘incentive function’ of equity. We find that (i) an allowance for corporate equity (ACE) and a lower tax rate discourage risk taking and offer stability and welfare gains, (ii) a revenue-neutral ACE unambiguously improves financial stability, and (iii) capital regulation and deposit insurance influence the risk-taking effects of taxation.

Rethinking 'Political' Considerations in Investment
Webber, David H.
This is a transcript of my remarks as 2016 Visiting Scholar in Corporate and Business Law at Delaware Law Widener University, delivered to the members of the Delaware Judiciary and Bar at the Wilmington Club on September 12, 2016. I introduce the idea of multipreference shareholders whose interests may at times depart from maximizing returns, and I address the question more generally on taking so-called "political" considerations into account when making investment decisions. I argue that political pressures are increasing in the investment world "everywhere at the same time."

Stock Market Liberalization and Corporate Social Responsibility: Evidence From a Quasi-Natural Experiment in China
Chemmanur, Thomas J.,Jiang, Dequan,Li, Weiping,Pittman, Jeffrey,Wang, Zi-Tian
Exploiting a quasi-natural experiment in China in which some firms become investible to the global market across different periods (i.e., pilot firms), we evaluate the role that stock market liberalization plays in shaping local firms’ incentives to invest in corporate social responsibility (CSR) activities. In a staggered difference-in-differences research design, we find that pilot firms significantly reduce their CSR investments from the pre-liberalization period to the post-liberalization period, relative to non-pilot firms that remain under strict capital controls during the same timeframe. This result is concentrated among firms that suffer worse agency problems. Additional empirical analyses suggest that pilot firms enjoy higher labor productivity and better stock performance after reducing their CSR activities in the post-liberalization period; however, a major negative externality is that they emit more pollution afterward. Collectively, our results suggest that market liberalization induces local firms to curtail their CSR activities, benefiting shareholders at the expense of the environment. Our findings provide new insights into the importance of stock market liberalization for firms’ CSR activities, market values, labor productivities, and environmental effects.

The Benefit of Diversified Guaranteed Income for Retirees: Combining Immediate Fixed and Immediate Variable Annuities
Blanchett, David
This paper explores the potential benefits of developing a retirement income that considers both immediate fixed annuities (IFA) and immediate variable annuities (IVA) using a stochastic utility model combined with a scenario framework. Optimal annuity allocations vary considerably across household type, but certainty equivalent retirement income increases by 20 percent, on average, when incorporating annuities. Total annuity allocations increase when both IFAs and IVAs are considered, and retirees realize only approximately two-thirds of the benefits of annuitization when just one annuity type is considered. IVA allocations were typically higher than IFA allocations because most households already have a base level of fixed guaranteed income (through Social Security); therefore, IVAs can be a unique diversifier from a retirement-income perspective. Overall, this analysis strongly suggests retirees (and financial advisors) should consider annuities as part of a retirement-income strategy, and that they should consider different types of annuities to create the best possible plan.

The Curious Case of Backward Short Rates
Lyashenko, Andrei,Nie, Yutian
In this paper, we discuss short rate modeling in the post-Libor world and, in particular, how to adapt a typical short rate model implementation to handle backward-looking rates. We introduce the concept of backward short rate, which proves to be very useful not only for dealing with fixed income securities referencing backward-looking term rates but also for pricing and hedging the classic securities tied to forward-looking (Libor-like) rates.

The Development and Regulation of Mobile Payment: Chinese Experiences and Comparative Perspectives
Huang, (Robin) Hui,Lam, Abby Oi Ling,Yu , Anthea Wing Ting,Wang, Christine Meng Lu
China has become one of the leaders in the global mobile payment market in terms of market volume, growth rate, and innovation capability. This can be attributed to a number of enabling factors, including technological advancement in China and mobile payment’s competitive advantages and wide acceptance by the Chinese people. Mobile payment brings significant benefits as well as various risks and thus should be regulated in a way that reaps its benefits while containing those risks. This article critically examines China’s regulatory regime for mobile payments, focusing on several key elements such as the entry and exit mechanism, management of customer reserves, anti-money laundering measures, and consumer protection. A comparative study is also conducted on the regulation of mobile payment in several major jurisdictions, including the US, the UK, Singapore, and Hong Kong. Then, this article analyses the strengths and shortcomings of the Chinese regulation and, based on international experiences, makes relevant improvement suggestions. China is advised to enact a unified law specifically for mobile payment and adopt a more nuanced risk-based approach in setting out regulatory requirements. There is a need to address the negative effects on competition in the mobile payment market that may be brought by the high entry threshold and the centralized clearing mechanism. China should also streamline the enforcement aspect of its regulatory regime and pay particular attention to important issues of consumer protection such as data protection.

The Log Moment formula for implied volatility
Vimal Raval,Antoine Jacquier

We revisit the foundational Moment Formula proved by Roger Lee fifteen years ago. We show that when the underlying stock price martingale admits finite log-moments E[|log(S)|^q] for some positive q, the arbitrage-free growth in the left wing of the implied volatility smile is less constrained than Lee's bound. The result is rationalised by a market trading discretely monitored variance swaps wherein the payoff is a function of squared log-returns, and requires no assumption for the underlying martingale to admit any negative moment. In this respect, the result can derived from a model-independent setup. As a byproduct, we relax the moment assumptions on the stock price to provide a new proof of the notorious Gatheral-Fukasawa formula expressing variance swaps in terms of the implied volatility.

The Role of Institutional Investors in Corporate and Entrepreneurial Finance
Chemmanur, Thomas J.,Hu, Gang,Wei, K.C. John
Institutional investors, collectively the majority shareholders of most publicly traded corporations, play important roles in almost all aspects of corporate finance. This special issue puts together sixteen papers covering a wide range of topics, such as M&As, capital structure, bonds and loans, corporate governance, IPOs, VCs, SEOs, broker/underwriter relationships, behavioral finance, corporate disclosure, and regulation. These special issue papers demonstrate that institutional investors, a traditional focus of investments research, are worthy of continued and further academic inquiry in many corporate finance topics. In terms of directions for future research, we believe that the availability of new datasets (or existing datasets not yet widely used in corporate finance) and the application of new or unique research methodologies could bear fruit for researchers, as demonstrated by some papers in this special issue. In terms of datasets, the success of Abel Noser institutional trading data serves as a good example.

Tracking Biased Weights: Asset Pricing Implications of Value-Weighted Indexing
Jiang, Hao,Vayanos, Dimitri ,Zheng, Lu
We show theoretically and empirically that flows into index funds raise the prices of large stocks in the index disproportionately more than the prices of small stocks. Conversely, flows predict a high future return of the small-minus-large index portfolio. This finding runs counter to the CAPM, and arises when noise traders distort prices, biasing index weights. When funds tracking value-weighted indices experience inflows, they buy mainly stocks in high noise-trader demand, exacerbating the distortion. During our sample period 2000-2019, a small-minus-large portfolio of S&P500 stocks earns ten percent per year, while no size effect exists for non-index stocks.

Underwriter Compensation, Marketing Effects, Investor Attention, and IPO Performance
Cheng, Louis T. W.,Hu, Gang,Yan, Siyuan
The literature suggests that underwriters perform significant marketing functions in securities offerings. We argue that underwriter’s efforts related to marketing can be estimated by the abnormal component of IPO underwriting spread. This is feasible using a large sample of Chinese IPOs, which demonstrate a significant cross-sectional variation in underwriting spreads relative to highly clustered spreads in the U.S. We find that underwriter’s efforts produce short-term marketing effects as measured by pre-IPO institutional investors’ participation and offer price up-ward revision. Moreover, we document that underwriter’s efforts enhance the persistence of investor attention in the long run. We show that abnormal underwriting spread is positively associated with various measures of post-IPO investor attention including analyst coverage, media coverage, the number of institutional investors holding the stock, as well as aftermarket liquidity. Further, we show that underwriter’s efforts are negatively associated with IPO underpricing and positively related to total firm value.

Weak Identification in Discrete Choice Models
David T. Frazier,Eric Renault,Lina Zhang,Xueyan Zhao

We study the impact of weak identification in discrete choice models, and provide insights into the determinants of identification strength in these models. Using these insights, we propose a novel test that can consistently detect weak identification in commonly applied discrete choice models, such as probit, logit, and many of their extensions. Furthermore, we demonstrate that when the null hypothesis of weak identification is rejected, Wald-based inference can be carried out using standard formulas and critical values. A Monte Carlo study compares our proposed testing approach against commonly applied weak identification tests. The results simultaneously demonstrate the good performance of our approach and the fundamental failure of using conventional weak identification tests for linear models in the discrete choice model context. Furthermore, we compare our approach against those commonly applied in the literature in two empirical examples: married women labor force participation, and US food aid and civil conflicts.

Which eligible assets are compatible with comonotonic capital requirements?
Pablo Koch-Medina,Cosimo Munari,Gregor Svindland

Within the context of capital adequacy, we study comonotonicity of risk measures in terms of the primitives of the theory: acceptance sets and eligible, or reference, assets. We show that comonotonicity cannot be characterized by the properties of the acceptance set alone and heavily depends on the choice of the eligible asset. In fact, in many important cases, comonotonicity is only compatible with risk-free eligible assets. The incompatibility with risky eligible assets is systematic whenever the acceptability criterion is based on Value at Risk or any convex distortion risk measure such as Expected Shortfall. These findings qualify and arguably call for a critical appraisal of the meaning and the role of comonotonicity within a capital adequacy context.

Willingness to Pay and Attitudinal Preferences of Indian Consumers for Electric Vehicles
Prateek Bansal,Rajeev Ranjan Kumar,Alok Raj,Subodh Dubey,Daniel J. Graham

Consumer preference elicitation is critical to devise effective policies for the diffusion of electric vehicles in India. For this purpose, we use stated preferences of over 1000 Indian consumers and present the first estimates of the additional purchase price that Indian consumers are willing to pay to improve the electric vehicle attributes (e.g., driving range). We adopt a hybrid choice modelling framework to simultaneously model the willingness to pay and the effect of consumers' latent attitudes (e.g., hedonic and symbolic values) on their likelihood to adopt electric vehicles. We also account for reference dependence by considering a conventional vehicle as the reference alternative and illustrate that the resulting willingness to pay estimates are more realistic. Based on our results, Indian consumers are willing to pay additional USD 10-34 in purchase price to reduce the fast charging time by 1 minute, USD 7-40 to add a kilometre to the driving range of electric vehicle at 200 kilometres, and USD 104-692 to save USD 1 per 100 kilometres in operating cost. These estimates and the effect of attitudes on the likelihood to adopt electric vehicles provide insights about electric vehicle design, marketing strategies, and pro-electric-vehicle policies (e.g., specialised lanes and reserved parking for electric vehicles) to expedite the adoption of electric vehicles in India.