Research articles for the 2021-01-25

'Ο numerus clausus των κινητών αξιών που εκδίδει η Î'.Ε. και η διάσπαση της αρχής' (The Principle of 'Numerus Clausus' of Securities Issued by Société Anonyme (Shares, Bonds, Founding Titles, Warrants) and Its Disintegration)
Linaritis, Ioannis
SSRN
Greek Abstract: Οι εξελισσόμενες ανάγκες χρηματοδότησης των επιχειρήσεων, οι αυξανόμενες απαιτήσεις των επενδυτών και η διεθνοποίηση των κεφαλαιαγορών κατέστησαν τις παραδοσιακές μορφές τίτλων ανεπαρκείς, δρομολογώντας αλλεπάλληλη δημιουργία νέων κινητών αξιών. Όμως, τυχόν άρνηση του «κλειστού αριθμού» (numerus clausus) των τελευταίων για την ημεδαπή ανώνυμη εταιρία, δηλαδή αναγνώριση της δυνατότητας των συναλλασσομένων να διαμορφώνουν κατά το δοκούν τους τίτλους της, καταλήγει αντιμέτωπη με την ίδια την πεμπτουσία της. Η μοναδικότητα της άρρηκτης σχέσης που συνδέει κάθε μέτοχο με την εταιρία «του» (affectio societatis), η αρχή της ισότιμης μεταχείρισης των μετόχων, η σταθερότητα του κεφαλαίου, το αδιαίρετο του πλέγματος των δικαιωμάτων που απορρέουν από ορισμένο μετοχικό ή ομολογιακό τίτλο, κλονίζονται σταδιακά, ενώπιον των νέων περίτεχνων τίτλων που δοκιμάζονται επιτυχημένα στις συναλλαγές. Συγκριτικές παρατηρήσεις φανερώνουν την κυρίαρχη τάση απελευθέρωσης και των τελευταίων ρυθμιστικών «στεγανών» στην ηπειρωτική Ευρώπη, ακολουθώντας τις επινοήσεις της χρηματοοικονομικής βιομηχανίας.Σε συνέχεια προηγούμενων μεταρρυθμίσεων, ο νέος νόμος για την Î'.Ε. (Ν. 4548/2018) συστηματοποιεί και εκσυγχρονίζει το δίκαιο των κινητών αξιών της. Θεσπίζει «καταρχήν περιοριστικό» κατάλογο τεσσάρων (4) ειδών τίτλων (μετοχές, ομολογίες, τίτλοι κτήσης μετοχών, ιδρυτικοί τίτλοι), με την επιφύλαξη νομοθετικής καθιέρωσης πρόσθετων τίτλων. Όσον αφορά στις μετοχές, επιβεβαιώνει την καταστατική ελευθερία των μετόχων, ως προς την εξειδίκευση και διαφοροποίηση των προνομίων (περιουσιακής φύσης) των προνομιούχων μετοχών. Î"ιευρύνει τις διαθέσιμες κατηγορίες εξαγοράσιμων μετοχών και διορθώνει παρωχημένες ρυθμίσεις για τους ιδρυτικούς τίτλους. Όσον αφορά στις ομολογίες, αίρει προϋφιστάμενους περιορισμούς της συμβατικής ελευθερίας και προβαίνει σε πανηγυρική καταγραφή επιμέρους σύγχρονων μορφών. Η εισαγωγή των warrants (επί μετοχών) στο «οπλοστάσιο» των κινητών αξιών της α.ε. αποτελεί ξεχωριστή καινοτομία. Πρόκειται για την αυτόνομη τιτλοποίηση ενός δικαιώματος προαίρεσης με αντικείμενο την απόκτηση μετοχών. Τα σύνθετα χαρακτηριστικά του νέου τίτλου, ιδίως η χρηματοοικονομική μόχλευση, ο «θνησιγενής» χαρακτήρας, η δρομολόγηση ετεροχρονισμένων αυξήσεων κεφαλαίου και οι συνθήκες δευτερογενούς διαπραγμάτευσης στην κεφαλαιαγορά, ανοίγουν σπουδαίες προοπτικές για την αξιοποίησή του, τόσο στην ενίσχυση παραδοσιακών και νεοφυών επιχειρήσεων, ακόμη και υπό συνθήκες αφερεγγυότητας ή ραγδαίας ανάπτυξης, όσο και στην άμυνα έναντι προτάσεων εξαγορών ή στην υλοποίηση εταιρικών μετασχηματισμών.Τα φαινομενικά στεγανά των (4) ειδών κινητών αξιών και τα όρια του «numerus clausus», έρχονται να αμφισβητήσουν έμπρακτα δύο πρόσθετες ρυθμίσεις. Χάρη στη δυνατότητα σύζευξης τίτλων (“stapled securities”) και ανάλογα με τα χαρακτηριστικά της (διαρκή, «ασφυκτική», προσωρινή), διανοίγονται περιθώρια de facto δημιουργίας πρωτότυπων συνδυασμών κινητών αξιών και ευθυγράμμισης των οικονομικών συμφερόντων διαφορετικών κατηγοριών εταιρικών stakeholders. Î'ντίστροφα, η δυνατότητα κατάτμησης των δικαιωμάτων τίτλων (“stripped securities”) συνιστά κάμψη της «αρχής του αδιαιρέτου». Οδηγεί στη δημιουργία νέων αξιών, μέσω κατακερματισμού σύνθετων μορφών, θέτοντας ενδιαφέροντα ερμηνευτικά ζητήματα για τα διαθέσιμα εργαλεία έννομης προστασίας των κατόχων.Î'κόμη και μετά το Ν. 4548/2018 εξακολουθούν να υφίστανται αρκετές «αρρύθμιστες κινητές αξίες», των οποίων δεν επιτρέπεται η έκδοση από την α.ε. Είναι το τίμημα της «λελογισμένης απελευθέρωσης της αγοράς επενδυτικών αξιογράφων», που επέλεξε ο νομοθέτης. Όσο για τις πολυάριθμες πλέον αναγνωριζόμενες κατηγορίες κινητών αξιών, συμπεριλαμβανομένων των συζευγμένων, κατατμημένων και «μεταλλασσόμενων» τίτλων, ενδείκνυται να αξιολογούνται ως ανταγωνιστικά μεταξύ τους, εργαλεία χρηματοδότησης της εκδότριας. Î'ποδεικνύεται ότι τα ουσιαστικά χαρακτηριστικά των δικαιωμάτων των κομιστών τους είναι προεχόντως ζήτημα της εσωτερικής καταστατικής οργάνωσης και συμβατικής διαμόρφωσης της α.ε., και λιγότερο της αναγκαστικού δικαίου νομοθεσίας. Υπό το ίδιο πρίσμα, αντί της τυπικής ορολογικής ένταξης, ο συνδυασμός επενδυτικού κινδύνου/απόδοσης (risk/return) κάθε συγκεκριμένου τίτλου αποτελεί την πλέον κρίσιμη ιδιότητά του, που μπορεί να συνεισφέρει ιδίως στην ερμηνευτική επίλυση ασαφών και αμφισβητούμενων ιδιωτικών (εταιρικών και συμβατικών) ρυθμίσεων. English Abstract: Continuous creation of new securities in international markets practice, based on the needs of corporations, investors and the inventions of financial industry, calls into question the principle of the "numerus clausus" of the securities issued by Greek Société Anonyme. Recent L. 4548/2018 systematizes and modernizes the law of companies’ securities, by establishing a "mainly restrictive" catalogue comprising four (4) types of securities. In addition to extending the available features and categories of shares, bonds and founding titles, distinct innovation has been observed in relation to the legislative recognition of warrants, the regulation of autonomous securitization of an option to acquire shares. The apparent frontiers distinguishing among the above types have been further questioned by the legal rules about 'stapled securities' and 'stripped securities'. Ultimately, they lead to the disintegration of the principle of 'numerus clausus', the creation of complex combinations or fragmented forms of securities, which in turn raise interesting interpretative issues in respect of the legal remedies available to their holders.

A Business Cycle Capital Asset Pricing Model
Tse, Wai Man
SSRN
An asset pricing model is introduced that captures the market, liquidity, credit, and business cycle risks. The explicit incorporation of economic-phase-switching business cycle risks with rational expectations makes the predicted return volatility equal to the observed return volatility. Therefore, the concerns over excessive volatility and equity premium puzzle become insignificant. The risk-return tradeoff dynamic disequilibrium model builds on the equilibrium CAPM, taken as its steady state. It has no worse explanatory power than that of the Fama-French three-factor model and its variants but significantly better out-of-sample predictive power and ex-post S&P 500 portfolio returns over the last 20-year period.

A machine learning solver for high-dimensional integrals: Solving Kolmogorov PDEs by stochastic weighted minimization and stochastic gradient descent through a high-order weak approximation scheme of SDEs with Malliavin weights
Riu Naito,Toshihiro Yamada
arXiv

The paper introduces a very simple and fast computation method for high-dimensional integrals to solve high-dimensional Kolmogorov partial differential equations (PDEs). The new machine learning-based method is obtained by solving a stochastic weighted minimization with stochastic gradient descent which is inspired by a high-order weak approximation scheme for stochastic differential equations (SDEs) with Malliavin weights. Then solutions to high-dimensional Kolmogorov PDEs or expectations of functionals of solutions to high-dimensional SDEs are accurately approximated without suffering from the curse of dimensionality. Numerical examples for PDEs and SDEs up to 100 dimensions are shown by using second and third-order discretization schemes in order to demonstrate the effectiveness of our method.



A new efficient approximation scheme for solving high-dimensional semilinear PDEs: control variate method for Deep BSDE solver
Akihiko Takahashi,Yoshifumi Tsuchida,Toshihiro Yamada
arXiv

This paper introduces a new approximation scheme for solving high-dimensional semilinear partial differential equations (PDEs) and backward stochastic differential equations (BSDEs). First, we decompose a target semilinear PDE (BSDE) into two parts, namely "dominant" linear and "small" nonlinear PDEs. Then, we apply a Deep BSDE solver with a new control variate method to solve those PDEs, where approximations based on an asymptotic expansion technique are effectively applied to the linear part and also used as control variates for the nonlinear part. Moreover, our theoretical result indicates that errors of the proposed method become much smaller than those of the original Deep BSDE solver. Finally, we show numerical experiments to demonstrate the validity of our method, which is consistent with the theoretical result in this paper.



Analisis Pengaruh Struktur Kepemilikan Keluarga terhadap Kinerja Perusahaan: Studi Empiris pada Perusahaan Non Keuangan Terdaftar di Bursa Efek Indonesia Periode 2009-2014 (The Analysis of Family Ownership Structure on Firm Performances: Empirical Study of Non Financing Listed Firms on Indonesia Stock Exchange by Period 2009-2014)
Septiana, Eva,Dalimunthe, Zuliani ,Wasilah, Wasilah
SSRN
Indonesian abstract: Penelitian ini bertujuan untuk menganalisis bagaimana struktur kepemilikan perusahaan keluarga berpengaruh terhadap kinerja perusahaan. Kinerja perusahaan diukur menggunakan Tobin’s Quntuk dapat melihat bagaimana pasar merespon terhadap strategi dan kebijakan yang diambil olehperusahaan keluarga. Penelitian ini mengambil sampel 147 perusahaan keluarga yang terdaftar diBursa Efek Indonesia selama 2009-2014. Hasil penelitian ini menunjukkan bahwa perusahaan keluarga mempunyai kinerja yang signifikan lebih rendah dibandingkan perusahaan non keluarga, tetapihubungan antara porsi kepemilikan saham oleh keluarga berbentuk kuadratik dimana terjadi pembalikan arah pada tingkat kepemilikan 76%. Penelitian ini juga menemukan bahwa kinerja perusahaanadalah lebih rendah ketika CEO perusahaan keluarga dikelola oleh generasi kedua dibandingkanketika dikelola oleh generasi pertama.English abstract: The study aims to analyse how the ownership structure of a family company affects the company’s performance. The company’s performance was measured using Tobin’s Q to see how the market responds to strategies and policies taken by the family company. The study took samples of 147 family companies listed on the Indonesia Stock Exchange during 2009-2014. The results showed that the family company had significantly lower performance compared to non-family companies, but the relationship between ownership by the family is a quadratic in which there is a direction reversal at the 76% ownership rate. The study also found that the company’s performance is lower when the CEO of the family company is managed by the second generation than when administered by the first generation.

Analysis of stock index with a generalized BN-S model: an approach based on machine learning and fuzzy parameters
Xianfei Hui,Baiqing Sun,Hui Jiang,Indranil SenGupta
arXiv

We use the superposition of the Levy processes to optimize the classic BN-S model. Considering the frequent fluctuations of price parameters difficult to accurately estimate in the model, we preprocess the price data based on fuzzy theory. The price of S&P500 stock index options in the past ten years are analyzed, and the deterministic fluctuations are captured by machine learning methods. The results show that the new model in a fuzzy environment solves the long-term dependence problem of the classic model with fewer parameter changes, and effectively analyzes the random dynamic characteristics of stock index option price time series.



Analyzing the Structural Breaks and the Exchange Market Turbulence on Volatility Spillovers Between Exchange Rates and Tehran Stock Exchange
Gholizadeh, Mohammadmehdi,Erfani, Alireza
SSRN
This article has studied several fluctuations in the Iranian currency market and multiple turmoils in the economy that have not only wiped out Iranians private savings but also affected financial market activists to provide a better understanding of fluctuations' movement between markets. To doing so, we used the exchange rate in the open market (in some periods, the black market) as one variable and the Tehran Stock Exchange Index (TEDPIX) as a second in the form of multivariate conditional heterogeneity variance (MGarch) model.According to the results, the time series suggests multiple structural breaks from Dec. 2018 to Jan. 2020. Using the so-called GLS-Based unit root test, we observed five structural breaks that produced stationary problems at the level and no evidence of stationary problems at the return of the data. Also, by using DCC and FDCC models we confirm that there is a fluctuation between the two markets during the period. This overflow shows a different performance if structural failures are considered.

Beyond cost reduction: Improving the value of energy storage in electricity systems
Maximilian Parzen,Fabian Neumann,Addrian H. Van Der Weijde,Daniel Friedrich,Aristides Kiprakis
arXiv

An energy storage technology is valuable if it makes energy systems cheaper. Traditional ways to improve storage technologies are to reduce their costs; however, the cheapest energy storage is not always the most valuable in energy systems. This paper reviews techno-economic storage valuation methods and expands them by the new "market potential method" which derives a system-value by examining the capacities obtained from a long-term investment planning optimisation. We apply and compare this method to other cost metrics in a renewables-based European power system model, covering diverse energy storage technologies. We find that characteristics of high-cost hydrogen storage can be equally or even more valuable than low-cost hydrogen storage. Additionally, we show that modifying the freedom of storage sizing and component interactions can make the energy system 10% cheaper and impact the value of technologies. The results suggest to look beyond the pure cost reduction paradigm and focus on developing technologies with value approaches that can lead to cheaper electricity systems in future. One practical and useful value method to guide energy storage innovation could be the market potential method.



Bond Lending and the Law of One Price in China's Treasury Markets
Magnani, Jacopo,Wang, Yabin
SSRN
This paper examines how the introduction of bond lending in China's bond market has affected violations of the law of one price, measured by the yield spread between similar treasury bonds. To identify the effect of bond lending, we exploit the fact that in China identical bonds are traded on two segmented markets and bond lending has been introduced in only one of the two markets. We find that the introduction of bond lending has led to a decline in deviations from the law of one price. Consistent with an interpretation based on limits to arbitrage, a significant fraction of the deviations from the law of one price in our sample represent actual profit opportunities and the introduction of bond lending has reduced arbitrage profits.

Capital growth and survival strategies in a market with endogenous prices
Mikhail Zhitlukhin
arXiv

We call an investment strategy survival, if an agent who uses it maintains a non-vanishing share of market wealth over the infinite time horizon. In a discrete-time multi-agent model with endogenous asset prices determined through a short-run equilibrium of supply and demand, we show that a survival strategy can be constructed as follows: an agent should assume that only their actions determine the prices and use a growth optimal (log-optimal) strategy with respect to these prices, disregarding the actual prices. Then any survival strategy turns out to be close to this strategy asymptotically. The main results are obtained under the assumption that the assets are short-lived.



Climate-related Risks and Central Banks’ Collateral Policy: A Methodological Experiment
Oustry, Antoine,Erkan, Bünyamin,Svartzman, Romain
SSRN
Central banks increasingly acknowledge that climate change is a source of financial risks, which is likely to also impact their conduct of monetary policy. Against this backdrop, the aim of this paper is to explore one potential approach to factoring climate-related transition risks into a central bank’s collateral framework. Given the radical uncertainty associated with measuring such risks, this approach relies on so-called climate “alignment” methodologies, which enable to assess the consistency of eligible and pledged marketable assets with specific climate targets. Moreover, this paper proposes a “climate-hedging portfolio approach”: instead of seeking to “align” the collateral on an asset-by-asset basis, central banks could aim for “alignment”, in aggregate, of the collateral pools pledged by their counterparties with a given climate target. The rationale for this choice is that assessing climate-related risk at the pool level avoids the Eurosystem having to decide on which assets/issuers in the pools should be excluded or capped, and is therefore more compatible with a market neutrality approach. The numerical experiment using Eurosystem marketable criteria data suggests that, in aggregate, neither the Eurosystem eligible collateral universe nor the collateral pledged is “aligned” with the climate targets of the European Union. From this perspective, the Eurosystem marketable collateral can be considered to be exposed to climate-related transition risks. We discuss the potential practical implications of aiming to “align” collateral pools, and suggest avenues for further work

Counterparty Credit Limits: The Impact of a Risk-Mitigation Measure on Everyday Trading
Martin D. Gould,Nikolaus Hautsch,Sam D. Howison,Mason A. Porter
arXiv

A counterparty credit limit (CCL) is a limit that is imposed by a financial institution to cap its maximum possible exposure to a specified counterparty. CCLs help institutions to mitigate counterparty credit risk via selective diversification of their exposures. In this paper, we analyze how CCLs impact the prices that institutions pay for their trades during everyday trading. We study a high-quality data set from a large electronic trading platform in the foreign exchange spot market, which enables institutions to apply CCLs. We find empirically that CCLs had little impact on the vast majority of trades in this data. We also study the impact of CCLs using a new model of trading. By simulating our model with different underlying CCL networks, we highlight that CCLs can have a major impact in some situations.



Deep Learning for Portfolio Optimization
Zihao Zhang,Stefan Zohren,Stephen Roberts
arXiv

We adopt deep learning models to directly optimise the portfolio Sharpe ratio. The framework we present circumvents the requirements for forecasting expected returns and allows us to directly optimise portfolio weights by updating model parameters. Instead of selecting individual assets, we trade Exchange-Traded Funds (ETFs) of market indices to form a portfolio. Indices of different asset classes show robust correlations and trading them substantially reduces the spectrum of available assets to choose from. We compare our method with a wide range of algorithms with results showing that our model obtains the best performance over the testing period, from 2011 to the end of April 2020, including the financial instabilities of the first quarter of 2020. A sensitivity analysis is included to understand the relevance of input features and we further study the performance of our approach under different cost rates and different risk levels via volatility scaling.



Disclosure Processing Costs and Market Feedback Around the World
McClure, Charles,Shi, Shawn X.,Watts, Edward M.
SSRN
Investors' incentive to acquire private informationâ€"and the extent it is reflected in priceâ€"is a function of disclosure processing costs. Theory predicts that if these costs change, the amount the manager can learn from price will also vary. To provide evidence on this issue, we exploit the worldwide introduction of centralized electronic disclosure systems, which, like the SEC's EDGAR, substantially reduces disclosure processing costs. Leveraging country- and firm-level variation resulting from these platforms' adoptions, we find an economically significant decrease in investment sensitivity to price. Moreover, we find that higher levels of country-wide technology use, more developed capital markets, and better regulatory environments mute this decline in investment sensitivity to price. Collectively, our findings show that technology adoptions that reduce disclosure processing costs have real effects on the economy.

Do Activist Directors Add Value?
Kushner, Thomas N,Mamun, Khawaja A.
SSRN
Since the financial crisis and with the help of large passive investors, activist hedge funds, who initially served as a catalyst in resolving agency conflict, have increased influence beyond their concentrated stock holdings advocating for board representation. We study the performance of companies with activist directors using a hand-collected dataset and attempt to fill a void in the emerging study of corporate activism. Our data covers a complete list of activist hedge fund directors, their tenure, and operating performance and returns associated with their board service. Additionally, our findings provide context for the ongoing policy debate on the attributes of activism and corporate governance. We find scant statistically significant evidence that activist hedge funds that nominate directors by winning a proxy contest or by consulting with management generate long-term value for shareholders in the form of superior operating performance and outsized monthly returns during their board tenure.

Estimating real-world probabilities: A forward-looking behavioral framework
Ricardo Crisóstomo
arXiv

We show that disentangling sentiment-induced biases from fundamental expectations significantly improves the accuracy and consistency of probabilistic forecasts. Using data from 1994 to 2017, we analyze 15 stochastic models and risk-preference combinations and in all possible cases a simple behavioral transformation delivers substantial forecast gains. Our results are robust across different evaluation methods, risk-preference hypotheses and sentiment calibrations, demonstrating that behavioral effects can be effectively used to forecast asset prices. Further analyses confirm that our real-world densities outperform densities recalibrated to avoid past mistakes and improve predictive models where risk aversion is dynamically estimated from option prices.



Flip or Flop? Tobin Taxes in the Real Estate Market
Chi, Chun-Che,LaPoint, Cameron,Lin, Ming-Jen
SSRN
This paper analyzes the effects of transfer taxes targeting property flips on house prices and investment decisions. We study a 2011 reform in Taiwan which required sellers of non-owner occupied properties to pay a surcharge of up to 15% of the full sale price for properties held for two years or less. Linking the universe of personal income tax returns to transaction records, we show immediate and substantial bunching at the two-year holding period threshold, but negligible changes in overall prices. According to our missing mass estimates, the tax generated a 75% drop in one-year flips and a 40% drop in overall second home sales volume. We use shocks to housing net worth from inheritances received after decedents’ untimely deaths to show that investors with more portfolio exposure pass through the tax to buyers. While low-wealth out-of-town investors account for most of the drop in sales volume, locals and non-residents earn similar holding period returns in the pre-reform period. We use spatial and time variation in the severity of typhoon seasons to estimate a 20% share of noise trading prior to the reform. We combine our estimates of the noise trading share and change in short-term sales volume to parametrize a model of optimal financial transaction taxes. The optimal transfer tax on short-term sales is 4%, at most, which is close to the flat transfer tax rates imposed in most major real estate markets. Our results point to market segmentation and inventory effects as key constraints on the effectiveness of property flip taxes towards promoting housing affordability.

Going-Concern Debt of Financial Intermediaries
Ma, Yueran,Scheinkman, José
SSRN
We study asset and debt characteristics of US bank holding companies. We show that financial institutions, especially large institutions, are not just about holding discrete assets. Services and going-concern values are important, and capital market debt against going-concern values accounts for 10% to 15% of total assets, comparable to the volume of capital market debt against discrete assets. We find that financial institutions' debt against going-concern values has weak monitoring, relative to similar debt among non-financial firms. We argue that weak monitoring prevails because creditors cannot easily punish or restructure these institutions should they violate covenants, which limits covenants' usefulness.

How Market Ecology Explains Market Malfunction
Maarten P. Scholl,Anisoara Calinescu,J. Doyne Farmer
arXiv

Standard approaches to the theory of financial markets are based on equilibrium and efficiency. Here we develop an alternative based on concepts and methods developed by biologists, in which the wealth invested in a financial strategy is like the abundance of a species. We study a toy model of a market consisting of value investors, trend followers and noise traders. We show that the average returns of strategies are strongly density dependent, i.e. they depend on the wealth invested in each strategy at any given time. In the absence of noise the market would slowly evolve toward an efficient equilibrium, but the statistical uncertainty in profitability (which is adjusted to match real markets) makes this noisy and uncertain. Even in the long term, the market spends extended periods of time away from perfect efficiency. We show how core concepts from ecology, such as the community matrix and food webs, give insight into market behavior. The wealth dynamics of the market ecology explain how market inefficiencies spontaneously occur and gives insight into the origins of excess price volatility and deviations of prices from fundamental values.



In Defence of Cyclical Coordinate Descent for Computing Risk Parity Portfolios
Rubsamen, Roman
SSRN
In this note, we review the conclusions of a paper comparing a cyclical coordinate descent (CCD) algorithm with other algorithms for solving risk parity portfolio optimization problems. In particular, we show that a proper numerical implementation of the CCD algorithm is fast, robust and convergent, confirming that the CCD algorithm is one of the most efficient algorithms to solve risk parity portfolio optimization problems.

Indifference Pricing Under Sahara Utility
Chen, An,Nguyen, Thai,Sørensen, Nils
SSRN
We study utility indifference pricing of untradeable assets in incomplete markets using a symmetric asymptotic hyperbolic absolute risk aversion (SAHARA) utility function, both from the buyer's and seller's perspective. The use of the SAHARA utility function allows us to tackle the ``short call'' problem, which power and exponential utility functions are unable to solve. While no closed-form solutions are available for the indifference prices, we are able to derive some pricing bounds. Furthermore, we rely on the dynamic programming approach to solve the associated utility maximization problem, which leads to a two-dimension HJB equation. A complex algorithm discussed in [Ma&Forsyth2016] is consequently adopted to numerically solve the HJB equation. We determine utility indifference prices for options written on the untradeable underlying assets and some insurance contracts.

Inference on the New Keynesian Phillips Curve with Very Many Instrumental Variables
Max-Sebastian Dovì
arXiv

Limited-information inference on New Keynesian Phillips Curves (NKPCs) and other single-equation macroeconomic relations is characterised by weak and high-dimensional instrumental variables (IVs). Beyond the efficiency concerns previously raised in the literature, I show by simulation that ad-hoc selection procedures can lead to substantial biases in post-selection inference. I propose a Sup Score test that remains valid under dependent data, arbitrarily weak identification, and a number of IVs that increases exponentially with the sample size. Conducting inference on a standard NKPC with 359 IVs and 179 observations, I find substantially wider confidence sets than those commonly found.



Information thermodynamics of financial markets: the Glosten-Milgrom model
Léo Touzo,Matteo Marsili,Don Zagier
arXiv

The Glosten-Milgrom model describes a single asset market, where informed traders interact with a market maker, in the presence of noise traders. We derive an analogy between this financial model and a Szil\'ard information engine by {\em i)} showing that the optimal work extraction protocol in the latter coincides with the pricing strategy of the market maker in the former and {\em ii)} defining a market analogue of the physical temperature from the analysis of the distribution of market orders. Then we show that the expected gain of informed traders is bounded above by the product of this market temperature with the amount of information that informed traders have, in exact analogy with the corresponding formula for the maximal expected amount of work that can be extracted from a cycle of the information engine. This suggests that recent ideas from information thermodynamics may shed light on financial markets, and lead to generalised inequalities, in the spirit of the extended second law of thermodynamics.



Interacting Regional Policies in Containing a Disease
Arun G. Chandrasekhar,Paul Goldsmith-Pinkham,Matthew O. Jackson,Samuel Thau
arXiv

Regional quarantine policies, in which a portion of a population surrounding infections are locked down, are an important tool to contain disease. However, jurisdictional governments -- such as cities, counties, states, and countries -- act with minimal coordination across borders. We show that a regional quarantine policy's effectiveness depends upon whether (i) the network of interactions satisfies a balanced-growth condition, (ii) infections have a short delay in detection, and (iii) the government has control over and knowledge of the necessary parts of the network (no leakage of behaviors). As these conditions generally fail to be satisfied, especially when interactions cross borders, we show that substantial improvements are possible if governments are outward-looking and proactive: triggering quarantines in reaction to neighbors' infection rates, in some cases even before infections are detected internally. We also show that even a few lax governments -- those that wait for nontrivial internal infection rates before quarantining -- impose substantial costs on the whole system. Our results illustrate the importance of understanding contagion across policy borders and offer a starting point in designing proactive policies for decentralized jurisdictions.



Is the Capability approach a useful tool for decision aiding in public policy making?
Nicolas Fayard,Chabane Mazri,Alexis Tsoukiàs
arXiv

This paper aims at proposing a model representing individuals' welfare using Sen's capability approach (CA). It is the first step of an attempt to measure the negative impact caused by the damage at a Common on a given population's welfare, and widely speaking, a first step into modelling collective threat. The CA is a multidimensional representation of persons' well-beings which account for human diversity. It has received substantial attention from scholars from different disciplines such as philosophy, economics and social scientist. Nevertheless, there is no empirical work that really fits the theoretical framework. Our goal is to show that the capability approach can be very useful for decision aiding, especially if we fill the gap between the theory and the empirical work; thus we will propose a framework that is both usable and a close representation of what capability is.



Legal Aspects of Bank Bail-ins
Gleeson, Simon
SSRN
The aim of bail-in is that governments should have an alternative option to taxpayer-funded rescues of systemic banks. It operates through a mechanism whereby an insufficiently solvent bank can be returned to balance sheet stability by writing down not only the claims of its subordinated creditors but also some of its senior creditors; converting their claims to equity. To be effective, the mechanism should be "hybrid", in that the terms of the relevant instruments should provide for the bail-in to operate through private contract, but the power to trigger the bail-in and to determine the extent of write-down and the resulting compensation should be vested in the relevant public authority. The primary objective of bail-in is to enable the relevant institution to avoid a sudden and disorderly liquidation by enabling it to continue in business as a going concern until it can be restructured or run down. This avoids the systemic damage which results from a "sudden stop" insolvency, reduces contagion within the financial system and potentially preserves critical functions. It is particularly attractive in respect of institutions or groups whose business are too complex or too international to be capable of being disintegrated into a "good bank"/"bad bank" model in the relatively short space of time required if the good bank is to continue in business without government support.The primary weakness of a bail-in as a bank restructuring tool is that although it renders the firm creditworthy, it provides no new cash. Thus in order to survive the firm must not only be creditworthy, but credibly creditworthy to at least its central bank, and preferably to the market as a whole. It is therefore likely that bail-in will require statutory backing in order to convince counterparties to continue dealing with it post-reconstruction. Much of the discussion about bank resolution is predicated on the basis of the simplifying assumption that a bank is a single entity. In economic terms this is broadly correct, but in legal terms it is clearly not. Most banks, and all systemically important banks, are groups of legal entities. In legal terms groups do not exist â€" it is only the companies which comprise the group which can enter into contracts, incur liabilities or fail. This is not, however the way that economists (or people generally) see the world. Businesses are generally thought of as single undertakings â€""Ford" or "BP" are unitary concepts. Thus for a lawyer it makes perfect sense to talk of a group being partially insolvent, in that some of its components are insolvent whilst others are not. For non-lawyers, however, the concept is almost meaningless â€" it is like speaking of a human being as being partly dead. However, in the same way that it is possible in emergencies to preserve the life of a living organism by removing dead parts, it is possible in emergencies to save parts of bank groups by allowing other parts to become insolvent. To press the analogy slightly further, the question of whether this is possible or not rather depends on the functions of the parts being amputated. There are some parts of a group whose removal can be accomplished without damaging the business of the group as a whole; but there are others whose removal entails the immediate and automatic extinction of the entire organism. It is by no means always crystal clear which is which. There is therefore no automatic answer to the question "what are we trying to resolve â€" the group or the bank?" - the only meaningful answer is "it depends". Consequently it is necessary to think about bank resolution tools not only in the context of individual undertakings, but also in the context of how those tools could be applied to bank subsidiaries within a group, to parent companies of banks, and potentially to non-bank subsidiaries of banks. This is a difficult piece of analysis. To complicate matters further, bank groups are by no means uniform, and different bank managements have different strategies as to how the economic activity of the bank should be reflected in the legal structure of the group. I conclude by suggesting a basic taxonomy of bank groups which may permit these issues to be addressed.

Liquidity of China’s Government Bond Market: Measures and Driving Forces
Han, Gaofeng,Miao, Hui,Wang, Yabin
SSRN
We construct a daily liquidity index of China’s government bond market using transaction data from the national interbank market over the past twenty years. The index is a composite of popular price-based and quantity-based metrics of liquidity. The composite indexes, obtained by averaging across different metrics or by applying principal component analysis, both point to a better liquidity condition after 2010. Market liquidity swings appear to be highly correlated with domestic funding liquidity and financial market volatility, but display less correlation to global macro financial indicators. Our findings suggest that further deepening of government bond market would support domestic financial stability and monetary operations down the road.

Long Goodbyes: Why do Private Equity Funds hold onto Public Equity?
Jenkinson, Tim,Jones, Howard,Rauch, Christian
SSRN
We analyze how private equity funds sell down their stakes in companies they take public. The average duration of post-IPO holdings is 3 years, whereas lockups expire after 6 months. PE-backed IPOs perform well during the lockup, but we find no evidence that GPs add value for investors through the timing or speed of their sell-down strategies. GPs appear reluctant to sell losers, which is consistent with behavioral biases or fear of litigation. Faster sell-down strategies could have saved investors around $3.5bn in management fees alone. We discuss how, in the future, stock distributions followed by Direct Listings could significantly increase net returns to LPs.

Lower Bank Capital Requirements as a Policy Tool to Support Credit to SMEs: Evidence From a Policy Experiment?
Dietsch, Michel,Fraisse, Henri,LÉ, Mathias,Lecarpentier, Sandrine
SSRN
Starting in 2014 with the implementation of the European Commission Capital Requirement Directive, banks operating in the Euro area were benefiting from a 25% reduction (the Supporting Factor or "SF" hereafter) in their own funds requirements against Small and Medium-sized enterprises ("SMEs" hereafter) loans. We investigate empirically whether this reduction has supported SME financing and to which extent it is consistent with SME credit risk. Economic capital computations based on multifactor models do confirm that capital requirements should be lower for SMEs. Taking into account the uncertainty surrounding their estimates and adopting a conservative approach, we show that the SF is consistent with the difference in economic capital between SMEs and large corporates. As for the impact on credit distribution, our difference-in-differences specification enables us to find a positive and significant impact of the SF on the credit supply

Optimal Equilibria for Multi-dimensional Time-inconsistent Stopping Problems
Yu-Jui Huang,Zhenhua Wang
arXiv

We study an optimal stopping problem under non-exponential discounting, where the state process is a multi-dimensional continuous strong Markov process. The discount function is taken to be log sub-additive, capturing decreasing impatience in behavioral economics. On strength of probabilistic potential theory, we establish the existence of an optimal equilibrium among a sufficiently large collection of equilibria, consisting of finely closed equilibria satisfying a boundary condition. This generalizes the existence of optimal equilibria for one-dimensional stopping problems in prior literature.



Optimal Trading with Signals and Stochastic Price Impact
Jean-Pierre Fouque,Sebastian Jaimungal,Yuri F. Saporito
arXiv

Trading frictions are stochastic. They are, moreover, in many instances fast-mean reverting. Here, we study how to optimally trade in a market with stochastic price impact and study approximations to the resulting optimal control problem using singular perturbation methods. We prove, by constructing sub- and super-solutions, that the approximations are accurate to the specified order. Finally, we perform some numerical experiments to illustrate the effect that stochastic trading frictions have on optimal trading.



Optimal investment in illiquid market with search frictions and transaction costs
Jin Hyuk Choi,Tae Ung Gang
arXiv

We consider an optimal investment problem to maximize expected utility of the terminal wealth, in an illiquid market with search frictions and transaction costs. In the market model, an investor's attempt of transaction is successful only at arrival times of a Poisson process, and the investor pays proportional transaction costs when the transaction is successful. We characterize the no-trade region describing the optimal trading strategy. We provide asymptotic expansions of the boundaries of the no-trade region and the value function, for small transaction costs. The asymptotic analysis implies that the effects of the transaction costs are more pronounced in the market with less search frictions.



Pension Fund, Financial Development and Output Growth in Nigeria
Iwegbu, Onyebuchi
SSRN
This study examines the indirect effect of pension fund on economic growth in Nigeria through the financial system. Using Autoregressive Distributive Lag (ARDL) model, the study found out that pension fund contribution is effective in stimulating growth through investment in portfolios that yield short term returns; this implies that pension fund contribution cannot on its own without a credible financial system impact on economic growth. The policy implication of this study is for Pension Fund Administrators (PFAs) to invest in portfolios with short-term returns; thus, a large chunk of funds invested in federal government securities should be unbundled to other portfolios that yield short-term returns.

Political Regime and COVID 19 death rate: efficient, biasing or simply different autocracies ?
Guilhem Cassan,Milan Van Steenvoort
arXiv

The difference in COVID 19 death rates across political regimes has caught a lot of attention. The "efficient autocracy" view suggests that autocracies may be more efficient at putting in place policies that contain COVID 19 spread. On the other hand, the "biasing autocracy" view underlines that autocracies may be under reporting their COVID 19 data. We use fixed effect panel regression methods to discriminate between the two sides of the debate. Our results show that a third view may in fact be prevailing: once pre-determined characteristics of countries are accounted for, COVID 19 death rates equalize across political regimes. The difference in death rate across political regime seems therefore to be primarily due to omitted variable bias.



Population and Inequality Dynamics in Simple Economies
John C. Stevenson
arXiv

While the use of spatial agent-based and individual-based models has flourished across many scientific disciplines, the complexities these models generate are often difficult to manage and quantify. This research reduces population-driven, spatial modeling of individuals to the simplest configurations and parameters: an equal resource opportunity landscape with equally capable individuals; and asks the question, "Will valid complex population and inequality dynamics emerge from this simple economic model?" Two foraging economies are modeled: subsistence and surplus. The resulting, emergent population dynamics are characterized by their sensitivities to agent and landscape parameters. The various steady and oscillating regimes of single-species population dynamics are generated by appropriate selection of model growth parameters. These emergent dynamics are shown to be consistent with the equation-based, continuum modeling of single-species populations in biology and ecology. The intrinsic growth rates, carry capacities, and delay parameters of these models are implied for these simple economies. Aggregate measures of individual distributions are used to understand the sensitivities to model parameters. New local measures are defined to describe complex behaviors driven by spatial effects, especially extinctions. This simple economic model is shown to generate significantly complex population and inequality dynamics. Model parameters generating the intrinsic growth rate have strong effects on these dynamics, including large variations in inequality. Significant inequality effects are shown to be caused by birth costs above and beyond their contribution to the intrinsic growth rate. The highest levels of inequality are found during the initial non-equilibrium period and are driven by factors different than those driving steady state inequality.



Precautionary Liquidity Shocks, Excess Reserves and Business Cycles
Bratsiotis, George,Theodoridis, Konstantinos
SSRN
This paper identifies a precautionary banking liquidity shock via a set of sign, zero and forecast variance restrictions imposed. The shock proxies the reluctance of the banking sector to "lend" to the real economy induced by an exogenous change in financial intermediaries' preference for "high" liquid assets. The identified shock has sizeable and state (volatility) dependent effects on the real economy. To understand the transmission of the shock, we develop a DSGE model of financial intermediation with credit and liquidity frictions. The precautionary liquidity shock is shown to work through two channels: it increases the level of reserves and the deposit rate. The former is a balance sheet effect, which reduces the loan-to-deposit ratio. The higher deposit rate affects the intertemporal decisions of households and the cost of borrowing to firms. The overall effect is a downward co-movement in output, consumption, investment and prices, which is amplified the higher are the long-run risk in the economy and the responsiveness of banks to potential risk.

Pricing Energy Storage in Real-time Market
Cong Chen,Lang Tong,Ye Guo
arXiv

The problem of pricing utility-scale energy storage resources (ESRs) in the real-time electricity market is considered. Under a rolling-window dispatch model where the operator centrally dispatches generation and consumption under forecasting uncertainty, it is shown that almost all uniform pricing schemes, including the standard locational marginal pricing (LMP), result in lost opportunity costs that require out-of-the-market settlements. It is also shown that such settlements give rise to disincentives for generating firms and storage participants to bid truthfully, even when these market participants are rational price-takers in a competitive market. Temporal locational marginal pricing (TLMP) is proposed for ESRs as a generalization of LMP to an in-market discriminative form. TLMP is a sum of the system-wide energy price, LMP, and the individual state-of-charge price. It is shown that, under arbitrary forecasting errors, the rolling-window implementation of TLMP eliminates the lost opportunity costs and provides incentives to price-taking firms to bid truthfully with their marginal costs. Numerical examples show insights into the effects of uniform and non-uniform pricing mechanisms on dispatch following and truthful bidding incentives.



Relief and Stimulus in A Cross-sector Multi-product Scarce Resource Supply Chain Network
Xiaowei Hu,Peng Li,Jaejin Jang
arXiv

In the era of a growing population, systemic change of the world, and rising risk of crises, humanity has been facing an unprecedented challenge of resource scarcity. Confronting and addressing the issues concerning the scarce resource's conservation, competition, and stimulation by grappling their characters and adopting viable policy instruments calls the decision-makers' attention to a paramount priority. In this paper, we develop the first general decentralized cross-sector supply chain network model that captures the unique features of the scarce resources under fiscal-monetary policies. We formulate the model as a network equilibrium problem with finite-dimensional variational inequality theories. We then characterize the network equilibrium with a set of classic theoretical properties, as well as some novel properties (with $\lambda_{min}$) that are new to the literature of network games application. Lastly, we provide a series of illustrative examples, including a medical glove supply chain, to showcase how our model can be used to investigate the efficacy of the imposed policies in relieving the supply chain distress and stimulating welfare. Our managerial insights encompass the industry profit and social benefit vis-\`a-vis the resource availability and policy instrument design.



Remotely Productive: The Economics of Long-Distance CEOs
Duchin, Ran,Sosyura, Denis
SSRN
We provide the first evidence on the efficacy of long-distance working arrangements between CEOs and firms. Long-distance CEOs underperform according to operating performance, insider reviews, and announcement returns to CEO departures. These effects are stronger when the CEO’s commute is longer and crosses multiple time zones. Using the quality of schools available to the CEO’s children as an instrument for the decision to commute, we argue that these effects are causal. CEOs’ private costs of working remotely have long-run effects on their strategic decisions and on the future of their firms. Remote CEOs are 60% more likely to sell their firm to an acquirer, and they do so at bargain prices.

Risk Dynamics with Heterogeneous Borrowers and Intermediaries
Lamichhane, Sujan
SSRN
This paper studies the effects of borrowers' balance sheet heterogeneity on economywide risks and fragility, together with effects from intermediary balance sheet channel. We build a continuous time heterogeneous agents model with financial frictions and analytically characterize the transition dynamics. Once the economy moves to high leverage states, it tends to stay there â€" a leverage trap. Transition speed increases (decreases) when the economy is leveraging up (deleveraging) and when interest rate is lower. Tail uncertainty lasts longer during transition. Intermediary failure risk can lead to severe decline in borrowing/lending activities that could further slow the recovery process.

Risk Management and the Prudent Investor Rule
Schanzenbach, Max M.,Sitkoff, Robert H.
SSRN
The prudent investor rule, now enacted in every state, is the centerpiece of trust investment law. In accordance with modern portfolio theory, the rule directs a trustee to implement an overall investment strategy having risk and return objectives reasonably suited to the trust. This article, recently published in Trusts & Estates magazine, summarizes the results of an earlier empirical study of the effect of the rule on asset allocation and management of market risk by bank trustees. We had two main findings. First, enactment of the rule was associated with increased stockholdings by bank trustees, but not among banks with average trust account sizes below the 25th percentile, a result that is consistent with sensitivity in asset allocation to trust risk tolerance. Second, enactment of the rule was associated with increased portfolio rebalancing by bank trustees, a result that is consistent with increased management of market risk. Given these findings, we concluded that reallocation toward additional stockholdings after enactment of the rule was correlated with trust risk tolerance and that the increased market risk exposure from those additional stockholdings was more actively managed.

Semi-Structural VAR and Unobserved Components Models to Estimate Finance-Neutral Output Gap
Katay, Gabor,Lequien, Matthieu,Kerdeljué, Lisa
SSRN
The paper assesses the impact of adding information on financial cycles on the output gap estimates for eight advanced economies using two unobserved components models: a reduced form extended Hodrick-Prescott filter, and a standard semi-structural unobserved components model. To complement these models, a semi-structural vector autoregression model is proposed in which only supply shocks are identified. The accuracy of the output gap estimates is assessed based on their performance in predicting recessions. The models with financial variables generally produce more accurate output gap estimates at the expense of increased real-time volatility. While the extended Hodrick-Prescott filter is particularly appealing for its real-time stability, it lags behind the two semi-structural models in terms of forecasting performance. The vector autoregression model augmented with financial variables features the best in-sample forecasting performance, and it has similar real-time prediction capabilities to the semi-structural unobserved components model. Overall, financial cycles appear to be relevant in Japan, Spain, the UK, and â€" to a lesser extent â€" in the US and in France, while they are relatively muted in Canada, Germany, and Italy.

Set-Up Costs and the Financing of Young Firms
Derrien, François,Mésonnier, Jean-Stéphane,Vuillemey, Guillaume
SSRN
We show that set-up costs are a key determinant of the capital structure of young firms. Theoretically, when firms face high set-up costs, they can only be established by leveraging up and lengthening debt maturity. Empirically, we use a large sample of French firms to show that young firms have a significantly higher leverage and issue longer-maturity debt than seasoned companies. As predicted by the model, these patterns are stronger in high set-up cost industries and for firms with lower profitability. Last, we show that, following an exogenous shock that reduces banks' supply of long-term loans, young firms in high set-up cost industries grow significantly less.

Short-Term Institutions’ Information Advantage and Overvaluation
Du, Brian,Serrano, Alejandro,Vianna, Andre C.
SSRN
Prior literature has documented that institutions which trade more frequently are better able to forecast future returns and have an informational advantage. This study examines a proximate explanation for the differences in performance based on institutions’ investment horizon â€" short-term institutions are better informed because they are better able to identify overvalued stocks that are short-sale constrained and overvalued in the context of Miller’s (1977) overvaluation hypothesis. Analysis is conducted on 6,330 unique firms from 1996 to 2014 using the calendar-time portfolio approach where abnormal returns are estimated from the Fama-French-Carhart four-factor regression model. The results provide evidence that stocks which are extremely overvalued due to short-sale constraints have the greatest decline in short-term institutional ownership, consistent with the notion that short-term institutions are able to correctly assess the components for stock overvaluation.

Should Defined Contribution Plans Include Private Equity Investments?
Brown, Gregory W.,Crouch, Keith,Ghent, Andra C.,Harris, Robert S.,Hochberg, Yael V.,Jenkinson, Tim,Kaplan, Steven N.,Maxwell, Richard,Robinson, David T.
SSRN
This paper evaluates the pros and cons of including private equity fund investments in defined contribution plans. Potential benefits include higher returns and improved diversification as well as a relatively safe method for accessing investments previously only available to institutions and the very wealthy. Despite these enticing benefits, they need to be weighed against potential challenges and costs that may arise from creating this broader access to private funds. The complicated structure and uncertainty around the mechanism to provide required liquidity backstops may bring increased fees or even disrupt the private fund model. Consequently, whether access to private investments provide a net benefit for DC plan participants will depend both on how private fund investments perform in the future as well as how institutional features around plan participation evolve.

Sleep Disruption and Investor Processing of Earnings News: Evidence from Daylight Saving Time Advances
Kleppe, Tyler J.,Pierce, Andrew T.,Wiebe, Zac,Yohn, Teri Lombardi
SSRN
Despite extensive evidence on the effects of psychological and behavioral factors on investors’ processing of accounting information, little is known about how physiological factors affect the investor response to accounting disclosures. We use “spring forward” Daylight Saving Time (DST) phase advances, which have been shown to inhibit cognitive function by disrupting the human sleep cycle and circadian rhythm, to examine the effect of sleep disruption on investors’ reactions to earnings news. We find consistent evidence of a muted reaction to earnings news released during the week following a DST advance. We also find that this effect is stronger when transient institutional ownership is higher and, therefore, when investors are more likely to be trading on earnings news. We find no evidence of a decrease in EDGAR downloads or media attention during this period, suggesting that DST advances affect investors’ information integration, rather than information acquisition. Our inferences are strengthened through a placebo test performed during the previous (i.e., pre-2007) DST phasing regime and through alternative design choices and robustness tests. Overall, our findings suggest that sleep disruptions affect investors’ ability to integrate value-relevant earnings news into their trading decisions.

Solving optimal stopping problems with Deep Q-Learning
John Ery,Loris Michel
arXiv

We propose a reinforcement learning (RL) approach to model optimal exercise strategies for option-type products. We pursue the RL avenue in order to learn the optimal action-value function of the underlying stopping problem. In addition to retrieving the optimal Q-function at any time step, one can also price the contract at inception. We first discuss the standard setting with one exercise right, and later extend this framework to the case of multiple stopping opportunities in the presence of constraints. We propose to approximate the Q-function with a deep neural network, which does not require the specification of basis functions as in the least-squares Monte Carlo framework and is scalable to higher dimensions. We derive a lower bound on the option price obtained from the trained neural network and an upper bound from the dual formulation of the stopping problem, which can also be expressed in terms of the Q-function. Our methodology is illustrated with examples covering the pricing of swing options.



Sticky Deposit Rates and Allocative Effects of Monetary Policy
Duquerroy, Anne,Matray, Adrien,Saidi, Farzad
SSRN
This paper documents that monetary policy affects credit supply through banks’ cost of funding. Using administrative credit-registry and regulatory bank data, we find that banks can incur an increase in their funding costs of at least 30 basis points before they adjust their lending. For identification, we exploit the existence of regulated-deposit accounts in France whose interest rates are set by the government and are, thus, not directly affected by the monetary-policy rate. When banks’ funding cost increases and they contract their lending, we observe portfolio reallocations consistent with risk shifting: banks that depend on regulated deposits lend less to large firms, and relatively more to small firms and entrepreneurs.

Tax-Aware Portfolio Construction via Convex Optimization
Nicholas Moehle,Mykel J. Kochenderfer,Stephen Boyd,Andrew Ang
arXiv

We describe an optimization-based tax-aware portfolio construction method that adds tax liability to standard Markowitz-based portfolio construction. Our method produces a trade list that specifies the number of shares to buy of each asset and the number of shares to sell from each tax lot held. To avoid wash sales (in which some realized capital losses are disallowed), we assume that we trade monthly, and cannot simultaneously buy and sell the same asset.

The tax-aware portfolio construction problem is not convex, but it becomes convex when we specify, for each asset, whether we buy or sell it. It can be solved using standard mixed-integer convex optimization methods at the cost of very long solve times for some problem instances. We present a custom convex relaxation of the problem that borrows curvature from the risk model. This relaxation can provide a good approximation of the true tax liability, while greatly enhancing computational tractability. This method requires the solution of only two convex optimization problems: the first determines whether we buy or sell each asset, and the second generates the final trade list. In our numerical experiments, our method almost always solves the nonconvex problem to optimality, and when it does not, it produces a trade list very close to optimal. Backtests show that the performance of our method is indistinguishable from that obtained using a globally optimal solution, but with significantly reduced computational effort.



The EU Policy on Sustainable Finance: A Discussion on the Design of ESG-Fit Suitability Requirements
Mezzanotte, Félix E.
SSRN
The suitability requirements (SRs) regulated in the Markets in Financial Instruments Directive (MiFID) II have attained a new, additional role. Traditionally used to protect investors from abusive conduct perpetrated by advisers and portfolio managers, the SRs have now become a critical component of the EU policy on sustainable finance. In this new role, the SRs are expected to provide a unique setting for advisers and portfolio managers to identify, negotiate, and treat the environmental, social and governance (ESG) preferences of their clients. Reshaped SRs will empower those clients willing to allocate their savings to fund ESG-friendly projects and companies, and thereby, directly infuse sustainability into the financial system. The success of this policy, however, has required reform. This Article addresses the problem of how to design SRs that are adequate to the ESG context. The first part of the Article explains the rules governing the SRs in the MiFID II regime and outlines the European Commission’s proposed amendments to such rules. The second part of the Article identifies and critically analyzes various solutions suggested by the industry. The investigation relied upon European Union (EU) law and policy documents. Importantly, the content of sixty-four responses submitted by industry actors to the public consultation on this subject launched by European Securities and Markets Authority (ESMA) was also analyzed. The findings shed light on the contours and implications of the suitability obligation of investment advisers and portfolio managers in the realm of sustainable finance.

The Effect of Oil Supply Shocks on Industry Returns
Huang, Dayong,Li, Jay Y.,Wu, Kai
SSRN
We examine how industry returns react to various oil shocks developed in Baumeister and Hamilton (2019) and find that oil supply shocks matter as much, if not more, as oil demand and economic activity shocks in driving industry returns. A long-short portfolio that buys (sells) industries benefiting (suffering) from negative oil supply shocks earns an initial abnormal monthly return of 0.88%. This return is corrected by sophisticated investors over time. We find no overreaction to oil demand and economic activity shocks. Our evidence corroborates the view that oil supply shocks matter and that retail investors tend to drive short-term overreaction.

The Housing as a Source of Constraints for the Monetary Policy From Romania
Dumitriu, Ramona,Stefanescu, Razvan
SSRN
The housing market could interact with the monetary policy in several ways. This paper approaches the situation of Romania where the national currency depreciation or the interest rates raise provoked, in the past, virulent reactions of the mortgage debtors. In these circumstances, the central bank has to take into consideration, when deciding, the potential impact on housing market.

The Role of Cost in the Integration of Security Features in Integrated Circuits for Smart Cards
Nikolaos Athanasios Anagnostopoulos
arXiv

This essay investigates the role of cost in the development and production of secure integrated circuits. Initially, I make a small introduction on hardware attacks on smart cards and some of the reasons behind them. Subsequently, I introduce the production phases of chips that are integrated to smart cards and try to identify the costs affecting each one of them. I proceed to identify how adding security features on such integrated circuits may affect the costs of their development and production. I then make a more thorough investigation on the costs of developing a hardware attack for such chips and try to estimate the potential damages and losses of such an attack. I also go on to examine potential ways of reducing the cost of production for secure chips, while identifying the difficulties in adopting them.

This essay ends with the conclusion that adding security features to chips meant to be used for secure applications is well worth it, because the costs of developing attacks are of comparable amounts to the costs of developing and producing a chip and the potential damages and losses caused by such attacks can be way higher than these costs. Therefore, although the production and development of integrated circuits come at a certain cost and security introduces further additional costs, security is inherently unavoidable in such chips. Finally, I additionally identify that security is an evolving concept and does not aim to make a chip totally impenetrable, as this may be impossible, but to lower the potential risks, including that of being compromised, to acceptable levels. Thus, a balance needs be found between the level of security and the levels of cost and risk.



The Two-Sided Market Network Anlysis Based on Transfer Entropy & Labelr
Seung Bin Baik
arXiv

This study more complex digital platforms in early stages in the two-sided market to produce powerful network effects. In this study, I use Transfer Entropy to look for super users who connect hominids in different networks to achieve higher network effects in the digital platform in the two-sided market, which has recently become more complex. And this study also aims to redefine the decision criteria of product managers by helping them define users with stronger network effects. With the development of technology, the structure of the industry is becoming more difficult to interpret and the complexity of business logic is increasing. This phenomenon is the biggest problem that makes it difficult for start-ups to challenge themselves. I hope this study will help product managers create new digital economic networks, enable them to make prioritized, data-driven decisions, and find users who can be the hub of the network even in small products.



Third-Party Consequences of Changes in Managerial Fiduciary Duties: The Case of Auditors’ Going Concern Opinions
Tan, Liang,Ramalingegowda, Santhosh,Yu, Yong
SSRN
This study examines the effect of managerial fiduciary duties on the likelihood of firms receiving going concern (GC) opinions from their auditors. We exploit an influential 1991 legal ruling that expanded fiduciary duties of corporate directors and officers in favor of creditors for near-insolvent Delaware firms. Our difference-in-differences test reveals an increase in GC opinions following the ruling for near-insolvent Delaware firms. Further tests indicate an increase in Type I audit opinion errors and no change in audit risk after the ruling. Additional analysis shows that after the ruling near-insolvent Delaware firms are less likely to dismiss their auditors following the receipt of a GC report. Overall, our findings are consistent with managers and directors with increased fiduciary duties toward creditors exerting less pressure on auditors and allowing them to reveal more GC opinions. Our results highlight important third-party consequences of changes in managerial fiduciary duties.

Uncertainty Network Risk and Currency Returns
Mykola Babiak,Jozef Barunik
arXiv

We examine the pricing of a horizon specific uncertainty network risk, extracted from option implied variances on exchange rates, in the cross-section of currency returns. Buying currencies that are receivers and selling currencies that are transmitters of short-term shocks exhibits a high Sharpe ratio and yields a significant alpha when controlling for standard dollar, carry trade, volatility, variance risk premium and momentum strategies. This profitability stems primarily from the causal nature of shock propagation and not from contemporaneous dynamics. Shock propagation at longer horizons is priced less, indicating a downward-sloping term structure of uncertainty network risk in currency markets.



Unraveling S&P500 stock volatility and networks -- An encoding and decoding approach
Xiaodong Wang,Fushing Hsieh
arXiv

We extend the Hierarchical Factor Segmentation(HFS) algorithm for discovering multiple volatility states process hidden within each individual S&P500 stock's return time series. Then we develop an associative measure to link stocks into directed networks of various scales of associations. Such networks shed lights on which stocks would likely stimulate or even promote, if not cause, volatility on other linked stocks. Our computing endeavors starting from encoding events of large return on the original time axis to transform the original return time series into a recurrence-time process on discrete-time-axis. By adopting BIC and clustering analysis, we identify potential multiple volatility states, and then apply the extended HFS algorithm on the recurrence time series to discover its underlying volatility state process. Our decoding approach is found favorably compared with Viterbi's in experiments involving both light and heavy tail distributions. After recovering the volatility state process back to the original time-axis, we decode and represent stock dynamics of each stock. Our measurement of association is measured through overlapping concurrent volatility states upon a chosen window. Consequently, we establish data-driven associative networks for S&P500 stocks to discover their global dependency relational groupings with respect to various strengths of links.



Unveiling Spatial Patterns of Disaster Impacts and Recovery Using Credit Card Transaction Variances
Faxi Yuan,Amir Esmalian,Bora Oztekin,Ali Mostafavi
arXiv

The objective of this study is to examine spatial patterns of impacts and recovery of communities based on variances in credit card transactions. Such variances could capture the collective effects of household impacts, disrupted accesses, and business closures, and thus provide an integrative measure for examining disaster impacts and community recovery in disasters. Existing studies depend mainly on survey and sociodemographic data for disaster impacts and recovery effort evaluations, although such data has limitations, including large data collection efforts and delayed timeliness results. In addition, there are very few studies have concentrated on spatial patterns and disparities of disaster impacts and short-term recovery of communities, although such investigation can enhance situational awareness during disasters and support the identification of disparate spatial patterns of disaster impacts and recovery in the impacted regions. This study examines credit card transaction data Harris County (Texas, USA) during Hurricane Harvey in 2017 to explore spatial patterns of disaster impacts and recovery during from the perspective of community residents and businesses at ZIP code and county scales, respectively, and to further investigate their spatial disparities across ZIP codes. The results indicate that individuals in ZIP codes with populations of higher income experienced more severe disaster impact and recovered more quickly than those located in lower-income ZIP codes for most business sectors. Our findings not only enhance the understanding of spatial patterns and disparities in disaster impacts and recovery for better community resilience assessment, but also could benefit emergency managers, city planners, and public officials in harnessing population activity data, using credit card transactions as a proxy for activity, to improve situational awareness and resource allocation.



Value-At-Risk Based Approach For Currency Hedging
Khurana, Rachna,Khetan, Umang
SSRN
Corporate FX risk management has gained complexity with increased number of currencies involved and varying correlations among them. Existing literature has highlighted the need to account for cross-currency correlations when optimizing hedge ratios for portfolio management (Dowd, 1999). In this paper, we propose a Value-at-Risk (VaR) based model to estimate the optimal hedge ratio for a multi-national corporate that aims to minimize the cost of hedging at a given tolerance level of expected loss arising out of FX movement. The paper illustrates both parametric and historical methods of VaR estimation at a portfolio level as the first step in risk management. As a second step, an efficient-frontier is derived based on the expected VaR level at various hedge ratios, and compared with associated hedge cost. The benefits of this approach include: identification of net exposures after correlations among currencies are accounted for in order to avoid duplication of hedges, and condensation of the parameters governing hedging decision into a single, intuitively-appealing number. The paper also highlights the need to frequently update the model’s assumptions as currency correlations and corporate exposures remain dynamic.

Ζητήματα από την αντικατάσταση των άυλων ομολογιακών τίτλων του Ελληνικού Î"ημοσίου (Greek Sovereign Debt Restructuring: Critical Legislative and State Acts, Affecting Private Investors in Dematerialized Government Bonds and Their Judicial Evaluation)
Linaritis, Ioannis
SSRN
Greek Abstract: H μελέτη επιχειρεί αξιολόγηση των κρίσιμων νομοθετικών και διοικητικών μέτρων της ελληνικής Πολιτείας σχετικά με τη συμμετοχή του ιδιωτικού τομέα στην αναδιάρθρωση του ελληνικού δημόσιου χρέους (Private Sector Involvement, 2012), με παράλληλη αναφορά στη δικαστική κρίση τους από το Συμβούλιο της Επικρατείας. Η καθιέρωση μηχανισμού συλλογικής δράσης των κατόχων ομολόγων υπό ελληνικό δίκαιο με αναδρομική ισχύ, οδήγησε αναγκαστικώς, κατόπιν της αποδοχής της πρότασης του Î"ημοσίου από ορισμένη πλειοψηφία ομολογιούχων δανειστών, στην αντικατάσταση του συνόλου των αντίστοιχων τίτλων με τίτλους αισθητά μειωμένης ονομαστικής αξίας, διαφορετικά χαρακτηριστικά, διάρκεια, εφαρμοστέο δίκαιο, μέρος των οποίων εκδόθηκε από το Ευρωπαϊκό Ταμείο Χρηματοπιστωτικής Σταθερότητας. Υπό τα ανωτέρω δεδομένα, ο έλεγχος νομιμότητας των μέτρων λαμβάνει χώρα ιδίως από τη σκοπιά των επιβληθέντων περιορισμών των ενωσιακών ελευθεριών και των ατομικών δικαιωμάτων των επενδυτών που δεν συναίνεσαν στην αντικατάσταση. Παράλληλα, εξετάζονται κριτικά οι προϋποθέσεις που θεσπίσθηκαν για την έγκυρη λήψη σχετικής συλλογικής απόφασης των ομολογιούχων, λαμβανομένου υπόψη και του ιδιαίτερου καθεστώτος για την έκδοση και κυκλοφορία επενδυτικών τίτλων σε άυλη μορφή. Επιμέρους χαρακτηριστικά και διακρίσεις ομολογιούχων, καθώς και χρηματοοικονομικές παράμετροι του προγράμματος αναδιάρθρωσης αναδεικνύονται ως ιδιαίτερα σημαντικές, προκειμένου για τη στάθμιση των επιπτώσεων των μέτρων στα διακυβευόμενα αντίρροπα συμφέροντα. Συμπεραίνεται ότι η καταληκτική δικαιϊκή στάθμιση στην οποία οδηγήθηκε το Î'νώτατο Î"ιοικητικό Î"ικαστήριο, κατά πλειοψηφία, ως προς την τήρηση των υπερνομοθετικών αρχών της ισότητας και της αναλογικότητας, φαίνεται ορθή, έστω και αν όφειλε να προηγηθεί προδικαστικό ερώτημα στο Î"ικαστήριο της Ευρωπαϊκής Ένωσης, λόγω της διασυνοριακής διάστασης των επίδικων διαφορών. Η συμπεριφορά του Î"ημοσίου, μέσω άσκησης εξουσιών jure imperii, μολονότι καταρχήν αντισυμβατική, κρίνεται κατ’ εξαίρεση νόμιμη, υπό το εφαρμοστέο ελληνικό δίκαιο και κανόνες διεθνών συμβάσεων, με βάση τον επιδιωκόμενο σκοπό σοβαρής δημόσιας ωφέλειας, ιδίως ενόψει τεκμηρίωσης δίκαιης ισορροπίας μεταξύ του γενικού συμφέροντος και των θεμελιωδών ατομικών δικαιωμάτων των θιγόμενων ιδιωτών, υπό ειδικές προϋποθέσεις και λεπτομερειακές επιφυλάξεις. Η δικαιολόγηση της ως άνω αντισυμβατικής ενέργειας δεν θίγει λοιπές αστικές αξιώσεις κατά του κράτους-οφειλέτη, στο μέτρο που θεμελιώνονται σε διακριτές νομικές βάσεις και στοιχειοθετείται η αναγκαία προϋπόθεση αιτιώδους συνάφειας της αποζημίωσης.English Abstract: The article studies the critical legislative and administrative measures of the Greek State, with regard to the participation of private sector investors in the largest Greek sovereign debt restructuring (“Private Sector Involvement”), implemented in 2012. The established regime is presented, in parallel reference to its subsequent respective judicial evaluation by the Greek supreme administrative court (“Council of State”), in 2014. The introduction of a mechanism for collective action of bondholders under Greek law, yet with retroactive effect, led, after the acceptance of the Government proposal by a special majority of bondholders (including State entities), to the compulsory replacement of the past issued Greek law securities, with new investment securities. Notably, the latter securities did have different (lower) nominal value, extended maturities, different coupon rate, significantly reduced market value, different applicable law, while marginal part of them was issued by the European Financial Stability Facility and some provided for contingency future payments. In the light of the above facts and additional parameters (such as the exclusion of ECB and national central banks from the scope of the transaction), the review of the legality of the state measures originates from the viewpoint of the restrictions imposed, de facto, on the main freedoms of European Union (free movement of capital) and on fundamental rights of private investors, who did not consent or expressly opposed to the government bonds replacement. The conditions provided in the law for the validity of the collective resolution of bondholders are critically examined, as well, taking into account the special regime regarding the issuance and sale of investment securities registered in dematerialized form to wholesale and retail investors. Individual characteristics and categorization of bondholders, as well as additional financial parameters of the restructuring regime are highlighted, as greatly significant, in order to weigh the actual impact of the measures on the conflicting interests of all involved stakeholders. Following comprehensive assessment of the legal and economic aspects and consequences of the enacted legislation and administrative acts, it is concluded that the final substantive judgment, reached by the Supreme Administrative Court, resolving by majority, in respect of the non-violation of supra-legislative principles of equality and proportionality, appears correct ultimately. Nevertheless, it is observed, procedurally, that relevant judicial cases should have been referred to the European Court of Justice, given the existing EU-Treaty dimension of several underlying disputed legal issues. The conduct of the Greek State, through the exercise of its jure imperii powers, although in principle unconventional, is considered lawful, exceptionally, under both the applicable Greek constitutional law and the International Treaties. Aforementioned conclusion is acknowledged, on the rationale of efficiently pursued objectives of serious public benefit (avoidance of disorderly State collapse and interrelated financial and social instability repercussions), especially in view of the (verified) achievement of a “fair balance” between the general interest and the fundamental rights of the affected individuals, yet it is subject to detailed conditions and some special reservations. Aforementioned justification of the State action is anyway without prejudice to any other potential civil claims of the affected investors against the debtor State or other entities involved, in so far as those might be based on distinct legal bases (other than the specially legislated regime), for example in cases that bondholders invoke different State or intermediary financial institutions’ violations. If appropriately founded in law, such other compensation claims may be pursued, on the additional requirement of necessary causation link between the purported breach of law or breach of contract and the State debtors’-private investors’ financial loss suffered.