Research articles for the 2021-02-28

A Multivariate GARCH in Mean Approach to Testing Uncovered Interest Parity: Evidence From Asia-Pacific Foreign Exchange Markets
Tai, Chu-Sheng
SSRN
The existence of time-varying risk premia in deviations from uncovered interest parity (UIP) is investigated based on a conditional capital asset pricing model (CAPM) using data from four Asia-Pacific foreign exchange markets. A parsimonious multivariate generalized autoregressive conditional heteroskedasticity in mean (GARCH-M) parameterization is employed to model the conditional covariance matrix of excess returns. The empirical results indicate that when each currency is estimated separately with an univariate GARCH-M parameterization, no evidence of time-varying risk premia is found except Malaysian ringgit. However, when all currencies are estimated simultaneously with the multivariate GARCH-M parameterization, strong evidence of time-varying risk premia is detected. As a result, the evidence supports the idea that deviations from UIP are due to a risk premium and not to irrationality among market participants. In addition, the empirical evidence found in this study points out that simply modeling the conditional second moments is not sufficient enough to explain the dynamics of the risk premia. A time-varying price of risk is still needed in addition to the conditional volatility. Finally, significant asymmetric world market volatility shocks are found in Asia-Pacific foreign exchange markets.

A Stock Market Model Based on CAPM and Market Size
Brandon Flores,Blessing Ofori-Atta,Andrey Sarantsev
arXiv

We introduce a new system of stochastic differential equations which models dependence of market beta and unsystematic risk upon size, measured by market capitalization. We fit our model using size deciles data from Kenneth French's data library. This model is somewhat similar to generalized volatility-stabilized models in (Pal, 2011; Pickova, 2013). The novelty of our work is twofold. First, we take into account the difference between price and total returns (in other words, between market size and wealth processes). Second, we work with actual market data. We study the long-term properties of this system of equations, and reproduce observed linearity of the capital distribution curve. Our model has two modifications: for price returns and for equity premium. Somewhat surprisingly, they exhibit the same fit, with very similar coefficients. In the Appendix, we analyze size-based real-world index funds.



A conditional version of the second fundamental theorem of asset pricing in discrete time
Lars Niemann,Thorsten Schmidt
arXiv

The second fundamental theorem of asset pricing characterizes completeness of a financial market by uniqueness of prices of financial claims. The associated super- and sub-hedging dualities give upper and lower bounds of the no-arbitrage interval. In this article we provide conditional versions of these results in discrete time.

The main tool we use are consistency properties of dynamic non-linear expectations, which we apply to the super- and sub-hedging prices. The obtained results extend existing results in the literature, where the conditional setting is in most cases considered only on finite probability spaces. Using non-linear expectations we also provide a new perspective on the optional decomposition theorem.



A procedure for loss-optimising default definitions across simulated credit risk scenarios
Arno Botha,Conrad Beyers,Pieter de Villiers
arXiv

A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II. Alternative delinquency measures, other than simply measuring payments in arrears, can also be evaluated using this optimisation procedure. Furthermore, a simulation study is performed in testing the procedure from `first principles' across a wide range of credit risk scenarios. Specifically, three probabilistic techniques are used to generate cash flows, while the parameters of each are varied, as part of the simulation study. The results show that loss minima can exist for a select range of credit risk profiles, which suggests that the loss optimisation of default thresholds can become a viable practice. The default decision is therefore framed anew as an optimisation problem in choosing a default threshold that is neither too early nor too late in loan life. These results also challenges current practices wherein default is pragmatically defined as `90 days past due', with little objective evidence for its overall suitability or financial impact, at least beyond flawed roll rate analyses or a regulator's decree.



Approximation of Stochastic Volterra Equations with kernels of completely monotone type
Aurélien Alfonsi,Ahmed Kebaier
arXiv

In this work, we develop a multi-factor approximation for Stochastic Volterra Equations with Lipschitz coefficients and kernels of completely monotone type that may be singular. Our approach consists in truncating and then discretizing the integral defining the kernel, which corresponds to a classical Stochastic Differential Equation. We prove strong convergence results for this approximation. For the particular rough kernel case with Hurst parameter lying in $(0,1/2)$, we propose various discretization procedures and give their precise rates of convergence. We illustrate the efficiency of our approximation schemes with numerical tests for the rough Bergomi model.



Are Fama-French and Momentum Factors Really Priced?
Tai, Chu-Sheng
SSRN
This paper investigates whether the existence of pricing anomalies represents compensation for bearing extra-market risks by directly testing a version of Merton's (1973) Intertemporal CAPM (ICAPM), allowing for both time-varying first and second moments of asset returns. The conditional ICAPM is estimated using multivariate GARCH in mean (MGARCH-M) modeling strategy, and then is used to examine three popular anomalies - size, book-to-market, and momentum. The results indicate that all the four risk factors (market portfolio (MKT), size portfolio (SMB), book-to-market portfolio (HML), and momentum portfolio (UMD)) are not only significantly priced, but also time-varying. The empirical results documented in this study provide a strong support of risk-based explanations for the anomalies. That is, the apparent high average returns represent compensation for bearing extra-market risks, which are not captured by the CAPM. The results also shed a new light on how the momentum effect should be interpreted since previous studies fail to detect a priced momentum factor in addition to book-to-market factor. Furthermore, because the ICAPM estimated in this study is fully parameterized, I am able to decompose the total time-varying risk premia into four components: market, size, book-to-market, and momentum. Among those four component risk premia, the market risk premium is the dominant one in describing the return dynamics of portfolios sorted based on the size, book-to-market, and industry.

Asymmetric Currency Exposure and Currency Risk Pricing
Tai, Chu-Sheng
SSRN
Whether stock returns are linked to currency movements and whether currency risk is priced in a domestic context are less conclusive and thus still subject to a great debate. Based on a different approach, this paper attempts to provide new empirical evidence on these two inter-related issues, which are critical to investors and corporate risk management. In particular, this paper not only explores the possibility of asymmetric currency exposure that may explain why prior studies, which focus exclusively on linear exposure, have difficulty in detecting it, but also tests whether this asymmetric currency exposure is priced. The results show strong evidence of asymmetric currency exposure and currency risk pricing, suggesting that both asymmetry and conditional heteroskedasticity play important roles in testing currency exposure and its price.

Asymmetric Currency Exposure of US Bank Stock Returns
Tai, Chu-Sheng
SSRN
Most of previous studies have not been successful in finding significant currency exposure. One possible explanation for this failure is that these studies ignore the asymmetric relationship between the value of a firm and exchange rate. Consequently, in this paper, I explore the possibility of asymmetric currency exposure using US bank stocks. The empirical results show that more than 80% of the sample are significantly exposed to exchange rate changes in a asymmetric way based on the tests of multi-factor model with multivariate GARCH parameterization. This empirical finding is robust to whether contemporaneous or lagged exchange rates changes are used to estimate the model. The strong evidence of asymmetric currency exposure suggests that both asymmetry and conditional heteroskedasticity play important roles in estimating currency exposure.

Can Bank Be a Source of Contagion During the 1997 Asian Crisis?
Tai, Chu-Sheng
SSRN
This paper tests whether bank can be a source of contagion during the 1997 Asian crisis using asset return data from a crisis country â€" Thailand. In particular, I examine whether Thai banking sector can produce contagion effects in both conditional means and volatilities of its foreign exchange and stock markets during the crisis after controlling economic fundamentals. The test results show that contagion-in-mean effects appear to be multidirectional since return shocks emanating from any one of the three markets can sweep across all markets, but contagion-in-volatility effects are mainly driven by the negative return shocks originating in the banking sector. Overall the empirical evidence indicates that the past return shocks emanating from banking sector have significant impact not only on the volatilities of foreign exchange and aggregate stock markets, but also on their prices, suggesting that bank can be a major source of contagion during the crisis.

Can Currency Risk Be a Source of Risk Premium in Explaining Forward Premium Puzzle? Evidence from Asia-Pacific Forward Exchange Markets
Tai, Chu-Sheng
SSRN
This paper studies time-varying price of risk and volatility in Asia-Pacific forward exchange markets in an attempt to see whether currency risk can be a potential source of risk premium to explain forward premium puzzle. To derive a measure of the risk premium, a conditional version of international CAPM (ICAPM) in the absence of PPP is estimated and the parameter restrictions are tested based on asset pricing theories. To incorporate time-varying feature of the risk premium into the model, not only are the second moments of asset returns allowed to change over time by utilizing a parsimonious parameterization of the asymmetric multivariate GARCH with conditionally t -distributed error process (MGARCH-t), but also the prices of risks are permitted to evolve through time based on some predetermined information variables. Estimation results indicate that the not only are currency risks priced, but also change over time. In addition, the explanatory power of the model measured by pseudo-R2 is relatively high with an average of 38.211%, suggesting that the predicted timevarying forward risk premia are both statistically and economically significant. Finally, both forward premium and its squared are statistically significant in describing the dynamics of currency risk prices, implying the non-linearity of forward risk premium, which sheds a new light in the estimation of international asset pricing model and on the test of forward premium puzzle.

Contagion: Evidence From International Banking Industry
Tai, Chu-Sheng
SSRN
This paper tests whether contagion can occur at the industry level, in particular the banking industry. In this paper ‘contagion’ is defined as significant spillovers of country-specific idiosyncratic shocks during the crisis after economic fundamentals or systematic risks have been accounted for. The economic fundamentals under intertemporal capital asset pricing model (ICAPM) are world market and Fama-French’s (FF) size and book-to-market risks, so the evidence of contagion is based on testing whether idiosyncratic risksâ€"the part that cannot be explained by the world market and FF risks, are significant in describing the dynamics of international banking sector returns during the 1997 Asian crisis. Using data from Thailand, Japan, and the US, strong evidence of contagion is found. Specifically, the return shocks originating in Thailand have significant impact on the return dynamics of both Japanese and the US banking sectors. On the other hand, the return shocks generated from the US have also significant impact on Thai and Japanese banking sectors. However, the return shocks emanating from Japan have significant impact on Thailand only. These findings suggest that the contagion can spread from a crisis-country not only to a non-crisis country within the same region, but also to another non-crisis country outside the region.

Deep Learning algorithms for solving high dimensional nonlinear Backward Stochastic Differential Equations
Lorenc Kapllani,Long Teng
arXiv

We study deep learning-based schemes for solving high dimensional nonlinear backward stochastic differential equations (BSDEs). First we show how to improve the performances of the proposed scheme in [W. E and J. Han and A. Jentzen, Commun. Math. Stat., 5 (2017), pp.349-380] regarding computational time by using a single neural network architecture instead of the stacked deep neural networks. Furthermore, those schemes can be stuck in poor local minima or diverges, especially for a complex solution structure and longer terminal time. To solve this problem, we investigate to reformulate the problem by including local losses and exploit the Long Short Term Memory (LSTM) networks which are a type of recurrent neural networks (RNN). Finally, in order to study numerical convergence and thus illustrate the improved performances with the proposed methods, we provide numerical results for several 100-dimensional nonlinear BSDEs including nonlinear pricing problems in finance.



Deep Prediction of Investor Interest: a Supervised Clustering Approach
Baptiste Barreau,Laurent Carlier,Damien Challet
arXiv

We propose a novel deep learning architecture suitable for the prediction of investor interest for a given asset in a given time frame. This architecture performs both investor clustering and modelling at the same time. We first verify its superior performance on a synthetic scenario inspired by real data and then apply it to two real-world databases, a publicly available dataset about the position of investors in Spanish stock market and proprietary data from BNP Paribas Corporate and Institutional Banking.



Does Bankruptcy Protection Affect Asset Prices? Evidence from changes in Homestead Exemptions
Yildiray Yildirim,Albert Alex Zevelev
arXiv

Does the ability to protect an asset from unsecured creditors affect its price? This paper identifies the impact of bankruptcy protection on house prices using 139 changes in homestead exemptions. Large increases in the homestead exemption raised house prices 3% before 2005. Smaller exemption increases, to adjust for inflation, did not affect house prices. The effect disappeared after BAPCPA, a 2005 federal law designed to prevent bankruptcy abuse. The effect was bigger in inelastic locations.



Does Target Firm Insider Trading Signal the Target’s Synergy Potential in Mergers and Acquisitions?
Suk, Inho,Wang, Mengmeng
SSRN
We find that the acquirer’s (1) abnormal returns at merger and acquisition (M&A) announcements and (2) long-term abnormal returns after acquisitions increase with target firm insiders’ net purchase ratios. Further, acquisition synergies, measured as the (1) acquirer-target combined cumulative abnormal returns at M&A announcements and (2) changes in three-year operating performance after acquisitions, increase with target insider net purchase ratios. Notwithstanding, targets with higher insider net purchase ratios receive higher takeover premiums. Overall, our findings suggest that, even under the “Short Swing rule,” target insider trading prior to the M&A announcement serves as a credible signal for acquisition outcomes.

Granddaughter and voting for a female candidate
Eiji Yamamura
arXiv

This study examines the influence of grandchildren's gender on grandparents' voting behavior using independently collected individual-level data. The survey was conducted immediately after the House of Councilors election in Japan. I observed that individuals with a granddaughter were more likely to vote for female candidates by around 10 % than those without. However, having a daughter did not affect the parents' voting behavior. Furthermore, having a son or a grandson did not influence grandparents' voting behavior. This implies that grandparents voted for their granddaughter's future benefit because granddaughters may be too young vote in a male-dominated and aging society.



History-Augmented Collaborative Filtering for Financial Recommendations
Baptiste Barreau,Laurent Carlier
arXiv

In many businesses, and particularly in finance, the behavior of a client might drastically change over time. It is consequently crucial for recommender systems used in such environments to be able to adapt to these changes. In this study, we propose a novel collaborative filtering algorithm that captures the temporal context of a user-item interaction through the users' and items' recent interaction histories to provide dynamic recommendations. The algorithm, designed with issues specific to the financial world in mind, uses a custom neural network architecture that tackles the non-stationarity of users' and items' behaviors. The performance and properties of the algorithm are monitored in a series of experiments on a G10 bond request for quotation proprietary database from BNP Paribas Corporate and Institutional Banking.



Housing Affordability and Transaction Tax Subsidies
Girshina, Anastasia,Koulischer, Francois,von Lilienfeld‐Toal, Ulf
SSRN
House prices have increased faster than average income in many countries over the last decade, raising concerns on the affordability of housing. We study the impact of transaction taxes on the real estate market and the effectiveness of tax subsidies to make housing more affordable. We show how the demand and supply elasticities for housing determine the price impact of tax subsidies and the distribution of gains between buyers and sellers. We then use data on all real estate transactions in Luxembourg from 2007 to 2018 to estimate the elasticity of housing supply and demand. For identification, we exploit discontinuities in the transaction tax schedule as well as rules on tax subsidies for new constructions. Our estimates suggest that the elasticity of house prices to transaction taxes is 0.27, so buyers capture a large part of the surplus from the subsidies.

Institutional Investors and Granularity in Equity Markets
Ghysels, Eric,Liu, Hanwei,Raymond, Steve
SSRN
The U.S. equity markets are largely driven by actions of institutional investors. Using quarterly 13-F holdings, we construct the Herfindahl-Hirschman Index of institutional investor concentration as a measure of granularity. We study how granularity affects: the cross-section of returns, conditional variances and downside risk. Next, we study the impact of granularity in a demand-driven asset pricing model introduced by Koijen and Yogo (2019). We derive a decomposition of expected returns in terms of equally weighted asset demands and granularity residuals. Using this decomposition, we revisit the empirical stylized facts pertaining to granularity and asset pricing.

It’s Not Time To Make a Change: Sovereign Fragility and the Corporate Credit Risk
Fornari, Fabio,Zaghini, Andrea
SSRN
Relying on a perspective borrowed from monetary policy announcements and introducing an econometric twist in the traditional event study analysis, we document the existence of an .event risk transfer., namely a significant credit risk transmission from the sovereign to the corporate sector after a sovereign rating downgrade. We find that after the delivery of the downgrade, corporate CDS spreads rise by 36% per annum and there is a widespread contagion across countries, in particular among those which were most exposed to the sovereign debt crisis. This effect exists on top of the standard relation between sovereign and corporate credit risk.

Le Sommet UE-Afrique 2021: Quo vadis, compte tenu du Brexit et de la Covid-19
Kohnert, Dirk
RePEC
ABSTRACT & RÉSUMÉ : Every three years, the AU-EU summit reunites African and EU leaders to outline the future direction of cooperation. The 6th summit had been to reaffirm and renew the partnership between the two blocks already in October 2020, but it was pushed back to the first quarter of 2021 or even later due to COVID-19 crisis. Besides, Brussels had to deal with its own post-Brexit situation and its repercussions on EU-Africa relations, excluding the UK. African states, for their part, wanted to renegotiate the EU-Africa partnership and to balance it with new promising Post-Brexit visions of the British premier Johnson about increased economic ties with the African Angloshere. China and other global players compete with the EU and its member states in the new scramble for African resources. Given that Africa is increasingly courted by other partners it could be inclined to successively limit its relations with the EU and see it as a mere provider of aid and security against Islamic terrorism. This trend was reinforced by the fact that the new EU-Africa strategy still hasn't been approved by EU member states. And a timely replacement of the Cotonou Agreement, which expires in November 2021, is open to question. ________________________________________________________________________ RÉSUMÉ : Tous les trois ans, le sommet UA-UE réunit les dirigeants africains et européens pour définir l'orientation future de la coopération. Le 6e sommet devait réaffirmer et renouveler le partenariat entre les deux blocs déjà en octobre 2020, mais il a été repoussé au premier trimestre 2021, ou même plus tard, en raison de la crise du COVID-19. En outre, Bruxelles a dû faire face à sa propre situation post-Brexit, compte tenu l'exclusion du Royaume-Uni, et à ses répercussions sur les relations UE-Afrique. Les États africains, pour leur part, souhaitaient renégocier le partenariat UE-Afrique, et l'équilibrer avec les nouvelles visions post-Brexit prometteuses du Premier ministre britannique Johnson sur le renforcement des liens économiques avec l'Anglosphère africaine. La Chine et d'autres acteurs mondiaux sont en concurrence avec l'UE et ses États membre dans la nouvelle ruée vers les ressources africaines. Étant donné que l'Afrique est de plus en plus courtisée par d'autres partenaires, elle pourrait être encline à limiter successivement ses relations avec l'UE et à la considérer comme un simple fournisseur d'aide et de sécurité contre le terrorisme islamique. Cette tendance a été renforcée par le fait que la nouvelle stratégie UE-Afrique n'a toujours pas été approuvée par les États membres de l'UE. Et un remplacement opportun de l'accord de Cotonou, qui expire en novembre 2021, est sujet à caution.

Looking for Contagion in Currency Futures Markets
Tai, Chu-Sheng
SSRN
This article tests whether there are pure contagion effects in both conditional means and volatilities among British pound, Canadian dollar, Deutsche mark, and Swiss franc futures markets during the 1992 ERM crisis. A conditional version of international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) is used to control for economic fundamentals. The empirical results indicate that overall there are no mean spillovers among those futures markets, but they are detected during the crisis period. That is, past return shocks originating in any one of the four markets have no impact on the other three markets during the entire sample period, suggesting that these markets are weak‐form efficient. However, this weak‐form market efficiency fails to hold during the market turmoil, especially for British pound and Swiss franc, and the sources of contagion‐in‐mean effects are mainly due to the return shocks originating in three European currency futures markets. As for the contagion‐in‐volatility, it is detected for British pound only because its conditional volatility is influenced by the negative volatility shocks from Canadian dollar, Deutsche mark, and Swiss franc, with Deutsche mark playing the dominant role in generating these shocks.

Looking for Risk Premium and Contagion in Asia-Pacific Foreign Exchange Markets
Tai, Chu-Sheng
SSRN
This article tests pure contagion effects among four Asian foreign exchange markets, namely, Japan, Hong Kong, Singapore, and Taiwan during the 1997 Asian crisis. A conditional version of international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) is used to control for economic fundamentals or systematic risks. The empirical results show strong contagion effects in both conditional means and volatilities of those markets after systematic risks have been accounted for. Specifically, the contagion-in-mean effects are mainly driven by the past return shocks in Hong Kong, Singapore, and Taiwan. As for contagion in volatility, the lead/lag relationships appear to be multidirectional among Japan, Singapore, and Taiwan, but between Hong Kong and Singapore, and between Hong Kong and Taiwan, they are unidirectional, with Hong Kong playing the dominant role in generating negative volatility shocks. In addition, the conditional ICAPM with asymmetric multivariate general autoregressive conditional heteroscedastic in mean (MGARCH(1,1)-M) structure is able to explain/predict on average 17.28% of the return variations in those markets. Therefore, this study provide a further evidence that the time-varying risk premium is a very strong candidate in explaining the predictable excess return puzzle [Lewis, K. K. (1994). Puzzles in international financial markets. NBER Working Paper No. 4951] since the risk premia founded in this article are not only statistically significant but also economically significant.

Market Integration and Contagion: Evidence From Asian Emerging Stock and Foreign Exchange Markets
Tai, Chu-Sheng
SSRN
This paper examines whether Asian emerging stock markets (India, Korea, Malaysia, Philippines, Taiwan, and Thailand) have become integrated into world capital markets since their official liberalization dates by estimating and testing a dynamic integrated international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) using an asymmetric multivariate GARCH(1,1)-in-Mean approach. Also examined in this paper is whether there are pure contagion effects between stock and foreign exchange markets for each Asian country during the 1997 Asian crisis. The empirical results show that first, both currency and world market risks are priced and time-varying, suggesting that an international asset pricing model under PPP and constant price of risk might give rise to model misspecification. Second, the stock markets for India, Korea, Malaysia, Philippines, and Thailand were segmented from the world capital markets before their liberalization dates, but all six markets have become fully integrated since then. Third, the market liberalization has reduced the cost of capital and price volatility for most of the countries. Finally, as for the contagion effects, strong positive impact of return shocks originating from the domestic stock market to its foreign exchange market during the crisis is found. This dynamic relationship between stock market and foreign exchange market is consistent with stock-oriented exchange rate models.

Market Integration and Currency Risk in Asian Emerging Markets
Tai, Chu-Sheng
SSRN
Most of the Asian emerging stock markets started to liberalize their markets in 1990s. In this paper, I examine whether those markets have become integrated with world stock market since the 1990s by estimating and testing a dynamic version of international CAPM (ICAPM) in the absence of purchasing power parity (PPP) using a parsimonious multivariate GARCH-in-Mean (MGARCH-M) approach. I also investigate to what extent the liberalization process has affected the cost of capital and price volatility for each market. The empirical results show that Philippines was segmented from the world stock market before its liberalization date, but no evidence of market segmentation is found for the other five markets (India, Korea, Malaysia, Taiwan, and Thailand) before their liberalization dates. However, all six markets have become integrated after opening up their markets to foreign investors. In addition, the estimated risk premia are lower after the liberalization, indicating that the liberalization process has reduced the cost of capital for their domestic firms. Moreover, there is no evidence of extra market volatility introduced by capital market liberalization, and on the contrary, the markets have become more stabilized through the liberalization process.

Overnight GARCH-It\^o Volatility Models
Donggyu Kim,Yazhen Wang
arXiv

Various parametric volatility models for financial data have been developed to incorporate high-frequency realized volatilities and better capture market dynamics. However, because high-frequency trading data are not available during the close-to-open period, the volatility models often ignore volatility information over the close-to-open period and thus may suffer from loss of important information relevant to market dynamics. In this paper, to account for whole-day market dynamics, we propose an overnight volatility model based on It\^o diffusions to accommodate two different instantaneous volatility processes for the open-to-close and close-to-open periods. We develop a weighted least squares method to estimate model parameters for two different periods and investigate its asymptotic properties. We conduct a simulation study to check the finite sample performance of the proposed model and method. Finally, we apply the proposed approaches to real trading data.



Pattern recognition in micro-trading behaviors before stock price jumps: A framework based on multivariate time series analysis
Ao Kong,Robert Azencott,Hongliang Zhu,Xindan Li
arXiv

Studying the micro-trading behaviors before stock price jumps is an important problem for financial regulations and investment decisions. In this study, we provide a new framework to study pre-jump trading behaviors based on multivariate time series analysis. Different from the existing literature, our methodology takes into account the temporal information embedded in the trading-related attributes and can better evaluate and compare the abnormality levels of different attributes. Moreover, it can explore the joint informativeness of the attributes as well as select a subset of highly informative but minimally redundant attributes to analyze the homogeneous and idiosyncratic patterns in the pre-jump trades of individual stocks. In addition, our analysis involves a set of technical indicators to describe micro-trading behaviors. To illustrate the viability of the proposed methodology, an application case is conducted based on the level-2 data of 189 constituent stocks of the China Security Index 300. The individual and joint informativeness levels of the attributes in predicting price jumps are evaluated and compared. To this end, our experiment provides a set of jump indicators that can represent the pre-jump trading behaviors in the Chinese stock market and have detected some stocks with extremely abnormal pre-jump trades.



Perk Consumption in Hard Times: Unintended Effects of Mandatory Dividend Policy in State-Owned Business Group
Kong, Dongmin,Liu, Lihua
SSRN
This study examines perk consumption in the business group when the unlisted parent firms experience an adverse shock of financial conditions. We exploit a quasi-experiment in China, the mandatory dividend of a state-owned business group in 2007, to conduct difference-in-differences estimation, and find that: (1) When parent central state-owned enterprises (parent CSOEs) are mandatorily required to pay dividend to the governments, their group-affiliated listed central state-owned enterprises (listed CSOEs) experience a substantial decrease in perk expenditures. (2) A plausible mechanism is that the adverse cash shock for parent CSOEs could reduce the resources under management control and alleviate the agency problems. (3) Our findings are more pronounced for firms with better internal and external governance. Overall, we provide the empirical evaluation of the economic consequences of mandatory dividend policy in terms of a firm’s perks within a state-owned business group.

Priming prosocial behavior and expectations in response to the Covid-19 pandemic -- Evidence from an online experiment
Valeria Fanghella,Thi-Thanh-Tam Vu,Luigi Mittone
arXiv

This paper studies whether and how differently projected information about the impact of the Covid-19 pandemic affects individuals' prosocial behavior and expectations on future outcomes. We conducted an online experiment with British participants (N=961) when the UK introduced its first lockdown and the outbreak was on its growing stage. Participants were primed with either the environmental or economic consequences (i.e., negative primes), or the environmental or economic benefits (i.e., positive primes) of the pandemic, or with neutral information. We measured priming effects on an incentivized take-and-give dictator game and on participants' expectations about future environmental quality and economic growth. Our results show that primes affect participants' expectations, but not their prosociality. In particular, participants primed with environmental consequences hold a more pessimistic view on future environmental quality, while those primed with economic benefits are more optimistic about future economic growth. Instead, the positive environmental prime and the negative economic prime do not influence expectations. Our results offer insights into how information affects behavior and expectations during the Covid-19 pandemic.



Product Market Risk, Financial Development and Firm Creation Along the Supply Chain
Li, Minwen,Makaew, Tanakorn,Maksimovic, Vojislav
SSRN
We study the effects of product market risk on entrepreneurial activities in China, using a favorable change in U.S. trade policy as a plausibly exogenous shock. We do not find an increase in entry rates for domestic firms in exposed industry. However, for upstream suppliers, entry rates increase significantly in undeveloped cities, but decrease in developed cities. We also find that domestic entrepreneurs in undeveloped areas are more likely to enter the upstream industry by exporting following the shock. Our results suggest that the product market shock only increases domestic firm formation in China at one remove along the supply chain.

Scaling of Urban Income Inequality in the United States
Elisa Heinrich Mora,Jacob J. Jackson,Cate Heine,Geoffrey B. West,Vicky Chuqiao Yang,Christopher P. Kempes
arXiv

Urban scaling analysis, the study of how aggregated urban features vary with the population of an urban area, provides a promising framework for discovering commonalities across cities and uncovering dynamics shared by cities across time and space. Here, we use the urban scaling framework to study an important, but under-explored feature in this community - income inequality. We propose a new method to study the scaling of income distributions by analyzing total income scaling in population percentiles. We show that income in the least wealthy decile (10%) scales close to linearly with city population, while income in the most wealthy decile scale with a significantly superlinear exponent. In contrast to the superlinear scaling of total income with city population, this decile scaling illustrates that the benefits of larger cities are increasingly unequally distributed. For the poorest income deciles, cities have no positive effect over the null expectation of a linear increase. We repeat our analysis after adjusting income by housing cost, and find similar results. We then further analyze the shapes of income distributions. First, we find that mean, variance, skewness, and kurtosis of income distributions all increase with city size. Second, the Kullback-Leibler divergence between a city's income distribution and that of the largest city decreases with city population, suggesting the overall shape of income distribution shifts with city population. As most urban scaling theories consider densifying interactions within cities as the fundamental process leading to the superlinear increase of many features, our results suggest this effect is only seen in the upper deciles of the cities. Our finding encourages future work to consider heterogeneous models of interactions to form a more coherent understanding of urban scaling.



Simulation-based optimisation of the timing of loan recovery across different portfolios
Arno Botha,Conrad Beyers,Pieter de Villiers
arXiv

A novel procedure is presented for the objective comparison and evaluation of a bank's decision rules in optimising the timing of loan recovery. This procedure is based on finding a delinquency threshold at which the financial loss of a loan portfolio (or segment therein) is minimised. Our procedure is an expert system that incorporates the time value of money, costs, and the fundamental trade-off between accumulating arrears versus forsaking future interest revenue. Moreover, the procedure can be used with different delinquency measures (other than payments in arrears), thereby allowing an indirect comparison of these measures. We demonstrate the system across a range of credit risk scenarios and portfolio compositions. The computational results show that threshold optima can exist across all reasonable values of both the payment probability (default risk) and the loss rate (loan collateral). In addition, the procedure reacts positively to portfolios afflicted by either systematic defaults (such as during an economic downturn) or episodic delinquency (i.e., cycles of curing and re-defaulting). In optimising a portfolio's recovery decision, our procedure can better inform the quantitative aspects of a bank's collection policy than relying on arbitrary discretion alone.



Stability of Equilibrium Asset Pricing Models: A Necessary and Sufficient Condition
Jaroslav Borovicka,John Stachurski
arXiv

We obtain an exact necessary and sufficient condition for the existence and uniqueness of equilibrium asset prices in infinite horizon, discrete-time, arbitrage free environments. Through several applications we show how the condition sharpens and improves on previous results. We connect the condition, and hence the problem of existence and uniqueness of asset prices, with the recent literature on stochastic discount factor decompositions. Finally, we discuss computation of the test value associated with our condition, providing a Monte Carlo method that is naturally parallelizable.



State Heterogeneity Analysis of Financial Volatility Using High-Frequency Financial Data
Dohyun Chun,Donggyu Kim
arXiv

Recently, to account for low-frequency market dynamics, several volatility models, employing high-frequency financial data, have been developed. However, in financial markets, we often observe that financial volatility processes depend on economic states, so they have a state heterogeneous structure. In this paper, to study state heterogeneous market dynamics based on high-frequency data, we introduce a novel volatility model based on a continuous Ito diffusion process whose intraday instantaneous volatility process evolves depending on the exogenous state variable, as well as its integrated volatility. We call it the state heterogeneous GARCH-Ito (SG-Ito) model. We suggest a quasi-likelihood estimation procedure with the realized volatility proxy and establish its asymptotic behaviors. Moreover, to test the low-frequency state heterogeneity, we develop a Wald test-type hypothesis testing procedure. The results of empirical studies suggest the existence of leverage, investor attention, market illiquidity, stock market comovement, and post-holiday effect in S&P 500 index volatility.



The economic impact of weather and climate
Richard S.J. Tol
arXiv

I propose a new conceptual framework to disentangle the impacts of weather and climate on economic activity and growth: A stochastic frontier model with climate in the production frontier and weather shocks as a source of inefficiency. I test it on a sample of 160 countries over the period 1950-2014. Temperature and rainfall determine production possibilities in both rich and poor countries; positively in cold countries and negatively in hot ones. Weather anomalies reduce inefficiency in rich countries but increase inefficiency in poor and hot countries; and more so in countries with low weather variability. The climate effect is larger that the weather effect.



The use of primary energy factors and CO2 intensities -- reviewing the state of play in academic literature
Sam Hamels,Eline Himpe,Jelle Laverge,Marc Delghust,Kjartan Van den Brande,Arnold Janssens,Johan Albrecht
arXiv

Reaching the 2030 targets for the EU primary energy use (PE) and CO2eq emissions (CE) requires an accurate assessment of how different technologies perform on these two fronts. In this regard, the focus in academia is increasingly shifting from traditional technologies to electricity consuming alternatives. Calculating and comparing their performance with respect to traditional technologies requires conversion factors (CFs) like a primary energy factor and a CO2eq intensity. These reflect the PE and CE associated with each unit of electricity consumed. Previous work has shown that the calculation and use of CFs is a contentious and multifaceted issue. However, this has mostly remained a theoretical discussion. A stock-taking of how CFs are actually calculated and used in academic literature has so far been missing, impeding insight into what the contemporary trends and challenges are. Therefore, we structurally review 65 publications across six methodological aspects. We find that 72% of the publications consider only a single country, 86% apply a purely retrospective perspective, 54% apply a yearly temporal resolution, 65% apply a purely operational (instead of a life-cycle) perspective, 91% make use of average (rather than marginal) CFs, and 75% ignore electricity imports from surrounding countries. We conclude that there is a strong need in the literature for a publicly available, transparently calculated dataset of CFs, which avoids the shortcomings found in the literature. This would enable more accurate and transparent PE and CE calculations, and support the development of new building energy performance assessment methods and smart grid algorithms.



Time-Varying Market, Interest Rate, and Exchange Rate Risk Premia in the U.S. Commercial Bank Stock Returns
Tai, Chu-Sheng
SSRN
This paper examines the role of market, interest rate, and exchange rate risks in pricing a sample of the US Commercial Bank stocks by developing and estimating a multi-factor model under both unconditional and conditional frameworks. Three different econometric methodologies are used to conduct the estimations and testing. Estimations based on nonlinear seemingly unrelated regression (NLSUR) via GMM approach indicate that interest rate risk is the only priced factor in the unconditional three-factor model. However, based on ‘pricing kernel’ approach by Dumas and Solnik [(1995). J. Finance 50, 445â€"479], strong evidence of exchange rate risk is found in both large bank and regional bank stocks in the conditional three-factor model with time-varying risk prices. Finally, estimations based on the multivariate GARCH in mean (MGARCH-M) approach where both conditional first and second moments of bank portfolio returns and risk factors are estimated simultaneously show strong evidence of time-varying interest rate and exchange rate risk premia and weak evidence of time-varying world market risk premium for all three bank portfolios, namely those of Money Center bank, Large bank, and Regional bank.

Time-Varying Risk Premia in Foreign Exchange and Equity Markets: Evidence From Asiaâ€"Pacific Countries
Tai, Chu-Sheng
SSRN
This paper examines the validity of the risk premia hypothesis in explaining deviations from Uncovered Interest Parity (UIP) and the role of deviations from Purchasing Power Parity (PPP) in the pricing of foreign exchange rates and equity securities in five Asiaâ€"Pacific countries and the US. Using weekly data from 1 January, 1988 to 27 February, 1998, I find that conditional variances are not related to the deviations from UIP in any statistical sense based on an univariate GARCH(1,1)-M model. As I consider both foreign exchange and equity markets together and test a conditional international CAPM (ICAPM) in the absence of PPP, I cannot reject the model based on the J-test by Hansen (Econometrica 50 (1982), 1029â€"1054) and find significant time-varying foreign exchange risk premia present in the data. This empirical evidence supports the notion of time-varying risk premia in explaining the deviations from UIP. It also supports the idea that the foreign exchange risk is not diversifiable and hence should be priced in both markets. © 1999 Elsevier Science B.V. All rights reserved.

Top Managers’ Liability Insurance and Firms’ Environmental Information Disclosure: Evidence from China
Kong, Dongmin,Yang, Xiandong,Zhao, Yuliang
SSRN
This article examines the effects of directors’ and officers’ liability (D&O) insurance on the quality of environmental information disclosure in China. We present strong evidence that the D&O insurance enhances the quality of environmental information disclosure, consistent with governance hypothesis. Our results are reliable after controlling for endogeneity and remain unchangeable with alternative measures and different specifications. The effect is more pronounced in state-owned enterprises and firms without environmental penalties experiences, without financial restatement, and not audited by the big 10 accountants. Two plausible mechanisms underlying our findings are increasing corporate value and alleviating financing constraints. Overall, this study provides clear practical implications for purchasing D&O insurance to significantly improve the level of environmental governance of enterprises.

Unconventional Monetary Policy and Corporate Bond Issuance
De Santis, Roberto A.,Zaghini, Andrea
SSRN
We assess the effect and the timing of the corporate arm of the ECB quantitative easing (CSPP) on corporate bond issuance. Because of several contemporaneous measures, to isolate the programme effects we rely on one key eligibility feature: the euro denomination of newly issued bonds. We find that the significant increase in bonds issuance by eligible firms is due to the CSPP and that this effect took at least six months to unfold. This result holds even when comparing firms with similar ratings, thus providing evidence that unconventional monetary policy can foster a financing diversification regardless of firms’ risk profile. We also highlight the impact of the programme on the real economic activity. The evidence suggests that while all firms increased investment in capital expenditures and intangible assets, the CSPP induced eligible firms to invest in marketable and equity securities, to repurchase their own stocks, to hold cash and to carry out short-term investment.