Research articles for the 2021-03-25

Cash Holding Behavior of the GHG Emitting Firms
Amin, Abu S.,Hossain, Ashrafee T,Masum, Abdullah Al
Recent global initiatives to reduce carbon emissions have increasingly exposed the carbon-emitting firms to regulatory and technological shocks. Given these shocks, we examine whether carbon emissions affect corporate cash holdings and find that carbon-emitting firms, on average, carry less cash. This finding is robust to alternate measures of our main variables, different model specifications, and various methods to address endogeneity, including a difference-in-differences approach. In the cross-section, we find that the documented negative relationship between carbon emissions and cash holdings magnifies with weaker internal governance, CEO overconfidence, and higher internal social capital. Further analyses reveal that carbon-emitting firms prefer spending more on capital investment but less on dividends and R&D activities. Finally, we document that carbon-emitting firms with excess cash holding have a lower firm valuation and a higher cost of capital, indicating that the capital market rewards them for holding less cash. Overall, consistent with agency theory, our results indicate that managerial preference for suboptimal investment or avoidance of external disciplining might attribute lower cash holding for carbon-emitting firms.

Intraday trading strategy based on time series and machine learning for Chinese stock market
Q. Wang,Y. Zhou,J. Shen

This article comes up with an intraday trading strategy under T+1 using Markowitz optimization and Multilayer Perceptron (MLP) with published stock data obtained from the Shenzhen Stock Exchange and Shanghai Stock Exchange. The empirical results reveal the profitability of Markowitz portfolio optimization and validate the intraday stock price prediction using MLP. The findings further combine the Markowitz optimization, an MLP with the trading strategy, to clarify this strategy's feasibility.

Low emission zones: Effects on alternative-fuel vehicle uptake and fleet CO2 emissions
Jens F. Peters,Mercedes Burguillo,Jose M. Arranz

This study analyses the actual effect of a representative low-emission zone (LEZ) in terms of shifting vehicle registrations towards alternative fuel technologies and its effectiveness for reducing vehicle fleet CO2 emissions. Vehicle registration data is combined with real life fuel consumption values on individual vehicle model level, and the impact of the LEZ is then determined via an econometric approach. The increase in alternative fuel vehicles (AFV) registration shares due to the LEZ is found to be significant but fosters rather fossil fuel powered AFV and plug-in hybrid electric vehicles than zero emission vehicles. This is reflected in the average CO2 emissions of newly registered vehicles, which do not decrease significantly. In consequence, while the LEZ is an effective measure for stimulating the shift towards low emission vehicles, the support of non-electric AFV as low emission vehicles jeopardizes its effectiveness for decarbonizing the vehicle fleet.

Machine Learning Based Trading Strategies
Madan, Dilip B.,Sharaiha, Yazid
Dynamic contributions to trading are evaluated using covariations between position and price changes a horizon. Other performance measures like Sharpe ratios, Gain loss ratios, Acceptability indices and Drawdowns are also employed. Machine learning strategies based on Gaussian Process Regression (GPR) are compared with Least Squares (LSQ). Further both are generalized by invoking conservative valuation schemes that lead to the study of conservative conditional expectations modeled by distorted expectations. The latter lead to the development of distorted least squares (DLSQ) and distorted Gaussian Process Regression (DGPR) as the associated estimation or prediction schemes. Trading strategies are executed for nine sectors of the US economy using fourteen different predictive factor sets. Results support improvements made by GPR, DGPR over LSQ, DLSQ with the distorted versions also impacting favorably the drawdowns.

Mehr Nachhaltigkeit im deutschen Leitindex DAX - Reformvorschläge im Lichte des Wirecard-Skandals (More Sustainability in the German Stock Market Index DAX - Lessons Learner from the Wirecard Scandal)
Brühl, Volker
German Abstract: Im Rahmen der Aufarbeitung des Wirecard-Skandals wird ebenfalls eine Änderung der Kriterien zur Aufnahme in den deutschen Leitindex DAX diskutiert. Die bislang von der Deutschen Börse vorgelegten Vorschläge zur Reformierung des DAX gehen in die richtige Richtung, sind aber nicht weitreichend genug. Es bedarf eines deutlichen Zeichens, dass sich künftig nur solche Unternehmen für den DAX qualifizieren können, die ein zumindest befriedigendes Maß an Nachhaltigkeit gemessen durch einen ESG (Environment, Social, Governance)-Risk-Score in ihrer Geschäftstätigkeit erreichen. Eine Simulation verdeutlicht, dass nach ESG-Kriterien seit langem kritisch betrachtete Unternehmen dem DAX nicht mehr angehören würden. Dies würde klare Anreize bei den Unternehmen setzen, Nachhaltigkeitsaspekte stärker als bisher in ihrer Strategie zu berücksichtigen. Letztlich kann eine Neugestaltung wichtiger Aktienindizes einen Beitrag dazu leisten, dass mehr Kapital in nachhaltig wirtschaftende Unternehmen und Sektoren fließt.English Abstract: In the course of analysing the causes and consequences of the Wirecard scandal, a potential reform of the German lead stock market index DAX is being discussed. The proposals so far presented by Deutsche Börse are moving in the right direction but are not far-reaching enough. A clear signal is needed that future constituents of the DAX are obliged to meet at least a satisfactory level of sustainability, measured by an ESG (Environment, Social, Governance) Risk Score for the respective business activities. A simulation presented in this article demonstrates that some current members would no longer qualify for the DAX. Adding an ESG Risk Score to the current index selection criteria would set strong incentives for companies to gear their business strategies towards greater sustainability. Redesigning major stock indices to include sustainability aspects could ultimately play an important role in having more capital allocated to sustainably operating companies and sectors.

Multi-asset optimal execution and statistical arbitrage strategies under Ornstein-Uhlenbeck dynamics
Philippe Bergault,Fayçal Drissi,Olivier Guéant

In recent years, academics, regulators, and market practitioners have increasingly addressed liquidity issues. Amongst the numerous problems addressed, the optimal execution of large orders is probably the one that has attracted the most research works, mainly in the case of single-asset portfolios. In practice, however, optimal execution problems often involve large portfolios comprising numerous assets, and models should consequently account for risks at the portfolio level. In this paper, we address multi-asset optimal execution in a model where prices have multivariate Ornstein-Uhlenbeck dynamics and where the agent maximizes the expected (exponential) utility of her P\&L. We use the tools of stochastic optimal control and simplify the initial multidimensional Hamilton-Jacobi-Bellman equation into a system of ordinary differential equations (ODEs) involving a Matrix Riccati ODE for which classical existence theorems do not apply. By using \textit{a priori} estimates obtained thanks to optimal control tools, we nevertheless prove an existence and uniqueness result for the latter ODE, and then deduce a verification theorem that provides a rigorous solution to the execution problem. Using numerical methods we eventually illustrate our results and discuss their implications. In particular, we show how our model can be used to build statistical arbitrage strategies.

Online Appendix for
Heath, Davidson,Macciocchi, Daniele,Michaely, Roni,Ringgenberg, Matthew C.
This Online Appendix provides additional empirical evidence to supplement the analysesprovided in the published text of "Do Index Funds Monitor?"

Partisan Return Gap: The Polarized Stock Market in the Time of a Pandemic
Sheng, Jinfei,Sun, Zheng,Wang, Wanyi
We document sharp differences in stock price responses to COVID-19 related news between public firms headquartered in blue counties (dominated by Democratic supporters) and those in red counties (dominated by Republican supporters). Red-county stocks on average experience 18 basis points higher abnormal returns than blue-county stocks on days with important COVID-19 news. We call this “Partisan Return Gap”. We find the return gap can be explained by different risk attitudes towards COVID between red and blue counties. Using social distancing behavior tracked by smartphone app to measure people’s attitude towards COVID-19, we show that individuals in red counties are more optimistic about COVID. More importantly, we find that stocks in counties where people are more optimistic about COVID have higher returns on COVID-19 news days. Exploiting Facebook connections as an identification, we find no strong evidence that the gap is driven by local economic conditions. Overall, this paper shows that investors’ partisanship affects their attitude toward COVID-19, resulting in polarized stock prices in the time of the pandemic.

Permanent and Transitory Responses to Capital Gains Taxes: Evidence from a Lifetime Exemption in Canada
Lavecchia, Adam,Tazhitdinova, Alisa
Using panel data on a 20% random sample of Canadian taxpayers, we study behavioral responses to the cancellation of a lifetime capital gains exemption that resulted in increased capital gains taxation for some individuals. The unique setting allows us to distinguish between short-term avoidance responses and permanent responses to capital gains taxes. We show that the exemption did not change the number of taxpayers reporting positive capital gains, and thus unlikely resulted in increased participation in capital markets. However, the exemption cancellation slightly increased capital gains realizations of the existing traders.

Putting a price on tenure
Thiago Marzagao

Government employees in Brazil are granted tenure after three years of taking their entrance exams. Firing a tenured government employee is all but impossible, so tenure is a big perquisite. But exactly how big is it? No one has ever attempted to estimate the monetary equivalent of tenure for Brazilian government workers. We do that in this paper. We use a modified version of the Sharpe ratio to estimate what the risk-adjusted salaries of government workers should be. The difference between actual salary and risk-adjusted salary gives us an estimate of how much tenure is worth for each employee. We find that the median value of tenure is R$ 4517 for federal government employees, R$ 2560 for state government employees, and R$ 672 for municipal government employees.

Robust Portfolio Selection Problems: A Comprehensive Review
Alireza Ghahtarani,Ahmed Saif,Alireza Ghasemi

In this paper, we provide a comprehensive review of recent advances in robust portfolio selection problems and their extensions, from both operational research and financial perspectives. A multi-dimensional classification of the models and methods proposed in the literature is presented, based on the types of financial problems, uncertainty sets, robust optimization approaches, and mathematical formulations. Several open questions and potential future research directions are identified.

Spatial-SIR with Network Structure and Behavior: Lockdown Rules and the Lucas Critique
Alberto Bisin,Andrea Moro

We introduce a model of the diffusion of an epidemic with demographically heterogeneous agents interacting socially on a spatially structured network. Contagion-risk averse agents respond behaviorally to the diffusion of the infections by limiting their social interactions. Firms also respond by allowing employees to work remotely, depending on their productivity. The spatial structure induces local herd immunities along socio-demographic dimensions, which significantly affect the dynamics of infections. We study several non-pharmaceutical interventions; e.g., i) lockdown rules, which set thresholds on the spread of the infection for the closing and reopening of economic activities; and ii) selective lockdowns, which restrict social interactions by location (in the network) and by the demographic characteristics of the agents. Substantiating a "Lucas critique" argument, we assess the cost of naive discretionary policies ignoring agents and firms' behavioral responses.

Stress Tests and Liquidity Crisis in the Banking System
Llorent Jurado, Julian,Melgar Hiraldo, M. Carmen,Ordaz Sanz, Jose Antonio,Guerrero Casas, Flor M.
The paper´s aim is to contribute to the debate on the impact of stress test on banking system liquidity. Due to the theoretical character of the problem, the used methodology is a set of results from research and theoretical works about how the attempts to increase system solvency could lead into a greater lack of liquidity.

The Information Content of Target Price Forecasts: Evidence from Mergers and Acquisitions
Ho, Tuan Quoc,Brownen‐Trinh, Ruby,Xu, Fangming
This paper investigates the informativeness and value relevance of analyst target prices in the context of mergers and acquisitions (M&A). Our results indicate that firms with high 12-month ahead target prices relative to current stock prices are more likely to become a takeover target and offer premium and acquirers’ announcement returns are positively associated with firms’ target price premium. We also show that a long-short trading strategy formed on target prices and firms’ takeover likelihood generates economically significant returns. Our results are robust to a battery of additional analysis, and the informativeness of target prices is not subsumed by other analyst-forecast outputs such as earnings forecasts and recommendations. Overall, our findings suggest that analysts convey valuable information through target price forecasts, which are useful for participants in the corporate takeover markets.

The Role of Users’ Engagement in Shaping Financial Reporting: Should Activists Target Accounting More?
Garcia Osma, Beatriz,Grande-Herrera, Cristina
We define accounting engagement as stakeholders’ actions taken with the intention of influencing corporate reporting. Using this definition, we review the literature on such activism and discuss avenues for research. The evidence reviewed suggests accounting engagement is rare. We reflect on the reasons of this, given evidence on increasing overt engagement on other corporate issues, such as managerial compensation and governance, social, and environmental responsibility. Both information production and information acquisition costs have decreased over time, raising further questions about why engagement has not increased. We consider potential reasons linked to concerns over whether financial reporting meets users’ information needs, particularly, given the emergence of new users and the role of new technologies in the diffusion and processing of information. These concerns have accompanied claims of increasing complexity of financial accounting and the threat of information overload.

The sub-fractional CEV model
Axel A. Araneda,Nils Bertschinger

The sub-fractional Brownian motion (sfBm) is a stochastic process, characterized by non-stationarity in their increments and long-range dependency, considered as an intermediate step between the standard Brownian motion (Bm) and the fractional Brownian motion (fBm). The mixed process, a linear combination between a Bm and an independent sfBm, called mixed sub-fractional Brownian motion (msfBm), keeps the features of the sfBm adding the semi-martingale property for H>3/4, is a suitable candidate to use in price fluctuation modeling, in particular for option pricing. In this note, we arrive at the European Call price under the Constant Elasticity of Variance (CEV) model driven by a mixed sub-fractional Brownian motion. Empirical tests show the capacity of the proposed model to capture the temporal structure of option prices across different maturities.

Unconventional Policies Effects on Stock Market Volatility: A MAP Approach
Demetrio Lacava,Giampiero M. Gallo,Edoardo Otranto

Taking the European Central Bank unconventional policies as a reference, we suggest a class of Multiplicative Error Models (MEM) taylored to analyze the impact such policies have on stock market volatility. The new set of models, called MEM with Asymmetry and Policy effects (MAP), keeps the base volatility dynamics separate from a component reproducing policy effects, with an increase in volatility on announcement days and a decrease unfolding implementation effects. When applied to four Eurozone markets, a Model Confidence Set approach finds a significant improvement of the forecasting power of the proxy after the Expanded Asset Purchase Programme implementation; a multi--step ahead forecasting exercise estimates the duration of the effect, and, by shocking the policy variable, we are able to quantify the reduction in volatility which is more marked for debt--troubled countries.

Understanding the Puzzle of Primary Health-care Use: Evidence from India
Pramod Kumar Sur

In India, households' use of primary health-care services presents a puzzle. Even though most private health-care providers have no formal medical qualifications, a significant fraction of households use fee-charging private health-care services, which are not covered by insurance. Although the absence of public health-care providers could partially explain the high use of the private sector, this cannot be the only explanation. The private share of health-care use is even higher in markets where qualified doctors offer free care through public clinics; despite this free service, the majority of health-care visits are made to providers with no formal medical qualifications. This paper examines the reasons for the existence of this puzzle in India. Combining contemporary household-level data with archival records, I examine the aggressive family planning program implemented during the emergency rule in the 1970s and explore whether the coercion, disinformation, and carelessness involved in implementing the program could partly explain the puzzle. Exploiting the timing of the emergency rule, state-level variation in the number of sterilizations, and an instrumental variable approach, I show that the states heavily affected by the sterilization policy have a lower level of public health-care usage today. I demonstrate the mechanism for this practice by showing that the states heavily affected by forced sterilizations have a lower level of confidence in government hospitals and doctors and a higher level of confidence in private hospitals and doctors in providing good treatment.

Новые способы измерения катастрофических рисков: меры
Minasyan, Vigen Babkenovich
Russian Abstract: Автор предлагает ввести семейство новых мер риска â€" «VaR в степени t». Цель работы â€" исследовать свойства данного семейства мер и вывести формулы для их вычисления. Ð' исследовании использованы методы оценки финансовых рисков в виде мер риска VaR и ES. Ð' результате предложен новый инструмент оценки катастрофических.финансовых рисков: «VaR в степени t». Ð"оказано, что для вычисления ( )t VaR достаточно рассчитать обычную меру риска VaR с определенным образом измененной доверительной вероятностью. Автор делает вывод, что данное семейство мер может быть полезно в практике риск-менеджмента компаний при решении задачи проникновения в риски событий с малыми вероятностями, но с катастрофическими финансовыми потерями. Результаты данного исследования также могут применяться регулятором для оценки достаточности капитала финансовых институтов. При t > 1 эти меры риска катастрофических потерь оказываются более консервативными, чем известные меры риска VaR, ES и GlueVaR.English Abstract: The author concludes that this family of measures can be useful in the practice of risk management of companies when solving the problem of penetration into risks of events with small probabilities, but with catastrophic financial losses. The results of this study can also be used by the regulator to assess the capital adequacy of financial institutions.The author proposes a new family of new risk measures, "VaR to degree t." The purpose of the work is to study the properties of this measure family and to derive formulas for their calculation. The study uses existing methods of assessing financial risks in the form of risk measures VaR and proposes a new tool for assessing them. As a result, it has been proven that it is sufficient to calculate a usual VaR risk measure, with a certain manner of changed confidence probability, for the calculation. The author concludes that this family of measures can be useful in the practice of risk management of companies when solving the problem of penetration into risks of events with small probabilities, but with catastrophic financial losses. The results of this study can also be used by the regulator to assess the capital adequacy of financial institutions.If t > 1, these measures prove to be more conservative risk measures for catastrophic losses than known risk measures for VaR, ES and GlueVaR.