Research articles for the 2021-01-21
A Discrete-Time Hedging Framework with Multiple Factors and Fat Tails: On What Matters
SSRN
This article presents a quadratic hedging framework for a general class of discrete-time affine multi-factor models and investigates the extent to which multi-component volatility factors, fat tails, and a non-monotonic pricing kernel can improve the hedging performance. A semi-explicit hedging formula is derived for our general framework which applies to a myriad of the option pricing models proposed in the discrete-time literature. We conduct an extensive empirical study of the impact of modelling features on the hedging effectiveness of S&P 500 options. Overall, we find that fat tails can be credited for half of the hedging improvement observed, while a second volatility factor and a non-monotonic pricing kernel each contribute to a quarter of this improvement. Moreover, our study indicates that the added value of these features for hedging is different than for pricing. A robustness analysis further shows that a similar conclusion can be reached when considering the Dow Jones Industrial Average.
SSRN
This article presents a quadratic hedging framework for a general class of discrete-time affine multi-factor models and investigates the extent to which multi-component volatility factors, fat tails, and a non-monotonic pricing kernel can improve the hedging performance. A semi-explicit hedging formula is derived for our general framework which applies to a myriad of the option pricing models proposed in the discrete-time literature. We conduct an extensive empirical study of the impact of modelling features on the hedging effectiveness of S&P 500 options. Overall, we find that fat tails can be credited for half of the hedging improvement observed, while a second volatility factor and a non-monotonic pricing kernel each contribute to a quarter of this improvement. Moreover, our study indicates that the added value of these features for hedging is different than for pricing. A robustness analysis further shows that a similar conclusion can be reached when considering the Dow Jones Industrial Average.
A Machine Learning Attack on Illegal Trading
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We design an adaptive framework for detection of illegal trading behavior. Its key component is an extension of a pattern recognition tool, originating from the field of signal processing and adapted to modern electronic systems of securities trading. The new methodology combines the flexibility of dynamic time warping with contemporary approaches from extreme value theory to explore large-scale order book data and accurately identify illegal trading patterns without access to any confirmed illegal transactions for training. The method is shown to achieve remarkable improvements over alternative approaches in the identification of suspected illegal insider trading cases in a high-frequency dataset provided by an international investment firm.
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We design an adaptive framework for detection of illegal trading behavior. Its key component is an extension of a pattern recognition tool, originating from the field of signal processing and adapted to modern electronic systems of securities trading. The new methodology combines the flexibility of dynamic time warping with contemporary approaches from extreme value theory to explore large-scale order book data and accurately identify illegal trading patterns without access to any confirmed illegal transactions for training. The method is shown to achieve remarkable improvements over alternative approaches in the identification of suspected illegal insider trading cases in a high-frequency dataset provided by an international investment firm.
A New Index of Option Implied Absolute Deviation
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This paper proposes of new index of forward looking absolute deviation extracted from option prices. The new index, named ADIX, is model-free and easy to compute using at-the-money straddle prices. An empirical analysis using S&P 500 options data for the time period 1996-2019 reveals that ADIX has similar behavior to VIX in terms of time series dynamics, risk premiums and forecasting ability. The new index offers an alternative risk measure, more intuitive as a measure of dispersion, to study information embedded in option prices.
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This paper proposes of new index of forward looking absolute deviation extracted from option prices. The new index, named ADIX, is model-free and easy to compute using at-the-money straddle prices. An empirical analysis using S&P 500 options data for the time period 1996-2019 reveals that ADIX has similar behavior to VIX in terms of time series dynamics, risk premiums and forecasting ability. The new index offers an alternative risk measure, more intuitive as a measure of dispersion, to study information embedded in option prices.
An approximate solution for the power utility optimization under predictable returns
arXiv
arXiv
This work presents an approximate solution of the portfolio choice problem for the investor with a power utility function and the predictable returns. Assuming that asset returns follow the vector autoregressive process with the normally distributed error terms (what is a popular choice in financial literature to model the return path) it comes up with the fact that portfolio gross returns appear to be normally distributed as a linear combination of normal variables. As it was shown, the log-normal distribution seems to be a good proxy of the normal distribution in case if the standard deviation of the last one is way much smaller than the mean. Thus, this fact is exploited to derive the optimal weights. Besides, the paper provides a simulation study comparing the derived result to the well-know numerical solution obtained by using a Taylor series expansion of the value function.
Bankruptcy Codes and Risk Sharing of Currency Unions
RePEC
Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.
RePEC
Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.
Biais comportementaux, aléa moral et juste régulation (Behavioral Biases, Moral Hazard, and Fair Regulation)
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French Abstract: Au lieu de se focaliser sur le court terme au risque d'hypothéquer l'équilibre des finances publiques et de détériorer le fonctionnement des marchés financiers sur le moyen terme, le régulateur doit prendre des mesures structurelles visant à donner aux intermédiaires financiers des incitants suffisamment forts pour qu'ils cessent de prendre des décisions qu'ils ne prendraient pas s'ils devaient en subir pleinement les conséquences. Tel est le fondement d'une régulation financière `juste'. La seule manière d'éviter une nouvelle crise d’une telle ampleur est de créer un environnement qui internalise les externalités négatives que les intermédiaires financiers peuvent générer.English Abstract: Instead of focusing on short-term issues at the risk of jeopardizing the financial sustainability of public finances and impairing the functioning of financial markets over the medium term, the regulator must take structural measures aiming at giving financial institutions sufficiently strong financial incentives to stop making decisions they would not make if they were to bear the full consequences of their decisions. This is the foundation of a “fair†financial regulation. The only way to avoid another crisis of this magnitude is to create an environment that internalizes the negative externalities that financial intermediaries may generate.
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French Abstract: Au lieu de se focaliser sur le court terme au risque d'hypothéquer l'équilibre des finances publiques et de détériorer le fonctionnement des marchés financiers sur le moyen terme, le régulateur doit prendre des mesures structurelles visant à donner aux intermédiaires financiers des incitants suffisamment forts pour qu'ils cessent de prendre des décisions qu'ils ne prendraient pas s'ils devaient en subir pleinement les conséquences. Tel est le fondement d'une régulation financière `juste'. La seule manière d'éviter une nouvelle crise d’une telle ampleur est de créer un environnement qui internalise les externalités négatives que les intermédiaires financiers peuvent générer.English Abstract: Instead of focusing on short-term issues at the risk of jeopardizing the financial sustainability of public finances and impairing the functioning of financial markets over the medium term, the regulator must take structural measures aiming at giving financial institutions sufficiently strong financial incentives to stop making decisions they would not make if they were to bear the full consequences of their decisions. This is the foundation of a “fair†financial regulation. The only way to avoid another crisis of this magnitude is to create an environment that internalizes the negative externalities that financial intermediaries may generate.
Capital-risque et performance à court terme de l’entreprise après introduction en bourse (Venture Capital and Post-IPO Short-Term Firm Performance)
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French Abstract. L’objectif de cet article est de mieux comprendre l’impact que le capital-risque peut avoir sur la performance à court terme des entreprises après leur introduction en bourse. Notre échantillon est composé de 601 entreprises ayant été introduites en bourse sur les marchés nord-américains ou européens entre 2010 et 2015. Cet échantillon est composé de 204 firmes ayant bénéficié de fonds provenant de capitaux-risqueurs et de 397 entreprises n’ayant pas reçu ce genre de financement. Cette étude montre, entre autres, que la présence de capital-risque ne conduit pas à une meilleure performance comptable un an après l’introduction en bourse, même si elle s’accompagne d’une plus forte croissance des ventes chez les entreprises aidées par ce type de financement.English Abstract. The objective of this paper is to better understand the impact that venture capital can have on the short-term performance of companies after their IPO. Our sample is composed of 601 companies that have gone public on North American or European markets between 2010 and 2015. This sample is made up of 204 firms that have received funding from venture capitalists and 397 firms that have not received such funding. This study shows, among other things, that the presence of venture capital does not lead to better accounting performance one year after the IPO, even if it is accompanied by stronger sales growth in the companies funded that way.
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French Abstract. L’objectif de cet article est de mieux comprendre l’impact que le capital-risque peut avoir sur la performance à court terme des entreprises après leur introduction en bourse. Notre échantillon est composé de 601 entreprises ayant été introduites en bourse sur les marchés nord-américains ou européens entre 2010 et 2015. Cet échantillon est composé de 204 firmes ayant bénéficié de fonds provenant de capitaux-risqueurs et de 397 entreprises n’ayant pas reçu ce genre de financement. Cette étude montre, entre autres, que la présence de capital-risque ne conduit pas à une meilleure performance comptable un an après l’introduction en bourse, même si elle s’accompagne d’une plus forte croissance des ventes chez les entreprises aidées par ce type de financement.English Abstract. The objective of this paper is to better understand the impact that venture capital can have on the short-term performance of companies after their IPO. Our sample is composed of 601 companies that have gone public on North American or European markets between 2010 and 2015. This sample is made up of 204 firms that have received funding from venture capitalists and 397 firms that have not received such funding. This study shows, among other things, that the presence of venture capital does not lead to better accounting performance one year after the IPO, even if it is accompanied by stronger sales growth in the companies funded that way.
Changing views about remote working during the COVID-19 pandemic: Evidence using panel data from Japan
arXiv
arXiv
COVID-19 has led to school closures in Japan to cope with the pandemic. Under the state of emergency, in addition to school closure, after-school care has not been sufficiently supplied. We independently collected individual level data through internet surveys to construct short panel data from mid-March to mid-June 2020, which covered before and after the state of emergency. We analyze how the presence of school-aged children influences their parents views about working from home. After controlling for various factors using a fixed effects model, we find that in cases where parents were workers, and the children are (1) in primary school, parents are willing to promote working from home. If children are (2) in junior high school, the parents view is hardly affected. (3) Surprisingly, workers whose children are primary school pupils are most likely to support promotion of working from home after schools reopen. Due to school closure and a lack of after-school care, parents need to work from home, and this experience motivated workers with small children to continue doing so to improve work-life balance even after schools reopen.
Climate Change Adaptation under Heterogeneous Beliefs
arXiv
arXiv
We study strategic interactions between firms with heterogeneous beliefs about future climate impacts. To that end, we propose a Cournot-type equilibrium model where firms choose mitigation efforts and production quantities such as to maximize the expected profits under their subjective beliefs. It is shown that optimal mitigation efforts are increased by the presence of uncertainty and act as substitutes; i.e., one firm's lack of mitigation incentivizes others to act more decidedly, and vice versa.
Conditions concurrentielles au sein du secteur bancaire belge entre 2002 et 2008 (Competitive Conditions in the Belgian Banking Sector between 2002 and 2008)
SSRN
French Abstract. L‟objectif de cette étude est de caractériser la nature de la concurrence au sein du secteur bancaire belge entre 2002 et 2008. Dans un premier temps, nous calculons quelques indicateurs structurels incontournables, dont l‟Indice d‟Herfindahl-Hirschman. Dans un second temps, nous appliquons la méthodologie développée par Panzar â€"Rosse (1987). A l‟instar de l‟étude effectuée par Matthews, Murinde et Zhao (2007) pour le secteur bancaire britannique, nous constituons un panel de 12 banques pour lesquelles nous rassemblons les informations requises sur la période 2002-2008. Par rapport aux études précédentes dont la plus récente porte sur la période 1997-2003 (Casu et Giardone, 2006), nous constatons une dégradation du niveau de concurrence.English Abstract. The goal of this paper is to characterize the nature of competition in the Belgian banking sector between 2002 and 2008. In the first part of the paper, we compute some key structural indicators, including the Herfindahl-Hirschman Index. In the second part, we apply the Panzar â€" Rosse (1987) methodology. We follow Matthews, Murinde et Zhao (2007) who published a comparable study for the British banks, by using a panel of 12 banks over the 2002-2008 time period. In comparison to past studies, the most recent one covering the time period from 1997 to 2003 (Casu and Giardone, 2006), we observe a lower level of competition.
SSRN
French Abstract. L‟objectif de cette étude est de caractériser la nature de la concurrence au sein du secteur bancaire belge entre 2002 et 2008. Dans un premier temps, nous calculons quelques indicateurs structurels incontournables, dont l‟Indice d‟Herfindahl-Hirschman. Dans un second temps, nous appliquons la méthodologie développée par Panzar â€"Rosse (1987). A l‟instar de l‟étude effectuée par Matthews, Murinde et Zhao (2007) pour le secteur bancaire britannique, nous constituons un panel de 12 banques pour lesquelles nous rassemblons les informations requises sur la période 2002-2008. Par rapport aux études précédentes dont la plus récente porte sur la période 1997-2003 (Casu et Giardone, 2006), nous constatons une dégradation du niveau de concurrence.English Abstract. The goal of this paper is to characterize the nature of competition in the Belgian banking sector between 2002 and 2008. In the first part of the paper, we compute some key structural indicators, including the Herfindahl-Hirschman Index. In the second part, we apply the Panzar â€" Rosse (1987) methodology. We follow Matthews, Murinde et Zhao (2007) who published a comparable study for the British banks, by using a panel of 12 banks over the 2002-2008 time period. In comparison to past studies, the most recent one covering the time period from 1997 to 2003 (Casu and Giardone, 2006), we observe a lower level of competition.
De l’(in)utilité des agences de notation (On the (Dis)utility of Credit Rating Agencies)
SSRN
French Abstract. Depuis la crise des emprunts hypothécaires risqués aux Etats-Unis, plus personne n’ignore l’existence des agences de notation. La population, les responsables politiques et même certains économistes se posent légitimement les questions suivantes : pourquoi les agences de notation ont-elles été créées ? Quelles sont leurs particularités ? Pourquoi jouent-elles un rôle si prépondérant aujourd’hui ? Quelles réformes faudrait-il mettre en oeuvre ? En abordant ces questions, cet article montre que les agences de notation ne sont ni des usurpateurs de pouvoir, ni des facteurs de transparence indispensables. Les réformes actuelles doivent inciter les acteurs économiques à déterminer et utiliser des notations plus conservatrices, que ces notations soient émises par une agence officielle, une institution financière, ou calculée à partir de prix observés sur le marché.English Abstract. Since the subprime mortgage crisis in the United States, no one has been unaware of the existence of rating agencies. The population, politicians and even some economists legitimately ask themselves the following questions: why were rating agencies created? What are their particularities? Why do they play such a prominent role today? What reforms should be implemented? By addressing these questions, this article shows that rating agencies are neither usurpers of power nor indispensable factors of transparency. Current reforms should encourage economic actors to determine and use more conservative ratings, whether these ratings are issued by an official agency, a financial institution, or calculated from market prices.
SSRN
French Abstract. Depuis la crise des emprunts hypothécaires risqués aux Etats-Unis, plus personne n’ignore l’existence des agences de notation. La population, les responsables politiques et même certains économistes se posent légitimement les questions suivantes : pourquoi les agences de notation ont-elles été créées ? Quelles sont leurs particularités ? Pourquoi jouent-elles un rôle si prépondérant aujourd’hui ? Quelles réformes faudrait-il mettre en oeuvre ? En abordant ces questions, cet article montre que les agences de notation ne sont ni des usurpateurs de pouvoir, ni des facteurs de transparence indispensables. Les réformes actuelles doivent inciter les acteurs économiques à déterminer et utiliser des notations plus conservatrices, que ces notations soient émises par une agence officielle, une institution financière, ou calculée à partir de prix observés sur le marché.English Abstract. Since the subprime mortgage crisis in the United States, no one has been unaware of the existence of rating agencies. The population, politicians and even some economists legitimately ask themselves the following questions: why were rating agencies created? What are their particularities? Why do they play such a prominent role today? What reforms should be implemented? By addressing these questions, this article shows that rating agencies are neither usurpers of power nor indispensable factors of transparency. Current reforms should encourage economic actors to determine and use more conservative ratings, whether these ratings are issued by an official agency, a financial institution, or calculated from market prices.
Dynamic Bank Capital Regulation and Optimal Macroprudential Policies in the Presence of Non-Regulated Financial Intermediaries
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I embed shadow banks, i.e. financial intermediaries without regulatory oversight, in a quantitative general equilibrium model in which both regulated banks and shadow banks finance firms that have production technologies with different riskiness. In the model, shadow banks 1) do not have deposit insurance, 2) do not face capital regulation, and 3) have a relatively lower price of taking risk compared with regulated banks. Limited liability and deposit insurance can lead regulated banks to provide socially inefficient risky loans; this excessive risk-taking can be activated by economic shocks that reduce the return on safer loans and can be prevented by higher bank capital requirements at the cost of lower liquidity provision. I propose a novel channel that additionally boosts excessive risk-taking incentives associated with migration of credit from shadow banks toward regulated banks when the returns to safer projects are depressed. The failure to account for the interaction between regulated banks and shadow banks does not only underestimate the impact of business cycle shocks on Ramsey optimal capital requirements in a range from 10 basis points to 1 percentage point, but may also lead to calling for increases in capital requirements when a decrease would otherwise be warranted. I show that capital requirements should also react to shocks that originate in the shadow banking sector even if these shocks do not influence regulated banks directly. The results stress the importance of considering the interactions of regulated banks and shadow banks for designing macroeconomic policies.
SSRN
I embed shadow banks, i.e. financial intermediaries without regulatory oversight, in a quantitative general equilibrium model in which both regulated banks and shadow banks finance firms that have production technologies with different riskiness. In the model, shadow banks 1) do not have deposit insurance, 2) do not face capital regulation, and 3) have a relatively lower price of taking risk compared with regulated banks. Limited liability and deposit insurance can lead regulated banks to provide socially inefficient risky loans; this excessive risk-taking can be activated by economic shocks that reduce the return on safer loans and can be prevented by higher bank capital requirements at the cost of lower liquidity provision. I propose a novel channel that additionally boosts excessive risk-taking incentives associated with migration of credit from shadow banks toward regulated banks when the returns to safer projects are depressed. The failure to account for the interaction between regulated banks and shadow banks does not only underestimate the impact of business cycle shocks on Ramsey optimal capital requirements in a range from 10 basis points to 1 percentage point, but may also lead to calling for increases in capital requirements when a decrease would otherwise be warranted. I show that capital requirements should also react to shocks that originate in the shadow banking sector even if these shocks do not influence regulated banks directly. The results stress the importance of considering the interactions of regulated banks and shadow banks for designing macroeconomic policies.
Déduction pour intérêts notionnels et diminution du coût des fonds propres : Une application empirique du MEDAF (Notional Interest Deduction and Cost of Equity Reduction: An Empirical Application of the CAPM)
SSRN
French Abstract: L’objectif de cette étude est de déterminer si la déduction pour intérêts notionnels a entraîné une diminution du coût des fonds propres. L’étude empirique est basée sur une version modifiée du Modèle d’Evaluation des Actifs Financiers (MEDAF), telle que développée par Colmant et Hübner (2005). Nous montrons que cette mesure fiscale conduit, en moyenne, à une diminution significative du coût des fonds propres pour notre échantillon composé de 30 sociétés cotées sur Euronext (Bruxelles).English Abstract: The goal of this paper is to determine whether the deduction for notional interests has led to a fall in the cost of equity. The empirical study is based on the Colmant and Hübner (2005) modified version of the Capital Asset Pricing Model (CAPM). We show that this fiscal measure has indeed led, on average, to a statistically significant decrease in the cost of equity for our sample of 30 public companies quoted on Euronext (Brussels).
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French Abstract: L’objectif de cette étude est de déterminer si la déduction pour intérêts notionnels a entraîné une diminution du coût des fonds propres. L’étude empirique est basée sur une version modifiée du Modèle d’Evaluation des Actifs Financiers (MEDAF), telle que développée par Colmant et Hübner (2005). Nous montrons que cette mesure fiscale conduit, en moyenne, à une diminution significative du coût des fonds propres pour notre échantillon composé de 30 sociétés cotées sur Euronext (Bruxelles).English Abstract: The goal of this paper is to determine whether the deduction for notional interests has led to a fall in the cost of equity. The empirical study is based on the Colmant and Hübner (2005) modified version of the Capital Asset Pricing Model (CAPM). We show that this fiscal measure has indeed led, on average, to a statistically significant decrease in the cost of equity for our sample of 30 public companies quoted on Euronext (Brussels).
Earnings Response Coefficient in the MENA Region
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This article documents the earnings response coefficient (ERC) for nonfinancial firms listed in the Middle East and North Africa region during the period between 2003 and 2013. Our results show significantly positive ERC for our sample firms. The results are robust across different countries and different industries. Our results also show that ERC increases with increasing the measurement interval. It indicates that more information is incorporated in prices as the measurement interval increase. Consequently, we argue that significance of reported earnings is higher for long-term investors in the MENA region.
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This article documents the earnings response coefficient (ERC) for nonfinancial firms listed in the Middle East and North Africa region during the period between 2003 and 2013. Our results show significantly positive ERC for our sample firms. The results are robust across different countries and different industries. Our results also show that ERC increases with increasing the measurement interval. It indicates that more information is incorporated in prices as the measurement interval increase. Consequently, we argue that significance of reported earnings is higher for long-term investors in the MENA region.
Eco-Friendly Policies and Financial Performance: Was the Financial Crisis a Game Changer for Large US Companies?
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Whether companies implementing eco-friendly policies are better immune to negative shocks in financial performance during crisis times and perform differently after the shocks remains an open question. We gather information on firms' CSR performance from the Bloomberg ESG Database, which contains environmental, social, and governance measures for thousands of companies. We build a panel dataset of large US caps included in the S&P 500 index between fiscal year 2005 and 2017. Controlling for financial health, social and governance performance, we employ seven proxies for environmental performance and look at both accounting- and market-based financial performance. We find that the existence of emission reduction or climate change policies in large US companies does not seem to be broadly associated with financial performance. Whether or not we condition the analysis on the occurrence of the 2008â€"2009 financial crisis, we do not observe clear-cut changes over time. Overall, we find weak evidence supporting the hypothesis that the relation between financial performance and environmental performance is specific to periods of low trust.
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Whether companies implementing eco-friendly policies are better immune to negative shocks in financial performance during crisis times and perform differently after the shocks remains an open question. We gather information on firms' CSR performance from the Bloomberg ESG Database, which contains environmental, social, and governance measures for thousands of companies. We build a panel dataset of large US caps included in the S&P 500 index between fiscal year 2005 and 2017. Controlling for financial health, social and governance performance, we employ seven proxies for environmental performance and look at both accounting- and market-based financial performance. We find that the existence of emission reduction or climate change policies in large US companies does not seem to be broadly associated with financial performance. Whether or not we condition the analysis on the occurrence of the 2008â€"2009 financial crisis, we do not observe clear-cut changes over time. Overall, we find weak evidence supporting the hypothesis that the relation between financial performance and environmental performance is specific to periods of low trust.
Extreme Events and the Cumulative Distribution of Net Gains in Gambling and Structured Products
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We argue that ethical principles in advertising and market communication cannot be properly discovered and applied to gambling without a deep understanding of its probabilistic implications, in particular when extreme events are influential. We carry out a probabilistic analysis of lottery games with lifetime prizes in order to derive sound recommendations about the pertinent information that should be communicated to nudge gamblers. We propose to focus on the cumulative distribution of net gains, for which there is currently no information available to gamblers. This holds true for structured products in which extreme events matter as well.
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We argue that ethical principles in advertising and market communication cannot be properly discovered and applied to gambling without a deep understanding of its probabilistic implications, in particular when extreme events are influential. We carry out a probabilistic analysis of lottery games with lifetime prizes in order to derive sound recommendations about the pertinent information that should be communicated to nudge gamblers. We propose to focus on the cumulative distribution of net gains, for which there is currently no information available to gamblers. This holds true for structured products in which extreme events matter as well.
Female teachers effect on male pupils' voting behavior and preference formation
arXiv
arXiv
This study examines the influence of learning in a female teacher homeroom class in elementary school on pupils' voting behavior later in life, using independently collected individual-level data. Further, we evaluate its effect on preference for women's participation in the workplace in adulthood. Our study found that having a female teacher in the first year of school makes individuals more likely to vote for female candidates, and to prefer policy for female labor participation in adulthood. However, the effect is only observed among males, and not female pupils. These findings offer new evidence for the female socialization hypothesis.
Finding Your Calling: Matching Skills With Jobs in the Mutual Fund Industry
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To best utilize labor, companies need to optimally match their employees’ skills with job types that best fit those skills. We examine this optimal matching process in the mutual fund industry. Mutual fund families enable their managers to try out funds with different investment styles in a learning-by-trying fashion until they find their optimal match. After this has happened, managers operate at higher productivity levels and tend to stay in the same investment style. Fund families respond to this rationally by allocating more capital to the optimally matched managers, while the optimally matched managers respond by taking more active bets.
SSRN
To best utilize labor, companies need to optimally match their employees’ skills with job types that best fit those skills. We examine this optimal matching process in the mutual fund industry. Mutual fund families enable their managers to try out funds with different investment styles in a learning-by-trying fashion until they find their optimal match. After this has happened, managers operate at higher productivity levels and tend to stay in the same investment style. Fund families respond to this rationally by allocating more capital to the optimally matched managers, while the optimally matched managers respond by taking more active bets.
Gestion du risque et investissement dans les hedge funds : le cas de la faillite d’Amaranth Advisors (Risk Management and Investment in Hedge Funds: The Amaranth Case)
SSRN
French Abstract. L’objectif de cette étude est d’analyser l’évolution du profil de risque des hedge funds pour parvenir à mieux se protéger contre un risque de faillite. L’étude de cas porte sur la débâcle d’Amaranth Advisors, hedge fund multi-stratégique qui a perdu plus de 6 milliards de Dollars en 2006 et ainsi battu le record de perte jusque là détenu par LTCM en 1998. Afin d’identifier les signes précurseurs de cette faillite, nous exploitons la méthode développée par EuroPerformance et EDHEC (2006) pour comparer la performance des hedge funds et établir l’Alpha League table, classement basé sur un rating multicritère. Les résultats mettent en évidence le changement radical d’objectif adopté par Amaranth ainsi que l’augmentation drastique des risques. Sur base de ces résultats, Amaranth n’aurait même plus été repris dans l’Alpha League table un an avant la faillite du fonds.English Abstract. The objective of this study is to identify the warning signs of the collapse of Amaranth Advisors hedge fund, which lost more than 6 billion dollars in 2006 and broke the record loss previously held by LTCM in 1998. The method used is the one developed by EuroPerformance and EDHEC (2006) to compare the performance of hedge funds and establish the Alpha League table, which ranks hedge funds according to a multi-criteria rating. The results highlight the dramatic change of target adopted by Amaranth and the spectacular increase in risk. Based on these results, Amaranth would have been excluded from the Alpha League table one year before the bankruptcy of the fund.
SSRN
French Abstract. L’objectif de cette étude est d’analyser l’évolution du profil de risque des hedge funds pour parvenir à mieux se protéger contre un risque de faillite. L’étude de cas porte sur la débâcle d’Amaranth Advisors, hedge fund multi-stratégique qui a perdu plus de 6 milliards de Dollars en 2006 et ainsi battu le record de perte jusque là détenu par LTCM en 1998. Afin d’identifier les signes précurseurs de cette faillite, nous exploitons la méthode développée par EuroPerformance et EDHEC (2006) pour comparer la performance des hedge funds et établir l’Alpha League table, classement basé sur un rating multicritère. Les résultats mettent en évidence le changement radical d’objectif adopté par Amaranth ainsi que l’augmentation drastique des risques. Sur base de ces résultats, Amaranth n’aurait même plus été repris dans l’Alpha League table un an avant la faillite du fonds.English Abstract. The objective of this study is to identify the warning signs of the collapse of Amaranth Advisors hedge fund, which lost more than 6 billion dollars in 2006 and broke the record loss previously held by LTCM in 1998. The method used is the one developed by EuroPerformance and EDHEC (2006) to compare the performance of hedge funds and establish the Alpha League table, which ranks hedge funds according to a multi-criteria rating. The results highlight the dramatic change of target adopted by Amaranth and the spectacular increase in risk. Based on these results, Amaranth would have been excluded from the Alpha League table one year before the bankruptcy of the fund.
Government and Private Household Debt Relief during COVID-19
SSRN
We follow a representative panel of US borrowers to study the suspension of household debt payments (debt forbearance) during the COVID-19 pandemic. Between March and October of 2020, loans worth $2 trillion entered forbearance. On average, cumulative payments missed per individual in forbearance during this period were largest for mortgage ($3,200) and auto ($430) borrowers. We estimate that more than 60 million borrowers will miss $70 billion on their debt payments by the end of 2021:Q1. This large amount of debt relief significantly dampened the household debt distress, which can help explain household delinquencies below pre-pandemic levelsâ€"a significant difference from other economic crises when delinquencies sharply increased along with unemployment. Forbearance thus may have had potentially large aggregate consequences for house prices and economic activity. Relief flows more to higher income individuals than those receiving stimulus checks, partially due to their higher debt balances: 60% of aggregate forbearance is provided to above median income borrowers. On the other hand, forbearance rates are higher among the more vulnerable populations: individuals with lower credit scores and lower incomes. Borrowers in regions with a higher likelihood of COVID-19 related economic shocks and higher shares of minorities were more likely to obtain debt relief. One third of borrowers in forbearance continued making full payments, suggesting that forbearance acts as a credit line, allowing borrowers to “draw†on payment deferral if needed. More than a quarter of total debt relief was provided by the private sector outside of the government mandates. Exploiting a discontinuity in mortgage eligibility under the CARES Act we estimate that implicit government debt relief subsidies increase the rate of forbearance by about 25%. Government and private relief follow similar patterns across income and creditworthiness, suggesting that borrower self-selection in requesting forbearance is an important determinant of debt relief incidence, and drives the distribution of relief across different population strata. Government relief is provided through private intermediaries, which differ in their propensity to supply relief, with shadow banks less likely to provide forbearance than traditional banks.
SSRN
We follow a representative panel of US borrowers to study the suspension of household debt payments (debt forbearance) during the COVID-19 pandemic. Between March and October of 2020, loans worth $2 trillion entered forbearance. On average, cumulative payments missed per individual in forbearance during this period were largest for mortgage ($3,200) and auto ($430) borrowers. We estimate that more than 60 million borrowers will miss $70 billion on their debt payments by the end of 2021:Q1. This large amount of debt relief significantly dampened the household debt distress, which can help explain household delinquencies below pre-pandemic levelsâ€"a significant difference from other economic crises when delinquencies sharply increased along with unemployment. Forbearance thus may have had potentially large aggregate consequences for house prices and economic activity. Relief flows more to higher income individuals than those receiving stimulus checks, partially due to their higher debt balances: 60% of aggregate forbearance is provided to above median income borrowers. On the other hand, forbearance rates are higher among the more vulnerable populations: individuals with lower credit scores and lower incomes. Borrowers in regions with a higher likelihood of COVID-19 related economic shocks and higher shares of minorities were more likely to obtain debt relief. One third of borrowers in forbearance continued making full payments, suggesting that forbearance acts as a credit line, allowing borrowers to “draw†on payment deferral if needed. More than a quarter of total debt relief was provided by the private sector outside of the government mandates. Exploiting a discontinuity in mortgage eligibility under the CARES Act we estimate that implicit government debt relief subsidies increase the rate of forbearance by about 25%. Government and private relief follow similar patterns across income and creditworthiness, suggesting that borrower self-selection in requesting forbearance is an important determinant of debt relief incidence, and drives the distribution of relief across different population strata. Government relief is provided through private intermediaries, which differ in their propensity to supply relief, with shadow banks less likely to provide forbearance than traditional banks.
IMF Programs and Economic Growth in the DRC
arXiv
arXiv
At the end of 2012 the International Monetary Fund (IMF) has suspended its financial assistance to the Democratic Republic of the Congo (DRC). Due to inflationary pressures which occurred in the last quarter of 2016, several decision-makers called for a reopening of a formal cooperation with the IMF. This process was formally completed in December 2019. The restart of IMF programs was greeted with satisfaction by politicians and widely commented in the media. However, recent history shows that the DRC managed to achieve exceptional economic performance, between 2012 and 2016, without being in a formal cooperation with the IMF. Some people wonder whether IMF assistance is a curse for recipient countries? We argue that the underlying problem has nothing to do with accepting or not the IMF assistance, but rather in the ability of policy makers to establish effective leadership and good governance for the development and implementation supporting structural reforms.
Impact of closing schools on mental health during the COVID-19 pandemic: Evidence using panel data from Japan
arXiv
arXiv
The spread of the novel coronavirus disease caused schools in Japan to close to cope with the pandemic. In response to this, parents of students were obliged to care for their children during the daytime when they were usually at school. Does the increase in burden of childcare influence parents mental health? Based on short panel data from mid-March to mid-April 2020, we explored how school closures influenced the mental health of parents with school-aged children. Using the fixed effects model, we found that school closures lead to students mothers suffering from worse mental health than other females, while the fathers mental health did not differ from other males. This tendency was only observed for less educated mothers who had children attending primary school, but not those attending junior high school. The contribution of this paper is to show that school closures increased the inequality of mental health between genders and the educational background of parents.
Implicit Transaction Cost Management Using Intraday Price Dynamics
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Using the Exchange Liquidity Measure, we show that implicit transaction costs exhibit intraday regularities around specific price change signals for a sample of European blue chips publicly quoted on Euronext. Not only transaction costs follow a reverse J-shape throughout the day, but they also decrease significantly around specific patterns of price dynamics. By focusing on these signals during the trading day, liquidity traders may detect intraday windows of opportunities during which implicit transaction costs are lower.
SSRN
Using the Exchange Liquidity Measure, we show that implicit transaction costs exhibit intraday regularities around specific price change signals for a sample of European blue chips publicly quoted on Euronext. Not only transaction costs follow a reverse J-shape throughout the day, but they also decrease significantly around specific patterns of price dynamics. By focusing on these signals during the trading day, liquidity traders may detect intraday windows of opportunities during which implicit transaction costs are lower.
Long-term effects of female teacher on her pupils' smoking behaviour later in life
arXiv
arXiv
In Japan, teacher and student is randomly matched in the first year of elementary school. Under the quasi-natural experimental setting, we examine how learning in female teacher homeroom class in the elementary school influence pupils' smoking behavior after they become adult. We found that pupils are unlikely to smoke later in life if they belonged to female teacher homeroom class in pupil's first year of school.
Notional Value Effect in Futures Markets
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We examine how the notional value of futures contracts predicts the cross-section of returns within the major asset classes tracking a large number of futures contracts. We find that low notional value contracts outperform high notional value contracts within government bonds, short-term rates, commodities, currencies, and equity indexes. A diversified portfolio of the strategy delivers abnormal returns after controlling for standard asset pricing factors. The strategy is related to value and reversal factors but their explanatory power is low. Differences in liquidity explain a large portion of the cross-section of notional value, where high notional value contracts are more liquid, and subsume the reversal and value factors. Volatility risk can be a partial explanation both cross-sectionally where low notional value contracts exhibit higher volatility and across time where shocks to market volatility decrease strategy returns.
SSRN
We examine how the notional value of futures contracts predicts the cross-section of returns within the major asset classes tracking a large number of futures contracts. We find that low notional value contracts outperform high notional value contracts within government bonds, short-term rates, commodities, currencies, and equity indexes. A diversified portfolio of the strategy delivers abnormal returns after controlling for standard asset pricing factors. The strategy is related to value and reversal factors but their explanatory power is low. Differences in liquidity explain a large portion of the cross-section of notional value, where high notional value contracts are more liquid, and subsume the reversal and value factors. Volatility risk can be a partial explanation both cross-sectionally where low notional value contracts exhibit higher volatility and across time where shocks to market volatility decrease strategy returns.
One Year Later. Leveraged ETFs in Portfolio Construction and Portfolio Protection
SSRN
One year after Coronovirus and three years later after initially suggesting them, we revisit the performance of balanced portfolios of leveraged ETFs that we initially suggested in the 2017 paper. Leveraged ETFs provide a convenient mechanism to dynamically change portfolio exposure and can be successfully used to construct robust portfolios that perform well during equity market drops. We start with a classical 60 percent Bonds/ 40 percent Stocks portfolio with monthly rebalancing that delivered 9.5 percent annually from January 1, 1986, to January 15, 2021. Its 120 percent leveraged cousin that is 72 percent Bonds/ 48 percent Stocks delivered 10.6 percent annually since 1986, same as SP500 but with lower volatility and drawdowns. Instead of leveraging with borrowing at the portfolio level, we can use a portfolio of leveraged ETFs.At the beginning of the paper we consider several balanced stocks/bonds portfolios created with leveraged ETFs but without borrowing money at the portfolio level and show that they present a very attractive risk-adjusted alternative to just stock index and classical stocks/bonds portfolios without leverage. A particular portfolio of 40 percent TQQQ, 20 percent TMF, 40 percent TLT with monthly rebalancing proposed by us in the 2017 paper as a leveraged ETF alternative to classical stocks/bonds portfolios performed well in 2018 and through the Coronavirus crisis up to January 15, 2021. We reviewed the performance of the 40-20-40 portfolio in our paper a year ago. Now after the Coronovirus crisis, we see that balanced portfolios suggested in 2017 sustained the crisis very well and performed well in 2020.A classical portfolio insurance strategy of Black-Jones-Perold can be easily implemented with leveraged ETFs. More complex dynamic portfolio strategies can also be implemented using leveraged ETFs.
SSRN
One year after Coronovirus and three years later after initially suggesting them, we revisit the performance of balanced portfolios of leveraged ETFs that we initially suggested in the 2017 paper. Leveraged ETFs provide a convenient mechanism to dynamically change portfolio exposure and can be successfully used to construct robust portfolios that perform well during equity market drops. We start with a classical 60 percent Bonds/ 40 percent Stocks portfolio with monthly rebalancing that delivered 9.5 percent annually from January 1, 1986, to January 15, 2021. Its 120 percent leveraged cousin that is 72 percent Bonds/ 48 percent Stocks delivered 10.6 percent annually since 1986, same as SP500 but with lower volatility and drawdowns. Instead of leveraging with borrowing at the portfolio level, we can use a portfolio of leveraged ETFs.At the beginning of the paper we consider several balanced stocks/bonds portfolios created with leveraged ETFs but without borrowing money at the portfolio level and show that they present a very attractive risk-adjusted alternative to just stock index and classical stocks/bonds portfolios without leverage. A particular portfolio of 40 percent TQQQ, 20 percent TMF, 40 percent TLT with monthly rebalancing proposed by us in the 2017 paper as a leveraged ETF alternative to classical stocks/bonds portfolios performed well in 2018 and through the Coronavirus crisis up to January 15, 2021. We reviewed the performance of the 40-20-40 portfolio in our paper a year ago. Now after the Coronovirus crisis, we see that balanced portfolios suggested in 2017 sustained the crisis very well and performed well in 2020.A classical portfolio insurance strategy of Black-Jones-Perold can be easily implemented with leveraged ETFs. More complex dynamic portfolio strategies can also be implemented using leveraged ETFs.
Outliers and Robust Inference in Archival Accounting Research
SSRN
This study examines the nature of outliers in archival accounting research and evaluates the merits and limitations of robust estimators in identifying and downweighing their influence. Using simulated and actual data samples, we demonstrate how outliers can result from the data generating process, research design choices such as scaling, and model misspecification. Given the nonrandom nature of outliers, we show that inferences based on robust estimators can be biased when the relation of interest varies with variables correlated with the likelihood of outliers (e.g., firm size). We also find that a failure to account for nonlinear relations can induce biases in robust estimators that are more severe than with OLS. Overall, we advise researchers to acknowledge the nonrandom nature of outliers in their samples, to be cautious in implementing and interpreting robust estimation methods, and to evaluate and report the sensitivity of these methods to critical design choices. We also highlight the usefulness of combining data visualizations with robust estimation techniques to assess both the nature of outliers and their impact on inference.
SSRN
This study examines the nature of outliers in archival accounting research and evaluates the merits and limitations of robust estimators in identifying and downweighing their influence. Using simulated and actual data samples, we demonstrate how outliers can result from the data generating process, research design choices such as scaling, and model misspecification. Given the nonrandom nature of outliers, we show that inferences based on robust estimators can be biased when the relation of interest varies with variables correlated with the likelihood of outliers (e.g., firm size). We also find that a failure to account for nonlinear relations can induce biases in robust estimators that are more severe than with OLS. Overall, we advise researchers to acknowledge the nonrandom nature of outliers in their samples, to be cautious in implementing and interpreting robust estimation methods, and to evaluate and report the sensitivity of these methods to critical design choices. We also highlight the usefulness of combining data visualizations with robust estimation techniques to assess both the nature of outliers and their impact on inference.
Political Idealism and Economic Realism: A Forced Marriage to Preserve the Eurozone
SSRN
Political idealism has prevailed over economic realism in the EU decision process. As a result, today’s Eurozone is a puzzle with too many missing pieces. Given the severity of the crisis, policymakers would be well advised to urgently take both structural and pragmatic measures to preserve the Eurozone, as proposed in the paper. Although the discussion about the right balance between fiscal rectitude and support for demand is useful, the fundamental challenge for Europe is to rethink the ‘welfare state’ model that has prevailed over the past 50 years or so. Political idealism can no longer ignore the significant intergenerational economic constraints that Europe faces today in a world in which it can no longer dictate the terms of exchange. What Europe desperately needs is a new and realistic vision for the 21st century.
SSRN
Political idealism has prevailed over economic realism in the EU decision process. As a result, today’s Eurozone is a puzzle with too many missing pieces. Given the severity of the crisis, policymakers would be well advised to urgently take both structural and pragmatic measures to preserve the Eurozone, as proposed in the paper. Although the discussion about the right balance between fiscal rectitude and support for demand is useful, the fundamental challenge for Europe is to rethink the ‘welfare state’ model that has prevailed over the past 50 years or so. Political idealism can no longer ignore the significant intergenerational economic constraints that Europe faces today in a world in which it can no longer dictate the terms of exchange. What Europe desperately needs is a new and realistic vision for the 21st century.
Portfolio Optimization Without Optimization
SSRN
In this paper we introduce a simple, yet flexible approach to construct (enhanced) index tracking portfolios. PADME (Portfolio Allocation via Density MatchEs) uses the density function of returns as a robust means of capturing investor preferences, and identifies suitable portfolios through a measure of closeness. Recognizing model uncertainty, PADME avoids optimization and instead relies upon the behavioral concept of revealed preferences by offering the investor a palette of options from which to choose. In a case study we consider an EIT manager with an SP500 benchmark. We illustrate PADME's flexibility by imposing several types of Bayesian beliefs simultaneously. Using far fewer assets than the SP500, we are able to generate numerous portfolios whose out-of-sample risk and return were superior to the benchmark during the turbulent COVID Crisis of 2020.
SSRN
In this paper we introduce a simple, yet flexible approach to construct (enhanced) index tracking portfolios. PADME (Portfolio Allocation via Density MatchEs) uses the density function of returns as a robust means of capturing investor preferences, and identifies suitable portfolios through a measure of closeness. Recognizing model uncertainty, PADME avoids optimization and instead relies upon the behavioral concept of revealed preferences by offering the investor a palette of options from which to choose. In a case study we consider an EIT manager with an SP500 benchmark. We illustrate PADME's flexibility by imposing several types of Bayesian beliefs simultaneously. Using far fewer assets than the SP500, we are able to generate numerous portfolios whose out-of-sample risk and return were superior to the benchmark during the turbulent COVID Crisis of 2020.
Product Market Threats: Implications for Future Profitability and its Use by Market Participants
SSRN
This study establishes the informational value of a firm’s product market competition, a measure derived from narrative disclosures in 10-K filings. Consistent with economic theory predicting faster mean reversion in earnings, we find that product market fluidity has large explanatory power for future profitability: higher fluidity (i.e., more competitive product market threats) is negatively associated with future earnings. However, capital market participants do not fully use this information leading to predictable future stock returns and sell-side analyst forecast errors. A trading strategy exploiting this information is associated with abnormal future returns and enhances other prominent size and book-to-market strategies. The findings are more consistent with mispricing than risk-based explanations: the results remain after adjusting for risk factors and cluster around subsequent earnings announcements. In addition, future analyst forecast errors and stock returns are directionally consistent with delayed information processing (mispricing). Overall, our findings suggest that qualitative disclosures can convey valuable information to capital market participants and play a meaningful role in fundamental analysis.
SSRN
This study establishes the informational value of a firm’s product market competition, a measure derived from narrative disclosures in 10-K filings. Consistent with economic theory predicting faster mean reversion in earnings, we find that product market fluidity has large explanatory power for future profitability: higher fluidity (i.e., more competitive product market threats) is negatively associated with future earnings. However, capital market participants do not fully use this information leading to predictable future stock returns and sell-side analyst forecast errors. A trading strategy exploiting this information is associated with abnormal future returns and enhances other prominent size and book-to-market strategies. The findings are more consistent with mispricing than risk-based explanations: the results remain after adjusting for risk factors and cluster around subsequent earnings announcements. In addition, future analyst forecast errors and stock returns are directionally consistent with delayed information processing (mispricing). Overall, our findings suggest that qualitative disclosures can convey valuable information to capital market participants and play a meaningful role in fundamental analysis.
Public Subsidies and the Sources of Venture Capital
SSRN
Research suggests that public subsidies for newly founded firms have a positive effect on follow-on financing, in particular, Venture Capital (VC). This study differentiates between Government VC, Independent VC, Corporate VC, and Business Angels and shows that public subsidies are not relevant for all of these sources. When accounting for firm characteristics that drive both selection into public subsidies as well as into VC financing through econometric matching techniques, we find that subsidies are only linked to Government VC and Business Angel financing.
SSRN
Research suggests that public subsidies for newly founded firms have a positive effect on follow-on financing, in particular, Venture Capital (VC). This study differentiates between Government VC, Independent VC, Corporate VC, and Business Angels and shows that public subsidies are not relevant for all of these sources. When accounting for firm characteristics that drive both selection into public subsidies as well as into VC financing through econometric matching techniques, we find that subsidies are only linked to Government VC and Business Angel financing.
Self-Fulfilling Risk Panics: An Expected Utility Framework
SSRN
Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known unique fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price.
SSRN
Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known unique fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions within an OLG structure. Our paper further shows that the existence of sentiment-driven equilibria is robust in a standard infinite-period model as long as the pricing kernel is affected by the asset price.
Smart Retail Traders, Short Sellers, and Stock Returns
SSRN
Using short sell transactions data from 2010 to 2016, this paper is the first to provide a comprehensive sample of short selling initiated by retail investors. We find that retail short selling can predict negative stock returns. A trading strategy that mimics weekly retail shorting earns an annualized risk-adjusted value-(equal-) weighted return of 6% (12.25%). Their predictive power is beyond that coming from retail investors as a group or from off-exchange institutional short sellers. Our results suggest that retail short sellers can profitably exploit public information, especially when it is negative. Retail short sellers also tend to be contrarians who provide liquidity when the market is one-sided due to (institutional) buying pressure.
SSRN
Using short sell transactions data from 2010 to 2016, this paper is the first to provide a comprehensive sample of short selling initiated by retail investors. We find that retail short selling can predict negative stock returns. A trading strategy that mimics weekly retail shorting earns an annualized risk-adjusted value-(equal-) weighted return of 6% (12.25%). Their predictive power is beyond that coming from retail investors as a group or from off-exchange institutional short sellers. Our results suggest that retail short sellers can profitably exploit public information, especially when it is negative. Retail short sellers also tend to be contrarians who provide liquidity when the market is one-sided due to (institutional) buying pressure.
Supplementary Material for
SSRN
This supplement contains information regarding the implementation of the Gaussian Mixture Model (GMM), One-Class Support Vector Machine (OCSVM) and Isolation Forrest (iForest) algorithms which are used as anomaly detection benchmarks in the paper “A Machine Learning Attack on Illegal Tradingâ€.
SSRN
This supplement contains information regarding the implementation of the Gaussian Mixture Model (GMM), One-Class Support Vector Machine (OCSVM) and Isolation Forrest (iForest) algorithms which are used as anomaly detection benchmarks in the paper “A Machine Learning Attack on Illegal Tradingâ€.
Targets, Predictability, and Performance
SSRN
We study market-timing strategies on a given portfolio to achieve a particular risk or return target. Targeting a constant risk level leads to increasing investment at better investment opportunities whereas targeting a constant expected return does the opposite. Theoretical and numerical analysis shows that, within the usual ranges of investment opportunities, risk targeting generates better unconditional performance than return targeting across a wide range of metrics. Empirical analysis with commonly constructed stock portfolios further highlights the practical infeasibility of return targeting due to the inherently low out-of-sample predicting power. By contrast, risk targeting tends to enhance unconditional stability and performance.
SSRN
We study market-timing strategies on a given portfolio to achieve a particular risk or return target. Targeting a constant risk level leads to increasing investment at better investment opportunities whereas targeting a constant expected return does the opposite. Theoretical and numerical analysis shows that, within the usual ranges of investment opportunities, risk targeting generates better unconditional performance than return targeting across a wide range of metrics. Empirical analysis with commonly constructed stock portfolios further highlights the practical infeasibility of return targeting due to the inherently low out-of-sample predicting power. By contrast, risk targeting tends to enhance unconditional stability and performance.
Testing the Effect of Technical Analysis on Market Quality and Order Book Dynamics
SSRN
We find empirical support for the theoretical finding in agent-based models of limit order book markets that the effect of technical trading on market quality is not positive. When signals occur, technical traders lower liquidity as proxied by the relative spread, the effective spread, the realized spread, the dispersion and the slope in the order book. Technical trading is also found to be accompanied by rising volatility. There is overall strong empirical support against the hypothesis that technical trading has no effect on order book dynamics.
SSRN
We find empirical support for the theoretical finding in agent-based models of limit order book markets that the effect of technical trading on market quality is not positive. When signals occur, technical traders lower liquidity as proxied by the relative spread, the effective spread, the realized spread, the dispersion and the slope in the order book. Technical trading is also found to be accompanied by rising volatility. There is overall strong empirical support against the hypothesis that technical trading has no effect on order book dynamics.
The Earnings Expectations Game and the Dispersion Anomaly
SSRN
This study examines the role of differences in firms' propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex-ante measures of firms' propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises, and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms' participation in the earnings expectations game provides a viable explanation for the dispersion anomaly.
SSRN
This study examines the role of differences in firms' propensity to meet earnings expectations in explaining why firms with high analyst forecast dispersion experience relatively low future stock returns. We first demonstrate that the negative relation between dispersion and returns is concentrated around earnings announcements. Next, we show that this relation disappears when we control for ex-ante measures of firms' propensity to meet earnings expectations and that the component of dispersion explained by these measures drives the return predictability of dispersion. We further demonstrate that firms with low analyst dispersion are substantially more likely to achieve positive earnings surprises, and provide new evidence consistent with both expectations management and strategic forecast pessimism explaining this result. Overall, we conclude that investor mispricing of firms' participation in the earnings expectations game provides a viable explanation for the dispersion anomaly.
The Real Effects of Financial Markets on Scientific Disclosure: Evidence From a Quasi-Natural Experiment
SSRN
While innovation disclosure is essential for cumulative knowledge production and economic growth, evidence on firm incentives to disclose innovation outcomes is lacking. We examine the role of financial markets in firms’ decisions to disseminate scientific research results. We employ a quasi-natural experiment that exploits plausibly exogenous variation in analyst coverage, resulting in higher information asymmetries. We find that firms respond by a quick and enduring increase in scientific publications. We also show that disclosure decisions are shaped by financial constraints and managerial incentives. We discuss important implications, such as potential crowding effects between transparency initiatives and socially desirable innovation disclosure.
SSRN
While innovation disclosure is essential for cumulative knowledge production and economic growth, evidence on firm incentives to disclose innovation outcomes is lacking. We examine the role of financial markets in firms’ decisions to disseminate scientific research results. We employ a quasi-natural experiment that exploits plausibly exogenous variation in analyst coverage, resulting in higher information asymmetries. We find that firms respond by a quick and enduring increase in scientific publications. We also show that disclosure decisions are shaped by financial constraints and managerial incentives. We discuss important implications, such as potential crowding effects between transparency initiatives and socially desirable innovation disclosure.
To VaR, or Not to VaR, That is the Question
arXiv
arXiv
This paper discusses the value-at-risk (VaR) concept and assesses the financial adequacy of the price probability determined by frequency of trades at price p. We take the price definition as the ratio of executed trade value to volume and show that it leads to price statistical moments, which differ from those, generated by frequency price probability. We derive the price n th statistical moments as ratio of n th statistical moments of the value and the volume of executed transactions. We state that the price probability determined by frequency of trades at price p does not describe probability of executed trade prices and VaR based on frequency price probability may be origin for unexpected and excessive losses. We explain the need to replace frequency price probability by frequency probabilities of the value and the volume of executed transactions and derive price characteristic function. After 50 years of the VaR usage main problems of the VaR concept are still open. We believe that VaR commitment to forecast the price probability for the time horizon T seems to be one of the most tough and expensive puzzle of modern finance.
Variations communes de liquidité au sein de portefeuilles de faible, moyenne et forte capitalisation: les enseignements des crises financières asiatique et russe (Commonalities in Liquidity within Size-Based Portfolios: What Do We Learn from the Asian and Russian Financial Crises?)
SSRN
French Abstract: Sur base de données relatives à 300 actions cotées sur le NYSE, nous montrons que les variations de liquidité qui affectent l’ensemble des actifs d’un portefeuille sont influencées par la capitalisation boursière de ces actifs. Nous montrons également que les crises financières ont, sur les variations communes de liquidité, un impact qui varie en fonction de la capitalisation boursière des actifs qui composent le portefeuille.English Abstract: Using data for 300 stocks listed quoted on the NYSE, we show that commonalities in liquidity within a given portfolio are dependent upon the market capitalization of the stocks that are included in the portfolio. We also show that financial crises have an impact on liquidity co-movements. This impact varies with the market capitalization of the stocks included in the portfolio.
SSRN
French Abstract: Sur base de données relatives à 300 actions cotées sur le NYSE, nous montrons que les variations de liquidité qui affectent l’ensemble des actifs d’un portefeuille sont influencées par la capitalisation boursière de ces actifs. Nous montrons également que les crises financières ont, sur les variations communes de liquidité, un impact qui varie en fonction de la capitalisation boursière des actifs qui composent le portefeuille.English Abstract: Using data for 300 stocks listed quoted on the NYSE, we show that commonalities in liquidity within a given portfolio are dependent upon the market capitalization of the stocks that are included in the portfolio. We also show that financial crises have an impact on liquidity co-movements. This impact varies with the market capitalization of the stocks included in the portfolio.
Volume, changement de cotation et contrat de liquidité sur Alternext (Volume, Listing Changes and Liquidity Contract on Alternext)
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French Abstract: L’objectif de cette étude est de déterminer si le passage du fixing à la cotation en continu ou l’utilisation d’un contrat de liquidité permet d’améliorer le volume des titres échangés sur Alternext. Notre échantillon couvre la période du 2 mai 2006 au 28 avril 2008. Il contient 32 sociétés qui sont passées d’une cotation au fixing à une cotation en continu et 25 sociétés qui ont signé un contrat de liquidité. Notre étude tend à confirmer que le passage à la cotation en continu a été un succès du point de vue des volumes de titres échangés. Par contre, les contrats de liquidité ne semblent pas avoir significativement amélioré le nombre de titres échangés.English Abstract: The goal of this paper is to determine whether the switch from fixing to continuous trading or the use of a liquidity provider agreement improves volume on Alternext. The sample period ranges from May 2, 2006 to April 28, 2008. It includes 32 companies that switched from fixing to continuous trading and 25 companies that signed a liquidity provider agreement. The empirical study indicates that the switch from fixing to continuous trading was successful with respect to the number of shares traded. However, liquidity provider agreements do not significantly improve volume.
SSRN
French Abstract: L’objectif de cette étude est de déterminer si le passage du fixing à la cotation en continu ou l’utilisation d’un contrat de liquidité permet d’améliorer le volume des titres échangés sur Alternext. Notre échantillon couvre la période du 2 mai 2006 au 28 avril 2008. Il contient 32 sociétés qui sont passées d’une cotation au fixing à une cotation en continu et 25 sociétés qui ont signé un contrat de liquidité. Notre étude tend à confirmer que le passage à la cotation en continu a été un succès du point de vue des volumes de titres échangés. Par contre, les contrats de liquidité ne semblent pas avoir significativement amélioré le nombre de titres échangés.English Abstract: The goal of this paper is to determine whether the switch from fixing to continuous trading or the use of a liquidity provider agreement improves volume on Alternext. The sample period ranges from May 2, 2006 to April 28, 2008. It includes 32 companies that switched from fixing to continuous trading and 25 companies that signed a liquidity provider agreement. The empirical study indicates that the switch from fixing to continuous trading was successful with respect to the number of shares traded. However, liquidity provider agreements do not significantly improve volume.
What Explains the Success of Reward-Based Crowdfunding Campaigns As They Unfold?
SSRN
Using hand-collected data from a French crowdfunding platform, we identify several success factors that backers value when they decide to support reward-based campaigns. We show that these success factors evolve as the campaign unfolds. The first week of the campaign is of particular interest. We validate most of the conclusions drawn for reward-based crowdfunding in the US and we argue that reward-based and equity-based crowdfunding campaigns seem to driven by similar success factors.
SSRN
Using hand-collected data from a French crowdfunding platform, we identify several success factors that backers value when they decide to support reward-based campaigns. We show that these success factors evolve as the campaign unfolds. The first week of the campaign is of particular interest. We validate most of the conclusions drawn for reward-based crowdfunding in the US and we argue that reward-based and equity-based crowdfunding campaigns seem to driven by similar success factors.
