Research articles for the 2021-02-05

Are ESG Stocks Safe-Haven during COVID-19?
Rubbaniy, Ghulame,Khalid, Ali Awais,Ali, Shoaib ,Naveed, Muhammad
We apply the wavelet coherence approach to measure the comovement between daily global COVID-19 fear index (GFI) with ESG indices' returns from February 5th, 2020 to January 18th, 2021. We find a strong and positive comovement between GFI and ESG indices over the pandemic, which confirms the existence of safe-haven properties of ESG indices during the COVID-19 pandemic. Our findings are of particular interest to the risk-averse equity investors and portfolio managers who can use ESG stocks to diversify their portfolios during economic crisis due to global pandemic.

Bank Credit and Short-Run Economic Growth: A Dynamic Threshold Panel Model for ASEAN Countries
Ho, Sy Hoa,Saadaoui, Jamel
We investigate short-run nonlinear impacts of bank credit on economic growth in ASEAN countries. We find an inverted L-shaped relationship and a statistically significant threshold of 96.5%. Positive effects of bank credit expansion on short-run economic growth fade away after this threshold.

Business Outlook and Financing Alternatives of Finnish Entrepreneurs During the COVID-19 Crisis
Paaso, Mikael,Pursiainen, Vesa,Torstila, Sami
This paper reports findings from a survey of 1,008 Finnish small-and-medium-sized enterprises (SMEs) on their business outlook and financing alternatives during the COVID-19 crisis as of June 2020. Sales have dropped by an average of 25%. The decline in revenues is generally uncorrelated with the number of coronavirus cases in a municipality, except in the hospitality industry and the arts, entertainment and recreation industry. 54% of respondents have applied for public subsidies, while only 16% have applied for a new loan from the bank. Across the cross-section of firms, firms reporting a larger loss of revenues and with a more precarious financial position at the end of 2019 (high debt and/or low cash) were more likely to apply for both direct grants as well as loans.

COVID-19 Outbreaks Following Full Reopening of Primary and Secondary Schools in England: Retrospective, Cross-Sectional National Surveillance
Aiano, Felicity,Mensah, Anna,McOwat, Kelsey,Obi, Chinelo,Vusirikala, Amoolya,Powell, Annabel,Flood, Jessica,Bosowski, Johanna,Letley, Louise,Jones, Samuel,Amin-Chowdhury, Zahin,Lacy, Joanne,Hayden, Iain,Ismail, Sharif A.,Ramsay, Mary E.,Ladhani, Shamez,Saliba, Vanessa
Background: The full reopening of schools in September 2020 was associated with an increase in COVID-19 cases and outbreaks in educational settings across England. Methods: Primary and secondary schools reporting an outbreak (≥2 laboratory-confirmed cases within 14 days) to Public Health England (PHE) between 31 August and 18 October 2020 were contacted to complete an online questionnaire. Interpretation: There were 969 primary (n=450) and secondary school outbreaks (n=519) reported to PHE, representing 3% of primary schools and 15% of secondary schools in England. Of the 369 schools contacted, 190 geographically-representative schools completed the questionnaire; 2,425 cases were reported. Secondary school students (1.20%; 95%CI, 1.13-1.28%) had higher attack rates than primary school students (0.84%; 95%CI, 0.75-0.94%). Outbreaks were larger and across more year groups in secondary schools than in primary schools. When an outbreak occurred, attack rates were higher in staff (926/19,083; 4.85%; 95%CI, 4.55-5.17%) than students, especially among primary school teaching staff (9.81%; 95%CI, 8.90-10.82%) compared to secondary school teaching staff (3.97%; 95%CI, 3.79-5.69%). Staff represented 59% (471/799) of cases in primary school outbreaks and 27% (410/1515) in secondary schools (P<0.001). Teaching staff were more likely to be the index case in primary (48/100, 48%) than in secondary (25/79, 32%) schools (P=0.027).Conclusions: Secondary schools were more likely to be affected by a COVID-19 outbreak than primary schools and to experience larger outbreaks across multiple school years. The higher attack rate among teaching staff during an outbreak suggests that additional protective measures may be needed. Funding: PHE

Central Bank Digital Currencies and payments: A review of domestic and international implications
Demmou, Lilas,Sagot, Quentin
Recent technological developments linked to secure messaging and traceability present an opportunity to address certain challenges in international and domestic payment systems. From an international perspective, foreign exchange markets remain costly and relatively less efficient than domestic payment systems. From a domestic perspective, the decline in the relative importance of cash in most economies reflects changes in consumers' preferences, which questions the future of money and payment infrastructure. Against that background, private initiatives falling outside of current regulation, such as stable coins and other virtual assets, are associated with several risks and opportunities and have fueled the debate on the opportunities for central banks to issue new form of digital public currency. This note reviews those different propositions and examine their implication for the international and domestic payment systems.

Does the Corporate Capital Structure Theory Apply to Banks? Evidence from the Field
Coutinho dos Santos, Mário
This paper investigates the value relevance of banks’ capital structure voluntary choices, their determinants, and preference in terms of funding mix policy models, using a unique survey-based dataset gathered through a face-to-face interview structured questionnaire, conducted to a sample of 51 Portuguese banks’ CEOs (89.5% survey response rate), over the 1989-1998 period. Survey participants, elicited ownership structure managerial control, growth opportunities, reputation in banking markets, financial flexibility, information signaling, bank size, share listing, business risk, dividend policy, and debt tax-shields, as the most relevant capital structure determinants at the bank level. The supervisory and regulatory discipline was indicated as the more influential external determinants for capital structure choice. A majority of 60 percent of state-owned bank CEOs declared a preference for following pre-determined guidelines on bank funding as capital structure policy model. Almost 53 percent of the privately-owned bank CEOs revealed a significant preference for the tradeoff capital structure policy model. The pecking order and the market-timing theories received moderate to weak preference. The paper extends the literature, providing field evidence that banking capital structure choice do matter and may be explained within the framework of the conventional corporate capital structure theory.

Dynamic Volatility Spillovers and Investor Sentiment Components Across Shipping Freight Rates
Melas, Konstantinos D.,Panayides, Photis,Tsouknidis, Dimitris A.
This paper investigates whether dynamic volatility spillovers across shipping freight markets can be explained by a comprehensive set of indicators capturing shipping investors’ sentiment. The results of this study reveal that an increase of the ratio of second-hand vessel price over newbuilding vessel price triggers an increase of the transmission of economic information within the dry-bulk and tanker segments; while an increase in the ratio of price to earnings and the ratio of the number of vessels sold over the number of vessels of the global fleet also trigger an increase of the economic information transmission within the dry-bulk and tanker vessels, respectively. These results have important implications for shipping market players as they reveal novel mechanisms of the transmission of economic information within the segments and across the sub-segments of shipping freight markets.

Effect of US Macroeconomic Variables on the Volatility of Conventional and Islamic Indices
Abba Ahmed, Bello,I. Isah, Salamatu
The paper examined the effect of macroeconomic variables on the volatility of conventional and Islamic indices. The macroeconomic variables included economic uncertainty index, federal funds rate, money supply, volatility fear index, consumer price index, Treasury bill and Brent oil price and the stock indices were from DOW Jones and FTSE. This study employed the daily closing stock prices of 22 major global Islamic and conventional indices from eleven countries comprising, US, EU, Canada, Kuwait, Qatar, Malaysia, Japan, China, Turkey, India, and Taiwan. The obtained from the data base of Wall Street Journal and FRED database of St. Louis Federal Reserve. The study employed three standard unit root tests, the Augmented Dickey-Fuller (ADF), the Phillips-Peron (PP) and the KPSS test as well as Johansen Cointegration and VECM models. ARCH and GARCH models were also used for the estimations. The study found the presence of a long-run association between Islamic indices, broad market index, and the US macroeconomic variables. However, it was discovered that most of the US macroeconomic variables were not statistically significant in determining the conditional variances of the selected conventional and Islamic indices. The study recommends that investors in the selected countries should give emphasis to the macroeconomic environment of each respective country as it could have greater impact on the returns of the indices than the US macroeconomic variables.

How Feasible is a Convertible Ijarah Contract for SME Financing?: A Simulation Approach
Dalimunthe, Zuliani ,Syakhroza, Akhmad,Nasution, Mustafa Edwin,Husodo, Zaäfri A.
Islamic financial institutions have relied for decades on margin-based contracts to provide financing for the business sector, despite the basic idea that Islamic finance is expected to provide an equity-based or a profit and loss sharing (PLS) contract. This fact raises the need to encourage the use of a margin-based instrument with an innovative scheme that allows for conversion of the contract into a PLS-based contract. Moreover, we propose a convertible ijarah contract to fill this need. A convertible ijarah contract is an ijarah (rent) contract that is convertible to a PLS contract according to the Islamic financier’s decision. In this study, we simulate three scenarios of project financing with (a) murabaha as a margin-based contract, (b) musharaka as a PLS contract and (c) a convertible ijarah contract. The aim is to evaluate whether the convertible ijarah contract will provide a higher return for the financier compared to the other contracts. The main input of the simulation is nine sectors of Indonesian SMEs’ financial performance. We found that when the financial performance of Indonesian SMEs was measured by short-term financial performance, the convertible ijarah contract outperformed the murabaha contract for all sectors but did not outperform the musharaka contract, except for low-margin sectors. However, when the financial performance of Indonesians SMEs was measured by long-term economic performance, we found that the convertible ijarah contract outperformed the murabaha contract and musharaka contract for almost all sectors.

Learning from Liquidation Prices
Rinaldi, Gianluca
I develop a model of investor learning driven by mistaken inference from market prices. Investors have heterogeneous beliefs about the worst case return of a risky asset and take leverage to buy it. When the worst case becomes more likely, forced liquidations result in price crashes, which investors mistake for negative information about worst case returns. They therefore revise cash flow expectations downwards, henceforth requiring larger returns. The model predicts that crashes lead to persistent changes in future average returns and that larger crashes are followed by larger changes. To link the model to historical crashes, I consider two strategies associated with the Black Monday crash in 1987 and the Lehman Brothers bankruptcy in 2008. Hedged put options selling suffered severe losses around Black Monday, while arbitraging the difference in implied credit risk between the corporate bond and CDS markets was similarly negatively affected after the Lehman bankruptcy. The losses on these strategies in those crisis episodes were likely exacerbated by deleveraging, but the increased returns after the crashes have been remarkably persistent, consistent with the implications of my model.

Mobility during the COVID-19 Pandemic and Retail Investor Attention
Cahill, Daniel,Ho, Chloe CY,Yang, Joey (Wenling)
Does the impact to mobility due to state-level lockdown during the COVID-19 pandemic affect retail investors’ attention in equity markets? Using Google’s mobility, the lockdown dates, and companies’ Wikipedia page views data, we show that stay-at-home duration increases retail attention. The effects are more pronounced for firms with non-lottery-like stocks, high institutional ownership, and those located in states with higher proportions of young population and populations that did not work from home prior to the pandemic. We further find increased trading activity in volume and volatility associated with stay-at-home duration.

Strategic Pay Ratio Estimation under Social Pressure
Alam, Zinat S.,Ghosh, Chinmoy,Ryan, Harley E.,Wang, Lingling
We examine firm decisions under social pressure by focusing on firms’ discretionary choices in estimating the CEO pay ratio. Reported pay ratios are significantly lower when firms use complex methods to identify the median employee, whose total pay is the denominator in the ratio. Firms choose more complex methods when their headquarter states have more prosocial attitudes toward income inequality, greater union coverage, and have proposed pay-ratio surtaxes. Our results suggest that a prosocial culture toward income inequality influences real firm decisions, and some firms strategically estimate pay ratios that better align with social norms without making changes to pay.

The Disposition Effect in Boom and Bust Markets
Bernard, Sabine,Loos, Benjamin,Weber, Martin
The disposition effect is implicitly assumed to be constant over time. However, drivers of the disposition effect (preferences and beliefs) are rather countercyclical. We use individual investor trading data covering several boom and bust periods (2001-2015). We show that the disposition effect is countercyclical, i.e. is higher in bust than in boom periods. Our findings are driven by individuals being 25% more likely to realize gains in bust than in boom periods. These changes in investors’ selling behavior can be linked to changes in investors’ risk aversion and in their beliefs across financial market cycles.

The Independence of Economic Authorities and Supervisors. The Case of the Banco de España. Testimony by the Governor of the Banco de España before the Audit Committee on Democratic Quality/Congress of Deputies, 22 December 2020 (La independencia de las autoridades y supervisores económicos. El caso del Banco de España. Comparecencia del gobernador del Banco de España ante la Comisión para la Auditoría de la Calidad Democrática / Congreso de los Diputados, el 22 de diciembre de 2020)
de Cos, Pablo Hernández
English Abstract: In his testimony, the Governor’s analysis of the impartiality and autonomy of independent economic authorities contributes to the Committee’s review of the “measures needed to strengthen the impartiality and independence of independent authorities and regulatory agencies”. He first reviews the arguments warranting the independence of economic authorities and supervisors. He then goes on to address the features that conform an institution’s formal independence, detailing their specific form in the case of the Banco de España. Next, he reflects on the status of independence as a necessary, but not sufficient, condition for the proper performance by independent agencies of their functions. He then highlights possible measures for strengthening the independence of the Banco de España, and identifies potential improvements to the financial supervision model in Spain. Lastly, he refers to the Bank’s control mechanisms and transparency standards, and certain aspects of its governance.Spanish Abstract: El gobernador contribuye con su análisis sobre la imparcialidad y la autonomía de las autoridades económicas independientes a la revisión de «las medidas necesarias de refuerzo de la imparcialidad e independencia de autoridades independientes y organismos de regulación» que realiza esta Comisión, ante la que comparece. Para ello, durante su intervención revisa los argumentos que justifican la independencia de las autoridades y los supervisores económicos. Pasa después a tratar los elementos que configuran la independencia formal de una institución y cómo se concretan en el caso del Banco de España. Seguidamente, reflexiona sobre la condición de independencia, como una condición necesaria, pero no suficiente, para el buen desempeño de los organismos independientes. Señala después algunas posibles vías para reforzar la independencia del Banco de España y, a continuación, identifica eventuales mejoras del modelo de supervisión financiera en España. Por último, se refiere a los mecanismos de control y a los estándares de transparencia del Banco de España, así como a algunos aspectos de su gobernanza.

The Optimal Spending Rate Versus the Expected Real Return of a Sovereign Wealth Fund
Aase, Knut K.,Bjerksund, Petter
We consider a sovereign wealth fund that invests broadly in the international financial markets. The influx to the fund has stopped. We adopt the life cycle model and demonstrate that the optimal spending rate from the fund is significantly less than the fund’s expected real rate of return. The optimal spending rate secures that the fund will last ”forever”. Spending the expected return will deplete the fund with probability one. Moreover, this strategy is inconsistent with optimal portfolio choice. Our results are contrary to the idea that it is sustainable to spend the expected return of a sovereign wealth fund.

Tribalism and Finance
Kodila-Tedika, Oasis,Asongu, Simplice
We assess the correlations between tribalism and financial development in 60 countries using data averages from 2000-2010. The tribalism index is used to measure tribalism whereas financial development is measured from perspectives of financial intermediary and stock market developments. The long term finance variable is stock market capitalisation while the short run variable is private and domestic credit. We find that tribalism is negatively correlated with financial development and the magnitude of negativity is higher for financial intermediary development relative to stock market development. The findings are particularly relevant to African and Middle Eastern countries where the scourge of tribalism is most pronounced.

Unbundling Banking, Money, and Payments
Awrey, Dan
For centuries, our systems of banking, money, and payments have been legally and institutionally intertwined. The fact that these threeâ€"theoretically distinctâ€"systems have been bundled together so tightly and for so long reflects a combination of historical accident, powerful economic and political forces, path dependence, and technological capacity. Importantly, it also reflects the unique and often under-appreciated privileges and protections that the law bestows on conventional deposit-taking banks. These privileges and protections have served to entrench banks as the dominant suppliers of both money and payments: erecting significant barriers to entry, undermining financial innovation and inclusion, spurring destabilizing regulatory arbitrage, and exacerbating the “too-big-to-fail” problem. Against this backdrop, the recent emergence of a variety of new financial technologies, platforms, and policy tools hold out the tantalizing prospect of breaking this centuries-old stranglehold over our basic financial infrastructure. The essential policy problem, at least as conventionally understood, is that creating a level legal playing field would pose a serious threat to both monetary and financial stability. This Article demonstrates that this need not be the case and advances a blueprint for how we can safely unbundle banking, money, and payments, thereby enhancing competition, promoting greater financial innovation and inclusion, and ameliorating the too-big-to-fail problem.

What's at Stake? Understanding the Role of Home Equity in Flood Insurance Demand
Liao, Yanjun,Mulder, Philip
Millions of properties in the U.S. are exposed to increasing threats from natural disasters. Yet, a large majority of at-risk homes are uninsured against the costliest disaster: flooding. Floods cause elevated rates of mortgage delinquency and default that can impact the broader housing finance system. In this paper, we explore the connection between homeowners' stake in their homes and their demand for flood insurance. To isolate the causal effect of home equity on food insurance demand, we study the response of flood insurance take-up to sudden house price changes over the housing boom and bust in the 2000s. We find that flood insurance take-up follows the dynamics of house prices in each market over the boom-bust cycle, with a home price elasticity around 0.33. A series of heterogeneity and robustness checks suggest that the role of mortgage default as implicit insurance is the most plausible mechanism for the positive relationship. We conclude by discussing the implications of our results for the effects of climate change on real estate and financial markets as well as for optimal disaster insurance policy.