Research articles for the 2021-02-08

(In)efficient repo markets
Dieler, Tobias,Mancini, Loriano,Schürhoff, Norman
Repo markets trade off the efficient allocation of liquidity in the financial sector with resilience to funding shocks. The repo trading and clearing mechanisms are crucial determinants of the allocation-resilience tradeoff. The two common mechanisms, anonymous central-counterparty (CCP) and non-anonymous over-the-counter (OTC) markets, are inefficient and their welfare rankings depend on funding tightness. CCP (OTC) markets inefficiently liquidate high (low) quality assets for large (small) funding shocks. Two innovations to repo market design contribute to maximize welfare: a liquidity-contingent trading mechanism and a two-tiered guarantee fund.

A Modularized and Scalable Multi-Agent Reinforcement Learning-based System for Financial Portfolio Management
Zhenhan Huang,Fumihide Tanaka

Financial Portfolio Management is one of the most applicable problems in Reinforcement Learning (RL) by its sequential decision-making nature. Existing RL-based approaches, while inspiring, often lack scalability, reusability, or profundity of intake information to accommodate the ever-changing capital markets. In this paper, we design and develop MSPM, a novel Multi-agent Reinforcement learning-based system with a modularized and scalable architecture for portfolio management. MSPM involves two asynchronously updated units: Evolving Agent Module (EAM) and Strategic Agent Module (SAM). A self-sustained EAM produces signal-comprised information for a specific asset using heterogeneous data inputs, and each EAM possesses its reusability to have connections to multiple SAMs. A SAM is responsible for the assets reallocation of a portfolio using profound information from the EAMs connected. With the elaborate architecture and the multi-step condensation of the volatile market information, MSPM aims to provide a customizable, stable, and dedicated solution to portfolio management that existing approaches do not. We also tackle data-shortage issue of newly-listed stocks by transfer learning, and validate the necessity of EAM. Experiments on 8-year U.S. stock markets data prove the effectiveness of MSPM in profits accumulation by its outperformance over existing benchmarks.

A Stationary Kyle Setup: Microfounding propagator models
Michele Vodret,Iacopo Mastromatteo,Bence Tóth,Michael Benzaquen

We provide an economically sound micro-foundation to linear price impact models, by deriving them as the equilibrium of a suitable agent-based system. Our setup generalizes the well-known Kyle model, by dropping the assumption of a terminal time at which fundamental information is revealed so to describe a stationary market, while retaining agents' rationality and asymmetric information. We investigate the stationary equilibrium for arbitrary Gaussian noise trades and fundamental information, and show that the setup is compatible with universal price diffusion at small times, and non-universal mean-reversion at time scales at which fluctuations in fundamentals decay. Our model provides a testable relation between volatility of prices, magnitude of fluctuations in fundamentals and level of volume traded in the market.

A fistful of dollars: Transmission of global funding shocks to EMs
Hari Kumar, Shekhar,Mathur, Aakriti
In this paper, we study transmission of global funding shocks to emerging economies (EMs) from the perspective of interbank markets. Money markets enable banks to engage in risk-sharing against liquidity shocks and are sensitive to global funding conditions. Accordingly, we first show that interbank rates better reflect the magnitude of transmission of foreign liquidity shocks to EMs as compared to benchmark short-term bond yields. Next, we disentangle the transmission into its various channels, focusing in particular on two pull factors associated with the domestic banking microstructure: dependence on wholesale funding and share of foreign banks. Our results indicate that money market rates in EMs react to global shocks, and that in particular dependence on wholesale funding has a significant role to play. Finally, we provide evidence that tools of macro-prudential policy like reserve requirements can help alleviate liquidity shocks to the EM banking system, weakening this global transmission.

Advanced Course in Asset Management (Presentation Slides)
Roncalli, Thierry
These presentation slides have been written for the Advanced Course in Asset Management (theory and applications) given at the University of Paris-Saclay. They contain 5 lectures (Part 1. Portfolio Optimization Part 2. Risk Budgeting Part 3. Smart Beta, Factor Investing and Alternative Risk Premia Part 4. Green and Sustainable Finance, ESG Investing and Climate Risk Part 5. Machine Learning in Asset Management) and 15 tutorial exercises.The Table of contents is the following:Part 1. Portfolio Optimization 1. Theory of portfolio optimization 1.a. The Markowitz framework 1.b. Capital asset pricing model (CAPM) 1.c. Portfolio optimization in the presence of a benchmark 1.d. Black-Litterman model2. Practice of portfolio optimization 2.a. Covariance matrix 2.b. Expected returns 2.c. Regularization of optimized portfolios 2.d. Adding constraints3. Tutorial exercises 3.a. Variations on the efficient frontier 3.b. Beta coefficient 3.c. Black-Litterman modelPart 2. Risk Budgeting 1. The ERC portfolio 1.a. Definition 1.b. Special cases 1.c. Properties 1.d. Numerical solution2. Extensions to risk budgeting portfolios 2.a. Definition of RB portfolios 2.b. Properties of RB portfolios 2.c. Diversification measures 2.d. Using risk factors instead of assets3. Risk budgeting, risk premia and the risk parity strategy 3.a. Diversified funds 3.b. Risk premium 3.c. Risk parity strategies 3.d. Performance budgeting portfolios4. Tutorial exercises 4.a. Variation on the ERC portfolio 4.b. Weight concentration of a portfolio 4.c. The optimization problem of the ERC portfolio 4.d. Risk parity fundsPart 3. Smart Beta, Factor Investing and Alternative Risk Premia1. Risk-based indexation 1.a. Capitalization-weighted indexation 1.b. Risk-based portfolios 1.c. Comparison of the four risk-based portfolios 1.d. The case of bonds2. Factor investing 2.a. Factor investing in equities 2.b. How many risk factors? 2.c. Construction of risk factors 2.d. Risk factors in other asset classes3. Alternative risk premia 3.a. Definition 3.b. Carry, value, momentum and liquidity 3.c. Portfolio allocation with ARP4. Tutorial exercises 4.a. Equally-weighted portfolio 4.b. Most diversified portfolio 4.c. Computation of risk-based portfolios 4.d. Building a carry trade exposurePart 4. Green and Sustainable Finance, ESG Investing and Climate Risk 1. ESG investing 1.a. Introduction to sustainable finance 1.b. ESG scoring 1.c. Performance in the stock market 1.d. Performance in the corporate bond market2. Climate risk 2.a. Introduction to climate risk 2.b. Climate risk modeling 2.c. Regulation of climate risk 2.d. Portfolio management with climate risk3. Sustainable financing products 3.a. SRI Investment funds 3.b. Green bonds 3.c. Social bonds 3.d. Other sustainability-linked strategies4. Impact investing 4.a. Definition 4.b. Sustainable development goals (SDG) 4.c. Voting policy, shareholder activism and engagement 4.d. The challenge of reporting5. Tutorial exercises 5.a. Probability distribution of an ESG score 5.b. Enhanced ESG score & tracking error controlPart 5. Machine Learning in Asset Management1. Portfolio optimization 1.a. Standard optimization algorithms 1.b. Machine learning optimization algorithms 1.c. Application to portfolio allocation2. Pattern learning and self-automated strategies3. Market generators4. Tutorial exercises 4.a. Portfolio optimization with CCD and ADMM algorithms 4.b. Regularized portfolio optimization

An analysis of network filtering methods to sovereign bond yields during COVID-19
Raymond Ka-Kay Pang,Oscar Granados,Harsh Chhajer,Erika Fille Legara

In this work, we investigate the impact of the COVID-19 pandemic on sovereign bond yields. We consider the temporal changes from financial correlations using network filtering methods. These methods consider a subset of links within the correlation matrix, which gives rise to a network structure. We use sovereign bond yield data from 17 European countries between the 2010 and 2020 period. We find the mean correlation to decrease across all filtering methods during the COVID-19 period. We also observe a distinctive trend between filtering methods under multiple network centrality measures. We then relate the significance of economic and health variables towards filtered networks within the COVID-19 period. Under an exponential random graph model, we are able to identify key relations between economic groups across different filtering methods.

Bankruptcy Codes and Risk Sharing of Currency Unions
Wang, Xuan
Since the Eurozone Crisis of 2010-12, a critical debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country general equilibrium model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative mechanism to improve the financial stability and welfare of a currency union. When domestic credit risks are present, I show that a lenient bankruptcy code in the cross-border capital markets union removes the pecuniary externality of banking insolvency, so it leads to a Pareto improvement within the currency union. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the financial stability and welfare implications of bankruptcy within a capital markets union in the Eurozone.

Bertram's Pairs Trading Strategy with Bounded Risk
Vladimír Holý,Michal Černý

Finding Bertram's optimal trading strategy for a pair of cointegrated assets following the Ornstein-Uhlenbeck price difference process can be formulated as an unconstrained convex optimization problem for maximization of expected profit per unit of time. We generalize this model to the form where the riskiness of profit, measured by its per-time-unit volatility, is controlled (e.g. in case of existence of limits on riskiness of trading strategies imposed by regulatory bodies). The resulting optimization problem need not be convex. In spite of this undesirable fact, we demonstrate that it is still efficiently solvable. We also investigate the problem critical for practice that parameters of the price difference process are never known exactly and are imprecisely estimated from an observed finite sample. We show how the imprecision affects the optimal trading strategy and quantify the loss caused by the imprecise estimate compared to a theoretical trader knowing the parameters exactly.

CEO Turnover and Director Reputation
von Meyerinck, Felix,Romer, Jonas,Schmid, Markus
This paper analyzes the reputational effects of forced CEO turnovers on outside directors. Outside directors interlocked to a forced CEO turnover experience large and persistent increases in withheld votes at subsequent board re-elections relative to non-turnover-interlocked directors. Increases in withheld votes are confined to departures without a successor in place, performance-induced turnovers, turnovers that occur during CEOs’ most productive tenure range, and turnovers at companies that share high common ownership with the interlocked firm. Reputational losses are larger for committee members responsible for hiring and monitoring the ousted CEO and directors affiliated with the CEO. Involvement in a forced CEO turnover is not associated with a long-term loss in directorships, but lost directorships are replaced by directorships at smaller firms. Our results imply that forced CEO turnovers signal a governance failure at the board level and that investors rely on salient actions to update their beliefs about directors’ hidden qualities.

Can We Take the 'Stress' Out of Stress Testing? Applications of Generalized Structural Equation Modeling to Consumer Finance
Canals-Cerda, José J.
Financial firms, and banks in particular, rely heavily on complex suites of interrelated statistical models in their risk management and business reporting infrastructures. Statistical model infrastructures are often developed using a piecemeal approach to model building, in which different components are developed and validated separately. This type of modeling framework has significant limitations at each stage of the model management life cycle, from development and documentation to validation, production, and redevelopment. We propose an empirical framework, spurred by recent developments in the implementation of Generalized Structural Equation Modeling (GSEM), which brings to bear a modular and all-inclusive approach to statistical model building. We illustrate the “game changing” potential of this framework with an application to the stress testing of credit risk for a representative portfolio of mortgages; we also extend it to the analysis of the allowance for credit loss under the novel Current Expected Credit Loss (CECL) accounting regulation. We illustrate how GSEM techniques can significantly enhance every step of the modeling framework life cycle. We also illustrate how GSEM can be used to combine various risk management projects and tasks into a single framework; we specifically illustrate how to seamlessly integrate stress testing and CECL (or IFRS9) frameworks and champion, and challenger, modeling frameworks. Finally, we identify other areas of model risk management that can benefit from the GSEM framework and highlight other potentially fruitful applications of the methodology.

Causal Evidence on the Effects of Enforcement Investigations
Gros, Marius,Nienhaus, Martin,Oehler, Christopher
We examine the costs and benefits of financial reporting enforcement investigations using a proprietary data set on randomly and risk-based selected enforcement investigations of listed German firms from 2005 to 2018. We find that risk-based selected firms show significant abnormal returns of -15.4 percent during investigations, whereas randomly selected firms do not show abnormal changes in firm value. Analyzing the role of selection reveals that the negative abnormal returns for risk-based selected investigations are likely the result of selection, and not caused by investigations themselves. Consistently, we find that risk-based selected firms, but not randomly selected firms, change their financial reporting behavior and transparency during enforcement investigations. Collectively, our study suggests that the negative firm-level outcomes of enforcement investigations as shown by prior research are likely a result of the selection process, and that enforcement investigations per se do not cause significant costs or benefits.

Climate Mitigation Pathways Need To Account for the Ambivalent Role of Finance
Battiston, Stefano,Monasterolo, Irene,Riahi, Keywan,van Ruijven, Bas
Modelling the ambivalent role of finance in climate mitigation scenarios is fundamental to identify feasible energy transition pathways to achieve the Paris Agreement target.

Climate Risks and Financial Stability
Battiston, Stefano,Dafermos, Yannis,Monasterolo, Irene
Climate change has been recently recognised as a new source of risk for the financial system. Several financial supervisors with a financial stability mandate have recently recommended that investors and financial institutions need to assess their exposure to climate-related financial risks and conduct climate stress-tests. Nevertheless, they fall short of methodologies to do so. Indeed, the characteristics of climate risks (like deep uncertainty, non-linearities and endogeneity) challenge traditional approaches to macroeconomic and financial risk analysis. Embedding climate change in macroeconomic and financial analysis is fundamental for a comprehensive understanding of risks and opportunities in the era of the climate crisis. This Special Issue is devoted to the relations between climate risks and financial stability and represents the first comprehensive attempt to fill methodological gaps in this area and to shed light on the financial implications of climate change. It includes original contributions that use a range of methodologies, like network modelling, dynamic evolutionary macroeconomic modelling and financial econometrics, to analyse the impacts of climate-related financial risks, as well as of financial policies and instruments aiming at the low-carbon transition. The research insights of these contributions inform financial supervisors about the integration of climate change considerations in financial risk assessment.

Corporate Optimism and Bank Lending
De Marco, Filippo,Sauvagnat, Julien,Sette, Enrico
We study how lenders respond to excessive optimism in the corporate sector. Our identification relies on plausibly exogenous variation in optimism across areas in Italy. We document that firms in optimistic areas hold favorable views about their own business, and that they are more likely to default on their debt. Banks are more likely to deny credit to firms in optimistic areas, but only for loans that cannot be easily collateralized. Our findings provide empirical support for the theoretical prediction that banks' collateral provision reduces the efficiency of the credit market when the corporate sector is prone to excessive optimism.

Correlated Bandits for Dynamic Pricing via the ARC algorithm
Samuel Cohen,Tanut Treetanthiploet

The Asymptotic Randomised Control (ARC) algorithm provides a rigorous approximation to the optimal strategy for a wide class of Bayesian bandits, while retaining reasonable computational complexity. In particular, it allows a decision maker to observe signals in addition to their rewards, to incorporate correlations between the outcomes of different choices, and to have nontrivial dynamics for their estimates. The algorithm is guaranteed to asymptotically optimise the expected discounted payoff, with error depending on the initial uncertainty of the bandit. In this paper, we consider a batched bandit problem where observations arrive from a generalised linear model; we extend the ARC algorithm to this setting. We apply this to a classic dynamic pricing problem based on a Bayesian hierarchical model and demonstrate that the ARC algorithm outperforms alternative approaches.

Cyber Risk in Health Facilities: A Systematic Literature Review
Alberto Sardi,Alessandro Rizzi,Enrico Sorano,Anna Guerrieri

The current world challenges include issues such as infectious disease pandemics, environmental health risks, food safety, and crime prevention. Through this article, a special emphasis is given to one of the main challenges in the healthcare sector during the COVID-19 pandemic, the cyber risk. Since the beginning of the Covid-19 pandemic, the World Health Organization has detected a dramatic increase in the number of cyber-attacks. For instance, in Italy the COVID-19 emergency has heavily affected cybersecurity; from January to April 2020, the total of attacks, accidents, and violations of privacy to the detriment of companies and individuals has doubled. Using a systematic and rigorous approach, this paper aims to analyze the literature on the cyber risk in the healthcare sector to understand the real knowledge on this topic. The findings highlight the poor attention of the scientific community on this topic, except in the United States. The literature lacks research contributions to support cyber risk management in subject areas such as Business, Management and Accounting; Social Science; and Mathematics. This research outlines the need to empirically investigate the cyber risk, giving a practical solution to health facilities. Keywords: cyber risk; cyber-attack; cybersecurity; computer security; COVID-19; coronavirus;information technology risk; risk management; risk assessment; health facilities; healthcare sector;systematic literature review; insurance

Deploying Narrative Economics to Understand Financial Market Dynamics: An Analysis of Activist Short Sellers’ Rhetoric
Paugam, Luc,Stolowy, Hervé,Gendron, Yves
We investigate how activist short sellers (AShSs) expose publicly listed firms in an increasingly popular form of “research reports” openly denouncing alleged frauds, flawed business models, accounting irregularities, and wrongdoings. We focus on six AShSs that issued research reports that often led to a strong negative market reaction. Our empirical analysis exploits both qualitative and quantitative methods for a comprehensive dataset of 383 research reports targeting 171 unique firms, and three firsthand interviews with AShSs. Drawing on Aristotle’s rhetoric, we first examine how AShSs use narratives in striving to convince other investors that the target firms are overvalued. Specifically, we search the documents produced by AShSs for stylized narratives related to credibility-based (ethos), emotions-based (pathos), and logic-based (logos) rhetorical strategies. To assess the impact of these strategies, we examine the extent to which the AShSs’ rhetorical strategies resonate in 3,665 press articles. As expected, the press often refers to logos-based arguments. Interestingly, the press also frequently brings up pathos-based and ethos-based statements. Considering the importance of the press in shaping investors’ opinions, our study points to AShSs’ narratives playing a major role in policing financial markets. Theoretically, we show that AShSs, as dissenting market participants, produce narratives that go beyond the language of formal rationalityâ€"as they strive to reveal new information and frame it persuasively, in order to destabilize the extent of trustworthiness surrounding target firms.

Do Stressed PE Firms Misbehave?
Jelic, Ranko,Zhou, Dan,Ahmad, Wasim
For private equity (PE) firms, follow-on funds provide additional streams of management fees for a considerable time. When prospective limited partners (LPs) evaluate the performance of a PE firm’s latest funds, they have to rely on valuations reported by PE firms. The link between PE firms’ fundraising and performance evaluation is thus an area susceptible to manipulation resulting in potentially high stakes. We examine the relationship between PE firms’ fundraising pressure and earnings management in portfolio companies, along with heterogeneity in behaviour by reputation and dry powder. To proxy for the degree of fundraising pressure, we develop an index based on PE firms’ affiliations, stage in the fundraising cycle, and fundraising frequency. Results suggest that the fundraising pressure leads to more earnings management in portfolio companies, regardless of PE firm reputation. While the reputational effect remains unchanged under a change in funding pressure, dry powder exhibits a strong moderating effect under extreme funding pressure. The results are robust to alternative proxies for earnings management, alternative fundraising indexes, and various controls for endogeneity concerns.

Dynamic Performance Management: An Approach for Managing the Common Goods
A. Sardi,E. Sorano

Public organizations need innovative approaches for managing common goods and to explain the dynamics linking the (re)generation of common goods and organizational performance. Although system dynamics is recognised as a useful approach for managing common goods, public organizations rarely adopt the system dynamics for this goal. The paper aims to review the literature on the system dynamics and its recent application, known as dynamic performance management, to highlight the state of the art and future opportunities on the management of common goods. The authors analyzed 144 documents using a systematic literature review. The results obtained outline a fair number of documents, countries and journals involving the study of system dynamics, but do not cover sufficient research on the linking between the (re)generation of common goods and organizational performance. This paper outlines academic and practical contributions. Firstly, it contributes to the theory of common goods. It provides insight for linking the management of common goods and organizational performance through the use of dynamic performance management approach. Furthermore, it shows scholars the main research opportunities. Secondly, it indicates to practitioners the documents providing useful ideas on the adoption of system dynamics for managing common goods.

Dynamics of the Price Behavior in Stock Market: A Statistical Physics Approach
Hung T. Diep,Gabriel Desgranges

We study in this paper the time evolution of stock markets using a statistical physics approach. Each agent is represented by a spin having a number of discrete states $q$ or continuous states, describing the tendency of the agent for buying or selling. The market ambiance is represented by a parameter $T$ which plays the role of the temperature in physics. We show that there is a critical value of $T$, say $T_c$, where strong fluctuations between individual states lead to a disordered situation in which there is no majority: the numbers of sellers and buyers are equal, namely the market clearing. We have considered three models: $q=3$ ( sell, buy, wait), $q=5$ (5 states between absolutely buy and absolutely sell), and $q=\infty$. The specific measure, by the government or by economic organisms, is parameterized by $H$ applied on the market at the time $t_1$ and removed at the time $t_2$. We have used Monte Carlo simulations to study the time evolution of the price as functions of those parameters. Many striking results are obtained. In particular we show that the price strongly fluctuates near $T_c$ and there exists a critical value $H_c$ above which the boosting effect remains after $H$ is removed. This happens only if $H$ is applied in the critical region. Otherwise, the effect of $H$ lasts only during the time of the application of $H$. The second party of the paper deals with the price variation using a time-dependent mean-field theory. By supposing that the sellers and the buyers belong to two distinct communities with their characteristics different in both intra-group and inter-group interactions, we find the price oscillation with time.

Explicit description of all deflators for market models under random horizon with applications to NFLVR
Tahir Choulli,Sina Yansori

This paper considers an initial market model, specified by its underlying assets $S$ and its flow of information $\mathbb F$, and an arbitrary random time $\tau$ which might not be an $\mathbb F$-stopping time. As the death time and the default time (that $\tau$ might represent) can be seen when they occur only, the progressive enlargement of $\mathbb F$ with $\tau$ sounds tailor-fit for modelling the new flow of information $\mathbb G$ that incorporates both $\mathbb F$ and $\tau$. In this setting of informational market, the first principal goal resides in describing as explicitly as possible the set of all deflators for $(S^{\tau}, \mathbb G)$, while the second principal goal lies in addressing the No-Free-Lunch-with-Vanishing-Risk concept (NFLVR hereafter) for $(S^{\tau}, \mathbb G)$. Besides this direct application to NFLVR, the set of all deflators constitutes the dual set of all "admissible" wealth processes for the stopped model $(S^{\tau},\mathbb G)$, and hence it is vital in many hedging and pricing related optimization problems. Thanks to the results of Choulli et al. [7], on martingales classification and representation for progressive enlarged filtration, our two main goals are fully achieved in different versions, when the survival probability never vanishes. The results are illustrated on the two particular cases when $(S,\mathbb F)$ follows the jump-diffusion model and the discrete-time model.

Extending MSMEs’ Access To Trade Finance Under the AfCFTA
Osakwe, Sone
While the African Continental Free Trade Area (AfCFTA) provides opportunities for regional financial sector development, it also poses a real test for the continent’s financial system. The ability of Africa’s financial sector to perform the crucial function of facilitating economic growth and integration, at the required scale to support the capacity of small firms to benefit from the single African market remains shaky. In terms of opportunities, the elimination of inhibitive regulations under the AfCFTA is expected to ease cross border trade, enable capital and information flow, attract greater foreign and intra-continental investments, potentially increase capital funds, and provide a much larger customer base for financial institutions to serve. This potential new market base includes traditionally excluded micro, small and medium enterprises (MSMEs) that constitute a large share of the African economy. MSMEs are expected to be a major catalyst for increasing intra African trade and shared economic growth. However, the constraint to MSME financing is a major threat to the success of the AfCFTA as effective economic integration and development depend on easily accessible and affordable capital. This brief therefore advocates for urgent implementation of harmonized financial sector policy reforms across the continent to eliminate these funding constraints, and allow for a more supportive business environment.

Federalizing Bank Governance
Min, David
Congress and federal financial regulators have long prioritized the safety and soundness of banking firms. But at the same time, the directors and officers of banking firms are legally bound to prioritize shareholder wealth maximization, which creates incentives for risk-taking that work against these regulatory goals. This shareholder primacy norm has long been a central feature of corporate governance, but as I describe in this Article its application to banks was not a deliberate policy choice but rather a historical accident. Indeed, banks possess several unique features that make shareholder wealth maximization an inapt governance priority for them. Banks are highly leveraged, which increases the importance of creditor agency costs. Banks also enjoy government guarantees, either explicit or implicit, on their short-term debt, and thus their governance is a matter of public concern. Finally, bank failures result in high negative externalities, and this also creates a strong public interest in bank safety and soundness.This Article argues that a new federal governance regime for banking institutions is appropriate and consistent with the historical purposes of banking regulations and charter oversight in the United States. Furthermore, such a regime would reduce the tensions between the law of state entities and the sprawling federal banking regulatory framework created by Congress, and harmonize the internal governance of banking firms with the broader goals of external banking regulations. Finally, I offer some thoughts on the key principles that should be present in any such federal governance regime for banking.For too long, we have tolerated a “cat-and-mouse” dynamic in banking, one in which regulators have sought to identify and address risky practices while knowing that the directors and officers of banking firms have strong incentives to take on higher risk. By changing this paradigm and realigning the incentives inherent in banking governance, we can take a major step towards ensuring long-term stability in our financial system.

Financial Transparency to the Rescue: Effects of Public Country-by-Country Reporting in the EU Banking Sector on Tax Avoidance
Overesch, Michael,Wolff, Hubertus
We analyze the effect of mandatory financial transparency on corporate tax avoidance. The effectiveness of comprehensive tax transparency, in the form of a public Country-by-Country Reporting, to mitigate corporate tax planning is largely unknown. Capital Requirements Directive IV by the European Commission required multinational banks to publish key financial and tax data in the form of public Country-by-Country Reporting. We examine tax avoidance of banks around the reform. Our focus is on multinational banks newly required to report activities in tax havens that had not been publicly disclosed before the Country-by-Country Reporting mandate. We predict and find that these exposed banks increased their tax expense relative to multinational banks with no activities in tax havens to disclose, as well as relative to domestic banks unaffected by the new mandate. In additional tests we compare our sample of exposed multinational banks to several control groups from the financial sector and other industries. Our results suggest that Country-by-Country Reporting can serve as an additional policy instrument to curb corporate tax avoidance, but only when the reporting exposes the firms’ tax sheltering activities to public scrutiny.

Firm Valuation, Capital Access and Transparency Effects of Dividend Distributions: An Emerging Market Story
Reddy, Nischala,Le, Ben
This paper investigates the impact of the relative ease of capital access and firm’s information transparency on the relationship between dividend cash payment and firm valuation using a panel data of Vietnamese firms. Several firms in Vietnam are state-owned enterprises (SOEs) that enjoy benefits, such as easier access to external capital at a lower cost, when compared to non-SOEs. We find that there is a significant and positive relationship between firm valuation and dividend cash payments. In addition, the same amount of increase in dividend payment is associated with a higher amount of increase in firm value for firms that have less access to external capital or have lower information transparency than for firms with better access to capital or in firms with more information transparency.

For Better or Worse? Financial Reporting Harmonization and Transnational Information Transfers
Herkenhoff, Manuel,Nienhaus, Martin
We find that global financial reporting harmonization is associated with investors overreacting to peer firms’ earnings announcements. Using a sample of 35,116 firm-pair-years from 51 countries between 2000 and 2010, we show that heightened information transfers due to financial reporting harmonization are followed by predictable price reversals when investors observe own-firm earnings. However, overreactions are not present for international firm-pairs that follow different accounting standards. Further, the same-standards overreactions are significantly stronger for firms with lower reporting incentives and weaker information environments. A difference-in-differences analysis of mandatory adoptions confirms our main results. Collectively, the findings reflect unintended consequences of harmonization.

How Can Developing Countries Reduce Financial Exclusion? A Critical Review of Nigeria’s Financial Inclusion Strategy
Osakwe, Sone
Efforts towards improved financial inclusion (FI) have heightened globally, as well as in Nigeria, due to the perceived positive links with faster development outcomes. Using secondary data, the study compared actual FI results with national targets. The findings show that since the introduction of the National Financial Inclusion Strategy (NFIS) in 2012, the number of Nigerian citizens with access to bank accounts and credit have significantly increased. While access to non-bank services such as insurance and pension, has scarcely improved. However, Nigeria is still not close to meeting its target of reducing the proportion of citizens aged eighteen (18) years and above, without access to any form of formal or informal financial services to 20% by 2020. In addition, there are disparities in the level of financial exclusion across gender and regional locations. There are also identified policy gaps worth investigating further. To this end, the study recommends a more holistic strategy approach that incorporates; increased flexibility to accommodate changes in the financial sector, effective stakeholder collaboration, recognition of local realities, and better policy coordination. Research into the efficacy of FI strategies in Nigeria remains limited. The findings in this review therefore add to the emerging FI literature especially in a developing country context, proffers useful considerations for policy formulation, and serves as a guide for FI stakeholders in making informed decisions.

Impact of Basel III on the Discretion and Timeliness of Banks’ Loan Loss Provisions
Jutasompakorn, Pearpilai,Lim, Chu Yeong,Ranasinghe, Tharindra,Yong, Kevin Ow
The Basel III Accord tightens capital adequacy requirements for banks by increasing the minimum Tier 1 regulatory capital threshold from 4 to 6 percent. It also emphasizes the need to improve timeliness of loan loss provisions. Using a sample of European banks, we examine the impact of this regulation on banks’ discretionary loan loss provisioning behavior. Underscoring banks’ increased incentives to report higher capital ratios, we observe a post-Basel III increase in banks’ use of discretionary loan loss provisions (DLLPs) for capital management purposes and a corresponding reduction in the use of these provisions for income smoothing purposes. Moreover, we find that the timeliness of loan loss provisions has improved following Basel III. We also find that the post-Basel III increase in capital management behavior is greater for banks that do not face conflicting incentives when using DLLPs to improve Tier 1 versus total capital ratio. In contrast, the improvement in loan loss provisioning timeliness is greater for banks that are less likely to engage in capital management due to these conflicting incentives. Our findings suggest that Basel III has significantly altered banks’ discretionary loan loss provisioning behavior.

Increasing the price of a university degree does not significantly affect enrolment if income contingent loans are available: evidence from HECS in Australia
Fabio Italo Martinenghi

I provide evidence that, when income-contingent loans are available, student enrolment in university courses is not significantly affected by large increases in the price of those courses. I use publicly available domestic enrolment data from Australia. I study whether large increases in the price of higher education for selected disciplines in Australia in 2009 and in 2012 was associated with changes in their enrolment growth. I find that large increases in the price of a course did not lead to significant changes in their enrolment growth for that course.

International Tax Transparency
Cockfield, Arthur J.
An imbalance exists between tax authorities and taxpayers when it comes to the latter’s financial information. Taxpayers have the information they need to calculate their tax liabilities and file their returns. Tax authorities, on the other hand, tend to have little beyond what is in the tax return. Thus it can be hard for tax authorities to detect non-compliance. The solution? Pass laws to force the taxpayer (or a third party) to provide more and better information to tax authorities. In other words, increase tax transparency. This Article discusses broad international trends that have been the principal catalyst for tax transparency measures such as the Foreign Account Tax Compliance Act, the Common Reporting Standard and Country-by-Country Reporting, which try to inhibit offshore tax evasion and non-compliant international tax avoidance. In a world where data is the “new oil,” tax advisers are increasingly called on to promote and protect their clients’ interests by advising on the collection, use, and disclosure of tax information.

Investing Through a Macro Factor Lens
Lohre, Harald,Hixon, Robert S,Raol, Jay H,Swade, Alexander,Tao, Hua,Wolle, Scott
A macro factor perspective can help guide portfolio allocation by focusing on salient macroeconomic factors like growth or inflation. We study the link between such macro factors and common multi-asset multi-factor investment building blocks. Specifically, we investigate their macro factor sensitivities and propose a simple, yet effective, route to designing diversified macro factor-mimicking portfolios that prove beneficial in diversifying a given portfolio allocation with respect to its macro factor exposures.

It’s Not Who You Know â€" It’s Who Knows You: Employee Social Capital and Firm Performance
Cho, DuckKi,Choi, Lyungmae,Hertzel, Michael G.,Wang, Jessie Jiaxu
We show that the social capital embedded in employees’ networks contributes to superior firm performance and provide evidence on the mechanism. Using data from a professional networking app, we measure a firm’s social capital derived from employees’ connections with external stakeholders. The directed nature of connections allows for identifying whether one party in a connection values the other more. Results show that firms with more employee social capital perform better. The positive effect arises primarily from employees being valued by others. We provide causal evidence by exploiting the enactment of an anti-graft act, which imparts a negative shock to networks.

Limiting Value of the Kolkata Index for Social Inequality and a Possible Social Constant
Asim Ghosh,Bikas K Chakrabarti

Based on some analytic structural properties of the Gini and Kolkata indices for social inequality, as obtained from a generic form of the Lorenz function, and some more new observations on the citation statistics of individual authors (including Nobel laureates), we make a conjecture that about $14\%$ of people or papers or social conflicts tend to earn or attract or cause about $86\%$ of wealth or citations or deaths in very competitive situations in markets, universities or wars. This is a modified form of the (more than a) century old $80-20$ law of Pareto in economy (not visible today because of various welfare and other strategies) and gives an universal value ($0.86$) of social (inequality) constant or number.

Looking the Other Way: The Screening Role of (Weak) Internal Monitoring
Feng, Felix Zhiyu,Wang, Wenyu,Wu, Yufeng
Internal monitoring is a cardinal responsibility of the board of directors, many of which have been subject to relentless criticism of conceding too much power to the managers and allowing them too much latitude. We analyze the role of internal monitoring in a dynamic adverse selection model, in which managers have unobservable ability and must be given rents through a compensation contract in exchange for revealing their private information. Monitoring has two effects: an ex-post disciplining effect, whereby more intense monitoring limits the information advantage and the rents for managers with higher ability; and an ex-ante screening effect, whereby weaker monitoring allows firms to attract better managers. We show an optimal level of monitoring intensity that balances the disciplining effect and the screening effect exists, even when monitoring is intrinsically costless and can be made arbitrarily strong. We empirically test these predictions and find that less monitoring by the board is indeed associated with on average more capable managers, and the relationship between monitoring intensity and firm value is hump-shaped in the data. Although the lack of monitoring is often viewed as a failure of internal governance, our analysis suggests it is a plausible tactic for attracting and retaining talented managers.

Market Inefficiencies Surrounding Energy Announcements
Alturki, Sultan,Kurov, Alexander
We use sequential energy inventory announcements to shed new light on the informational efficiency of financial markets. Our findings provide clear evidence of inefficiency in oil futures and stock markets. This inefficiency can be exploited by sophisticated traders. We examine the effect of market conditions, such as liquidity and oil attention, on the efficient incorporation of information in this setting. We also construct a predictor that can predict inventory surprises and pre-announcement returns in-sample and out-of-sample. Finally, we develop a combination forecast that can be used as a proxy for market expectations of oil inventory announcements.

Mobility-based contact exposure explains the disparity of spread of COVID-19 in urban neighborhoods
Rajat Verma,Takahiro Yabe,Satish V. Ukkusuri

The rapid early spread of COVID-19 in the U.S. was experienced very differently by different socioeconomic groups and business industries. In this study, we study aggregate mobility patterns of New York City and Chicago to identify the relationship between the amount of interpersonal contact between people in urban neighborhoods and the disparity in the growth of positive cases among these groups. We introduce an aggregate Contact Exposure Index (CEI) to measure exposure due to this interpersonal contact and combine it with social distancing metrics to show its effect on positive case growth. With the help of structural equations modeling, we find that the effect of exposure on case growth was consistently positive and that it remained consistently higher in lower-income neighborhoods, suggesting a causal path of income on case growth via contact exposure. Using the CEI, schools and restaurants are identified as high-exposure industries, and the estimation suggests that implementing specific mobility restrictions on these point-of-interest categories are most effective. This analysis can be useful in providing insights for government officials targeting specific population groups and businesses to reduce infection spread as reopening efforts continue to expand across the nation.

Modeling Univariate and Multivariate Stochastic Volatility in R with stochvol and factorstochvol
Darjus Hosszejni,Gregor Kastner

Stochastic volatility (SV) models are nonlinear state-space models that enjoy increasing popularity for fitting and predicting heteroskedastic time series. However, due to the large number of latent quantities, their efficient estimation is non-trivial and software that allows to easily fit SV models to data is rare. We aim to alleviate this issue by presenting novel implementations of four SV models delivered in two R packages. Several unique features are included and documented. As opposed to previous versions, stochvol is now capable of handling linear mean models, heavy-tailed SV, and SV with leverage. Moreover, we newly introduce factorstochvol which caters for multivariate SV. Both packages offer a user-friendly interface through the conventional R generics and a range of tailor-made methods. Computational efficiency is achieved via interfacing R to C++ and doing the heavy work in the latter. In the paper at hand, we provide a detailed discussion on Bayesian SV estimation and showcase the use of the new software through various examples.

Non-GAAP Earnings: A Consistency and Comparability Crisis?
Black, Dirk E.,Christensen, Theodore E.,Ciesielski, Jack T.,Whipple, Benjamin C.
We use a novel data set to examine the across-time consistency and across-firm comparability of firms’ non-GAAP earnings disclosures. Given widespread concern about non-GAAP reporting among regulators, standard setters, the investor community, and academics, our investigation provides timely evidence on how managers’ deviations from their own non-GAAP disclosure history, or the reporting of industry peers, affects how well earnings inform on firm performance. We begin by identifying firms that change their non-GAAP earnings definition from one year to the next. These deviations are uncommon, but when managers change the items they exclude in calculating non-GAAP earnings, the changes generally enhance the information in earnings about firms’ core performance. We also examine whether non-GAAP earnings are more comparable than GAAP earnings and find that firms’ non-GAAP adjustments result in greater earnings comparability. Finally, we examine instances in which firms deviate from common sector-wide definitions of non-GAAP earnings. We find that these deviations also result in earnings metrics that better represent firms’ core operations. Overall, our results suggest that when managers vary their non-GAAP calculations, either across time or across firms, the resulting non-GAAP metrics generally enhance the information in earnings about firms’ ongoing performance. Thus, our analysis helps mitigate concerns about why managers might vary their non-GAAP reporting calculations.

On finite population games of optimal trading
David Evangelista,Yuri Thamsten

We investigate stochastic differential games of optimal trading comprising a finite population. There are market frictions in the present framework, which take the form of stochastic permanent and temporary price impacts. Moreover, information is asymmetric among the traders, with mild assumptions. For constant market parameters, we provide specialized results. Each player selects her parameters based not only on her informational level but also on her particular preferences. The first part of the work is where we examine the unconstrained problem, in which traders do not necessarily have to reach the end of the horizon with vanishing inventory. In the sequel, we proceed to analyze the constrained situation as an asymptotic limit of the previous one. We prove the existence and uniqueness of a Nash equilibrium in both frameworks, alongside a characterization, under suitable assumptions. We conclude the paper by presenting an extension of the basic model to a hierarchical market, for which we establish the existence, uniqueness, and characterization of a Stackelberg-Nash equilibrium.

Optimal Investment and Consumption under a Habit-Formation Constraint
Bahman Angoshtari,Erhan Bayraktar,Virginia R. Young

We extend the result of our earlier study [Angoshtari, Bayraktar, and Young; "Optimal consumption under a habit-formation constraint," available at: arXiv:2012.02277, (2020)] to a market setup that includes a risky asset whose price process is a geometric Brownian motion. We formulate an infinite-horizon optimal investment and consumption problem, in which an individual forms a habit based on the exponentially weighted average of her past consumption rate, and in which she invests in a Black-Scholes market. The novelty of our model is in specifying habit formation through a constraint rather than the common approach via the objective function. Specifically, the individual is constrained to consume at a rate higher than a certain proportion $\alpha$ of her consumption habit. Our habit-formation model allows for both addictive ($\alpha=1$) and nonaddictive ($0<\alpha<1$) habits. The optimal investment and consumption policies are derived explicitly in terms of the solution of a system of differential equations with free boundaries, which is analyzed in detail. If the wealth-to-habit ratio is below (resp. above) a critical level $x^*$, the individual consumes at (resp. above) the minimum rate and invests more (resp. less) aggressively in the risky asset. Numerical results show that the addictive habit formation requires significantly more wealth to support the same consumption rate compared to a moderately nonaddictive habit. Furthermore, an individual with a more addictive habit invests less in the risky asset compared to an individual with a less addictive habit but with the same wealth-to-habit ratio and risk aversion, which provides an explanation for the equity-premium puzzle.

Optimal Network Compression
Hamed Amini,Zachary Feinstein

This paper introduces a formulation of the optimal network compression problem for financial systems. This general formulation is presented for different levels of network compression or rerouting allowed from the initial interbank network. We prove that this problem is, generically, NP-hard. We focus on objective functions generated by systemic risk measures under systematic shocks to the financial network. We conclude by studying the optimal compression problem for specific networks; this permits us to study the so-called robust fragility of certain network topologies more generally as well as the potential benefits and costs of network compression. In particular, under systematic shocks and heterogeneous financial networks the typical heuristics of robust fragility no longer hold generally.

Ordinal and cardinal solution concepts for two-sided matching
Federico Echenique,Alfred Galichon

We characterize solutions for two-sided matching, both in the transferable and in the nontransferable-utility frameworks, using a cardinal formulation. Our approach makes the comparison of the matching models with and without transfers particularly transparent. We introduce the concept of a no-trade matching to study the role of transfers in matching. A no-trade matching is one in which the availability of transfers do not affect the outcome.

Perfect Withdrawal in a Noisy World: Investing Lessons With and Without Annuities While in Drawdown Between 2000 and 2019
Clare, Andrew,Seaton, James,Smith, Peter N.,Thomas, Steve
We show how the relatively new concept of Perfect Withdrawal Rate can be used in assessing the appropriate sustainable withdrawal amounts from a pot of wealth. This can be applied equally to private retirement funds, endowments, charities, and indeed any context requiring regular withdrawals from an initial pot. The subject of estimating sustainable withdrawal rates usually falls back on describing the likely minimum safe withdrawal possibilities for various portfolio constructions over different decumulation periods. This analysis uses either a long period of historical data or a recombination of the data in the form of Monte Carlo simulations. Here, to illustrate the power of the Perfect Withdrawal concept, we consider the case of someone who started their retirement journey on 1st January 2000, aged 65 and, with the benefit of actual investment returns, consider their investment and withdrawal rate options and the lessons we can learn from this experience. We also introduce the concept and a methodology for purchasing, a delayed annuity, such that at age 85 on December 31st 2019, our retiree had fully transitioned from investment income to annuity income for the rest of their life, no matter how long that may be.

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

In recognition of the transformative opportunities that broadband connectivity presents, the United Nations Broadband Commission has committed the international community to accelerate universal access across the developing world. However, the cost of meeting this objective, and the feasibility of doing so on a commercially viable basis, are not well understood. This paper compares the global cost-effectiveness of different infrastructure strategies for the developing world to achieve universal 4G or 5G mobile broadband. Utilizing remote sensing and geospatial infrastructure simulation, least-cost network designs are developed for eight representative low and middle-income countries (Malawi, Uganda, Kenya, Senegal, Pakistan, Albania, Peru and Mexico), the results from which form the basis for aggregation to the global level. To provide at least 2 Mbps per user, 4G is often the cheapest option to reach universal coverage. The cost of meeting the UN Broadband Commission target of a minimum 10 Mbps per user is estimated at USD 1.7 trillion using 5G NSA, equating to approximately 0.6% of annual GDP for the developing world over the next decade. However, by creating a favorable regulatory environment, governments can bring down these costs by as much as three quarters, to USD 0.5 trillion (approximately 0.2% of annual GDP), and avoid the need for public subsidy. Providing governments make judicious choices, adopting fiscal and regulatory regimes conducive to lowering costs, broadband universal service may be within reach of most developing countries over the next decade.

Policy options for digital infrastructure strategies: A simulation model for broadband universal service in Africa
Edward Oughton

Internet access is essential for economic development and helping to deliver the Sustainable Development Goals, especially as even basic broadband can revolutionize available economic opportunities. Yet, more than one billion people still live without internet access. Governments must make strategic choices to connect these citizens, but currently have few independent, transparent and scientifically reproducible assessments to rely on. This paper develops open-source software to test broadband universal service strategies which meet the 10 Mbps target being considered by the UN Broadband Commission. The private and government costs of different infrastructure decisions are quantified in six East and West African countries (C\^ote D`Ivoire, Mali, Senegal, Kenya, Tanzania and Uganda). The results provide strong evidence that `leapfrogging` straight to 4G in unconnected areas is the least-cost option for providing broadband universal service, with savings between 13-51% over 3G. The results also demonstrate how the extraction of spectrum and tax revenues in unviable markets provide no net benefit, as for every $1 taken in revenue, a $1 infrastructure subsidy is required from government to achieve broadband universal service. Importantly, the use of a Shared Rural Network in unviable locations provides impressive cost savings (up to 78%), while retaining the benefits of dynamic infrastructure competition in viable urban and suburban areas. This paper provides evidence to design national and international policies aimed at broadband universal service.

Portfolio Optimisation within a Wasserstein Ball
Pesenti, Silvana M.,Jaimungal, Sebastian
We consider the problem of active portfolio management where a loss-averse and/or gain-seeking investor aims to outperform a benchmark strategy's risk profile while not deviating too much from it. Specifically, an investor considers alternative strategies that co-move with the benchmark and whose terminal wealth lies within a Wasserstein ball surrounding it. The investor then chooses the alternative strategy that minimises their personal risk preferences, modelled in terms of a distortion risk measure. In a general market model, we prove that an optimal dynamic strategy exists and is unique, and provide its characterisation through the notion of isotonic projections. Finally, we illustrate how investors with different risk preferences invest and improve upon the benchmark using the Tail Value-at-Risk, inverse S-shaped distortion risk measures, and lower- and upper-tail risk measures as examples. We find that investors' optimal terminal wealth distribution has larger probability masses in regions that reduce their risk measure relative to the benchmark while preserving some aspects of the benchmark.

Prisoner Dilemma in maximization constrained: the rationality of cooperation
Mahdi HajiAliAkbari,Shahin Esmaeili

David Gauthier in his article, Maximization constrained: the rationality of cooperation, tries to defend the joint strategy in situations in which no outcome is both equilibrium and optimal. Prisoner Dilemma is the most familiar example of these situations. He first starts with some quotes by Hobbes in Leviathan; Hobbes, in chapter 15 discusses an objection by someone is called Foole, and then will reject his view. In response to Foole, Hobbes presents two strategies (i.e. joint and individual) and two kinds of agents in such problems including Prisoner Dilemma, i.e. straightforward maximizer (SM) and constrained maximizer(CM). Then he considers two arguments respectively for SM and CM, and he will show that why in an ideal and transparent situation, the first argument fails and the second one would be the only valid argument. Likewise, in the following part of his article, he considers more realistic situations with translucency and he concludes that under some conditions, the joint strategy would be still the rational decision.

Research Methods (I): Description of GVC Links
Sourish Dutta

This part of my thesis would use several statistical measures to examine the degree of India's GVC engagement. Those measures can be classified according to the levels of vertical integration, such as measures of backward integration, measures of forward integration, and some other statistical measures. I have summarised the main measures of forward and backward dimensions as well as the other crucial measures of India's GVC engagement in the following sections.

Resource Adjustment Costs, Cost Stickiness, and Value Creation in M&A Deals
Jang, Youngki,Yehuda, Nir
We examine whether resource adjustment costs, such as installation and disposal costs for fixed assets, or hiring and firing costs for employees, impede value creation in mergers and acquisitions (M&A). We focus on M&A deals because they are major corporate investment decisions. As a proxy for adjustment costs, we use a firm-level measure of cost stickiness. We predict that acquirers with high adjustment costs have less flexibility in restructuring resources following the acquisition and will find it more costly to merge the target firm’s operations. Consistent with this prediction, we find that the acquirer’s adjustment costs are negatively associated with abnormal returns around the acquisition announcement. Additionally, adjustment costs are also negatively associated with deal synergies. Relatedly, we find that acquirers with high adjustment costs purchase targets with high adjustment costs. In accordance with this finding, we show that acquirers with high adjustment costs purchase intangible-intensive targets. Collectively, our results highlight the important implication of adjustment costs in M&A deals for managers and capital market participants.

Reward Design in Risk-Taking Contests
Marcel Nutz,Yuchong Zhang

Following the risk-taking model of Seel and Strack, $n$ players decide when to stop privately observed Brownian motions with drift and absorption at zero. They are then ranked according to their level of stopping and paid a rank-dependent reward. We study the problem of a principal who aims to induce a desirable equilibrium performance of the players by choosing how much reward is attributed to each rank. Specifically, we determine optimal reward schemes for principals interested in the average performance and the performance at a given rank. While the former can be related to reward inequality in the Lorenz sense, the latter can have a surprising shape.

Rumors of an Eclipse Are Exaggerated. The PE Model Is Here To Stay
Wright, Mike,Jelic, Ranko
In line with Jensen’s predictions, private equity (PE) industry has grown remarkably and become a global phenomenon. More recently, academic literature examines a sharp drop in number of listed firms and the role of PE firms in the possible demise of public corporations. Rather controversially, some authors were also predicting the eclipse of PE. In this monograph we discuss recent developments and argue that rumors of the eclipse of PE are exaggerated. The PE model, and its accompanying governance role, is here to stay but it will need to adapt to changing dynamics between general and limited partners, and emergence of fintech.

The Contours of Money, the Financial System and Ancillary Matters
Brown, Jay Gbleh-bo
Recent developments in the monetary sphere of Liberia including the “dearth of local currency banknotes” have triggered escalating public conversations about the financial system of Liberia and perceived risks and opportunities. Many pundits from within and outside Liberia have yielded to the innate summons of the moment to express their views on the nature of the problems and what solutions they believe exist. I have observed with keen interest the trend of the debate and deemed it super important to advance some thoughts that would at least refresh the experts and provide orientation for others.I have explained why the concept of money, its creation process and management framework need to be properly understood as the discussions in the public about the financial sector and the dearth of local currency banknotes heighten. I have posited that under the fractional reserve system, part of what we term as money and queue up to banks to collect physical currency against, is created out of “thin air” and is not matched by any available physical currency/banknotes. Coupled with the fact that banks use currency/banknotes deposited to extend loans which is expected to be repaid overtime, no financial system in the world can survive if an extremely high number of depositors show up for their deposits.The highly dollarized nature of the financial system makes the implementation of monetary policy a serious challenge as a greater share of the country’s money supply is in foreign currency (United State dollars) for which the local authorities have no control. The total money supply is incomplete as the quantum of United States dollars circulating outside the banking system is not calculated and reported. Calculating and reporting the total USD in circulation is practically difficult. At any point, it is difficult to know the total amount of US dollars circulating in the economy and impacting monetary conditions as anyone could fly in and out of Liberia with the US dollars. Therefore, expediting the de-dollarization roadmap would prove useful. And this would require the right monetary autonomy to have adequate amount of local currency to substitute the foreign currency. Actions directed at increasing the use of the Liberian dollar in daily transactions such as the Remittance Split Policy introduced few years ago but now suspended, while good for de-dollarization, led to significant surge in the Liberian dollar in circulation. In other words, significant de-dollarization would mean having more Liberian dollar for the conduct of daily transactions. Except digitization efforts gain traction, this would require more printing!

The Effects of Concentrated LIHTC Development on Surrounding House Prices
Voith, Richard,Liu, Jing,Zielenbach, Sean,Jakabovics, Andrew,An, Brian,Rodnyansky, Seva,Orlando, Anthony W.,Bostic, Raphael W.
The Low-Income Housing Tax Credit is the largest supply-side housing subsidy in the United States, costing over $8 billion per year. LIHTC properties tend to be concentrated in low-income urban communities. Numerous studies have examined the spillover effects of these properties but have not accounted for their clustering or teased out the effects of introducing additional LIHTC developments to neighborhoods. We combine an interrupted time series model with a difference-in-difference approach to estimate the additive property value effects in Chicago and surrounding Cook County, Illinois. The development of subsequent LIHTC properties within a neighborhood augments the positive effects of the initial property as far as half a mile away, in both low-income and higher-income areas. The effects are most pronounced in neighborhoods with low median incomes.

The Effects of Terrorist Attacks on Inventor Productivity and Mobility
Fich, Eliezer M.,Nguyen, Tung,Petmezas, Dimitris
We examine the causal effects of terrorism on inventor productivity and mobility. During the five-year window after terrorist attacks, inventors close to the strikes are more likely to move to distant companies. While the inventors that continue working for firms near the attacks exhibit a drastic productivity decline, those that relocate to faraway companies become very productive. These results prove robust to alternative specifications and numerous controls including the influence of the 9/11 attacks. Our findings provide novel insights about the impact of shocks that distort human capital productivity and promote the mobility and reallocation of specialized resources among firms.

The Market Measure of Carbon Risk and its Impact on the Minimum Variance Portfolio
Roncalli, Théo,Le Guenedal, Théo,Lepetit, Frederic,Roncalli, Thierry,Sekine, Takaya
Like ESG investing, climate change is an important concern for asset managers and owners, and a new challenge for portfolio construction. Until now, investors have mainly measured carbon risk using fundamental approaches, such as with carbon intensity metrics. Nevertheless, it has not been proven that asset prices are directly impacted by these fundamental-based measures. In this paper, we focus on another approach, which consists in measuring the sensitivity of stock prices with respect to a carbon risk factor. In our opinion, carbon betas are market-based measures that are complementary to carbon intensities or fundamental-based measures when managing investment portfolios, because carbon betas may be viewed as an extension or forward-looking measure of the current carbon footprint. In particular, we show how this new metric can be used to build minimum variance strategies and how they impact their portfolio construction.

The Real Merger Gains: Correcting for Partial Anticipation
Irani, Mohammad (Vahid)
Assuming mergers are unpredictable, previous studies have found they create no value for acquirers, while targets generally gain a hefty bid premium. This paper proposes a new approach to account for partial anticipation, which allows the parameters of the asset pricing model to change in response to anticipation signals. I find that pre-offer alphas capture signals, and so should be part of merger gains. Using matched-control samples, I address endogeneity concerns that market wide movements and firms’ ability to time takeovers may drive these findings. Overall, the gains are larger than a traditional market model would indicate, and mergers create substantial value for both firms.

The Rise of Bond Financing in Europe
Darmouni, Olivier,Papoutsi, Melina
In the Euro Area, the share of corporate borrowing coming from bond markets doubled since 2000 at the expense of bank lending. We use micro-level evidence from European public firms to dissect the steady rise of bond financing and document a number of potential risks behind the expansion, some of which came to light in spring 2020. There is a constant stream of firms entering the bond market for the first time which are significantly smaller and less profitable than historical issuers, but have comparable levels of leverage. New issuers expand their balance sheet, instead of just repaying bank loans. A shift toward bond financing is not without risk: the majority of firms facing a credit rating downgrade in 2020 crisis are small firms that entered the bond market after 2012. In light of the recent turmoil, our findings support broadening lender-of-last resort policies to include the corporate bond market.

The ‘Annuity Puzzle’ and Model Portfolios
Mindlin, Dimitry
The paper presents a model that demonstrates the advantages of partial annuitization in the most straightforward manner. The paper also briefly discusses “the annuity puzzle”, a decades old problem.

Three-Factor Commodity Forward Curve Model and Its Joint P and Q Dynamics
Ladokhin, Sergiy,Borovkova, Svetlana
In this paper, we propose a new framework for modelling commodity forward curves. The proposed model describes the dynamics of fundamental driving factors simultaneously under physical (P) and risk-neutral (Q) probability measures.Our model an extension of the forward curve model by Borovkova and Geman (2007), into several directions. It is a three-factor model, incorpo- rating the synthetic spot price, based on liquidly traded futures, stochastic level of mean reversion and an analogue of the stochastic convenience yield. We develop an innovative calibration mechanism based on the Kalman ltering technique and apply it to a large set of Brent oil futures. Addition- ally, we investigate properties of the time-dependent market price of risk in oil markets. We apply the proposed modelling framework to derivatives pricing, risk management and counterparty credit risk. Finally, we outline a way of adjusting the proposed model to account for negative oil futures prices observed recently due to coronavirus pandemic.

To Change or Not to Change: The Impact of the Law on Mortgage Origination
Sá, Ana Isabel
Differences in mortgage law have significant effects on loan characteristics at origination. Borrower-friendly laws impose higher costs and risks for lenders and, thus, induce effects on mortgage pricing and leverage. However, not all borrower-friendly laws have the same effects. This finding is established using loan-level data for the U.S. mortgage market between 2001 and 2011. Judicial foreclosure requirements imply higher mortgage interest rates due to higher recovery costs and activate the price channel. Recourse restrictions imply higher loan collateralization to compensate for the fewer recovery opportunities and activate the collateral channel.

Trade Union Strategies towards Platform Workers: Exploration Instead of Action (The Case of Hungarian Trade Unions)
Szilvia Borbely,Csaba Mako,Miklos Illessy,Saeed Nostrabadi

Although the share of platform work is very small compared to conventional and traditional employment system, research shows that the use of platform work is increasingly growing all over the world. Trade unions have also paid special attention to the platform work because they know that the transfer of a percentage of human resources to the platforms is undeniable. To this end, the trade unions prepare themselves for the challenges and dynamics of this emerging phenomenon in the field of human resources. Using a qualitative research method and a case study of Hungary, the present study aimed to identify the strategies adopted by Trade Unions to manage the transition to platform works and provide suggestions for both practitioners and future research.

Turkey’s Hidden Economic Disaster Fostered by Unorthodox Policies in Isolation
Taskinsoy, John
Huge difference a decade makes; from an uninterrupted growth in one decade (i.e. birth of the Justice and Development Party â€" AKP in August 2001 and the rise of the AKP during 2002-2013) to another decade of unorthodox policies induced by ever more authoritarianism (i.e. the loss of Istanbul and Ankara in the 2018 local elections marked the fall of the AKP. The Turkish economy under the AKP has endured both positive and negative developments; on the positive side, the start of Turkey’s accession negotiations (2005) to join the EU created positive investors sentiment, in turn continued capital inflows (dollar glut â€" cheap dollar) gave much needed boost to industrial production and mega infrastructure projects (airports, roads, bridges, etc.). Credit-fueled consumption allowed the Turkish economy to expand over 6% YoY (peaked at 11.8% in March 2011) and GDP per capita reached an all-time high of $12,582 in December 2013, placing Turkey in the group of high-income countries (16th largest economy as of 2013). On the negative side, Turkey has been accused of divergence from its Western allies due to its new ambitious foreign and defense policies; consequently, Turkey’s bid to join the EU is in limbo as its accession negotiations have been stalled, plus the EU refuses to renew the Customs Union agreement citing the issues related to Turkey’s energy exploration in the Eastern Mediterranean and Turkey’s refusal to open its ports to Cyprus. Turkey’s relations with its neighbors and allies are severely strained in recent years; the US-Turkey relations came to a breaking point after Turkey proceeded with its decision to purchase S-400 missile defense system from Russia. Especially in the aftermath of the July 2016 coup attempt, ErdoÄŸan’s AKP government increased its authoritarian ways, this caused a serious amount of irregularities in the rule of law, and a significant deterioration in human rights (rights of minority groups), freedom of expression and freedom of media (opposition is completely silenced); consequently, all economic and financial indicators have been at their worst levels in 2020 (GDP contracted nearly 10% and GDP per capita dropped to $9,126 in 2019).

Using Data Science to Identify ETF Model Followers
Madhavan, Ananth,Sobczyk, Aleksander
Investors seeking low cost, automated, and tax aware solutions are increasingly following ETF model portfolios either as self-directed individuals or through financial advisors. Despite the importance of model portfolios, there is no centralized way to track the growth of model assets and identify individual models; survey and self-reporting methods both face challenges. We use data science to identify all models based on monthly ownership data looking for clusters of nearly identical portfolio holdings. The algorithm yields important and novel insights into the growth of model portfolio assets, the characteristics of successful models, model rebalance flows, and trends in models.

Variational Autoencoders: A Hands-Off Approach to Volatility
Maxime Bergeron,Nicholas Fung,John Hull,Zissis Poulos

A volatility surface is an important tool for pricing and hedging derivatives. The surface shows the volatility that is implied by the market price of an option on an asset as a function of the option's strike price and maturity. Often, market data is incomplete and it is necessary to estimate missing points on partially observed surfaces. In this paper, we show how variational autoencoders can be used for this task. The first step is to derive latent variables that can be used to construct synthetic volatility surfaces that are indistinguishable from those observed historically. The second step is to determine the synthetic surface generated by our latent variables that fits available data as closely as possible. As a dividend of our first step, the synthetic surfaces produced can also be used in stress testing, in market simulators for developing quantitative investment strategies, and for the valuation of exotic options. We illustrate our procedure and demonstrate its power using foreign exchange market data.