Research articles for the 2021-04-06
A Comparative Evaluation of Predominant Deep Learning Quantified Stock Trading Strategies
arXiv
arXiv
This study first reconstructs three deep learning powered stock trading models and their associated strategies that are representative of distinct approaches to the problem and established upon different aspects of the many theories evolved around deep learning. It then seeks to compare the performance of these strategies from different perspectives through trading simulations ran on three scenarios when the benchmarks are kept at historical low points for extended periods of time. The results show that in extremely adverse market climates, investment portfolios managed by deep learning powered algorithms are able to avert accumulated losses by generating return sequences that shift the constantly negative CSI 300 benchmark return upward. Among the three, the LSTM model's strategy yields the best performance when the benchmark sustains continued loss.
A New Model for Screening Shariah Compliant Firms
SSRN
This paper develops a new quantitative measure that reflects the extent to which a firm complies with Shariah relative to the other firms located in a certain region at a certain time. This measure can be customized to be consistent with each investor’s objectives, constraints, and beliefs. I argue that the use of this measure is preferable to the existing use of ratio thresholds for the following two reasons. First, it is more Shariah-appropriate because it provides the Shariah-compliant investor with a clear understanding of the relative compliance status of each firm he wishes to invest in. Second, it can be incorporated into any portfolio optimization model to create a balance between improving Shariah compliance and not compromising investment returns. In conclusion, the paper provides illustrative results using a sample of all publicly traded US firms over the period from 2010 to 2016.
SSRN
This paper develops a new quantitative measure that reflects the extent to which a firm complies with Shariah relative to the other firms located in a certain region at a certain time. This measure can be customized to be consistent with each investor’s objectives, constraints, and beliefs. I argue that the use of this measure is preferable to the existing use of ratio thresholds for the following two reasons. First, it is more Shariah-appropriate because it provides the Shariah-compliant investor with a clear understanding of the relative compliance status of each firm he wishes to invest in. Second, it can be incorporated into any portfolio optimization model to create a balance between improving Shariah compliance and not compromising investment returns. In conclusion, the paper provides illustrative results using a sample of all publicly traded US firms over the period from 2010 to 2016.
A Study of Business Challenges for Organic Food Product segment
SSRN
Organic agriculture is booming in India these days. An increase in the family income, increase in educated population, health consciousness has led consumers to shift their preferences from conventional to organic food products. Due to its purity and health benefits, organic food products are gaining popularity in the Indian market. The availability of organic products is increasing at malls, specialty stores, and local markets places. This paper focuses on the organic food product segment and the business challenges for this segment.
SSRN
Organic agriculture is booming in India these days. An increase in the family income, increase in educated population, health consciousness has led consumers to shift their preferences from conventional to organic food products. Due to its purity and health benefits, organic food products are gaining popularity in the Indian market. The availability of organic products is increasing at malls, specialty stores, and local markets places. This paper focuses on the organic food product segment and the business challenges for this segment.
A high-frequency analysis of return and volatility spillovers in the European sovereign bond market
SSRN
Using high-frequency data from the MTS trading platform, we examine return and volatility spillover effects across different maturities in the European sovereign bond market over tranquil and crisis periods. The longer-term benchmark securities of core countries are the largest net volatility transmitters whereas the shorter-term benchmarks of periphery countries are the leading net receivers of volatility shocks. Moreover, the short-end and the long-end of the yield curve in both regions emerge as the sole net recipients of return spillovers. We note that bonds of periphery countries become volatility spillover transmitters during important macroeconomic events such as credit rating downgrades and financial assistance packages to financially distressed countries.
SSRN
Using high-frequency data from the MTS trading platform, we examine return and volatility spillover effects across different maturities in the European sovereign bond market over tranquil and crisis periods. The longer-term benchmark securities of core countries are the largest net volatility transmitters whereas the shorter-term benchmarks of periphery countries are the leading net receivers of volatility shocks. Moreover, the short-end and the long-end of the yield curve in both regions emerge as the sole net recipients of return spillovers. We note that bonds of periphery countries become volatility spillover transmitters during important macroeconomic events such as credit rating downgrades and financial assistance packages to financially distressed countries.
AN ANALYTICAL STUDY OF CASHLESS TRANSFORMATION AND GROWTH IN RETAIL MARKET IN INDIA
SSRN
Over the last six years from 2014-15 to 2019-20 cashless transactions in the Indian economyhave seen phenomenal growth. The demonetization injection in 2016 has led to a sharp increase in the size of the cashless Indian economy manifold. The last six years have seen a rise in volume clocking a CAGR of 48.17%, and the rise in the value of transactions clocking a CAGR of 16.15%. An interesting thing to note is that alongside the increase in the digital economy, the retail business simultaneously has also shown a sporadic rise. The market size of the Indian retail market has shot up to USD 1100 billion in 2019-20 from USD 534 billion in 2014-15. This shows a CAGR of 15.55% for the six years period. This paper reviews the linkage between the two â€" growth in cashless economy and growth in the retail market based on macro-level data for the six years period from 2014-15 to 2019-20. Regression analysis shows that growth in cashless explains around 92% of the growth in the retail mark. The correlation between the two is 0.96. Beyond any doubt, the findings lead to a clear conclusion that a cashless economy is a strong enabler for the growth of the retail market in India.
SSRN
Over the last six years from 2014-15 to 2019-20 cashless transactions in the Indian economyhave seen phenomenal growth. The demonetization injection in 2016 has led to a sharp increase in the size of the cashless Indian economy manifold. The last six years have seen a rise in volume clocking a CAGR of 48.17%, and the rise in the value of transactions clocking a CAGR of 16.15%. An interesting thing to note is that alongside the increase in the digital economy, the retail business simultaneously has also shown a sporadic rise. The market size of the Indian retail market has shot up to USD 1100 billion in 2019-20 from USD 534 billion in 2014-15. This shows a CAGR of 15.55% for the six years period. This paper reviews the linkage between the two â€" growth in cashless economy and growth in the retail market based on macro-level data for the six years period from 2014-15 to 2019-20. Regression analysis shows that growth in cashless explains around 92% of the growth in the retail mark. The correlation between the two is 0.96. Beyond any doubt, the findings lead to a clear conclusion that a cashless economy is a strong enabler for the growth of the retail market in India.
Am I riskier if I rescue my banks? The unintended effects of bailouts
SSRN
We examine the relationship between bank bailouts and sovereign risk in 35 countries and 19 bailouts during 2005â€"2015. Bailouts negatively affect sovereign ratings, with rating agencies consistently perceiving higher risk when the country’s banking system has been rescued (risk-increasing effect). Financial soundness and banking market structure shape the impact of bailouts on sovereign risk. In particular, proactiveness in undertaking public bailouts for banking systems that are largely distressed -risky and low profitable- and highly concentrated seems to lead to lower increases in sovereign risk. However, the strength of the connection between the public sector and the banking system neither moderates nor magnifies the impact of bailouts. Moreover, ratings dynamics (duration, momentum, timing) are found to be affected by bailouts revealing that the effects of bailouts on ratings are not short-lived. Results are robust to endogeneity concerns, sample selection bias and several robustness tests.
SSRN
We examine the relationship between bank bailouts and sovereign risk in 35 countries and 19 bailouts during 2005â€"2015. Bailouts negatively affect sovereign ratings, with rating agencies consistently perceiving higher risk when the country’s banking system has been rescued (risk-increasing effect). Financial soundness and banking market structure shape the impact of bailouts on sovereign risk. In particular, proactiveness in undertaking public bailouts for banking systems that are largely distressed -risky and low profitable- and highly concentrated seems to lead to lower increases in sovereign risk. However, the strength of the connection between the public sector and the banking system neither moderates nor magnifies the impact of bailouts. Moreover, ratings dynamics (duration, momentum, timing) are found to be affected by bailouts revealing that the effects of bailouts on ratings are not short-lived. Results are robust to endogeneity concerns, sample selection bias and several robustness tests.
An Invisible Oncologist: Health Implications of Financing Frictions
SSRN
Approximately 38.4% of men and women will be diagnosed with cancer at some point during their lifetime. This paper investigates the impacts of financing frictions on the longevity of cancer patients. We first document that an increase in house price causes a large improvement in patients' survivals, and the sensitivity is closely related to local credit conditions. We then propose a life-cycle model of portfolio choice where agents face a cancer risk but treatment can be limited by borrowing constraints. Counterfactual analyses suggest that a 5% increase in borrowing limit extends the longevity of more than 300,000 patients by on average a half-year.
SSRN
Approximately 38.4% of men and women will be diagnosed with cancer at some point during their lifetime. This paper investigates the impacts of financing frictions on the longevity of cancer patients. We first document that an increase in house price causes a large improvement in patients' survivals, and the sensitivity is closely related to local credit conditions. We then propose a life-cycle model of portfolio choice where agents face a cancer risk but treatment can be limited by borrowing constraints. Counterfactual analyses suggest that a 5% increase in borrowing limit extends the longevity of more than 300,000 patients by on average a half-year.
Bayesian prediction of jumps in large panels of time series data
arXiv
arXiv
We take a new look at the problem of disentangling the volatility and jumps processes of daily stock returns. We first provide a computational framework for the univariate stochastic volatility model with Poisson-driven jumps that offers a competitive inference alternative to the existing tools. This methodology is then extended to a large set of stocks for which we assume that their unobserved jump intensities co-evolve in time through a dynamic factor model. To evaluate the proposed modelling approach we conduct out-of-sample forecasts and we compare the posterior predictive distributions obtained from the different models. We provide evidence that joint modelling of jumps improves the predictive ability of the stochastic volatility models.
COMPARING CROWDFUNDING THEORY AND PRACTICE: THE CASE OF TECHNOLOGY INDUSTRY IN ENGLAND
SSRN
This article analyzes crowdfunding campaigns of technology firms in England. We compare the predictions of crowdfunding theories with empirical evidence. We are particularly focused on factors of campaign success related to indirect signalling (such as the choice of campaign target) by founders that have mixed evidence in existing research as opposed to direct signalling (eg. the number of updates by founders). We are also focused on comparing different cities of UK with regard to crowdfunding. Regression and correlation analyses were used to analyze the connections between different factors and the campaign outcomes. We have found that the campaign target has U-shape effect on success of campaign. For example, the probability of success increases if the threshold value is neither very small or significantly large. This is consistent with the spirit of some theoretical research on crowdfunding. We also find that cities with better access to ultrafast broadband among households and cities with greater number of people with higher education have significantly better results in crowdfunding. We also provide an overview of literature related to informational problems in crowdfunding, highlight gaps and controversial areas and provide some suggestions for future research.
SSRN
This article analyzes crowdfunding campaigns of technology firms in England. We compare the predictions of crowdfunding theories with empirical evidence. We are particularly focused on factors of campaign success related to indirect signalling (such as the choice of campaign target) by founders that have mixed evidence in existing research as opposed to direct signalling (eg. the number of updates by founders). We are also focused on comparing different cities of UK with regard to crowdfunding. Regression and correlation analyses were used to analyze the connections between different factors and the campaign outcomes. We have found that the campaign target has U-shape effect on success of campaign. For example, the probability of success increases if the threshold value is neither very small or significantly large. This is consistent with the spirit of some theoretical research on crowdfunding. We also find that cities with better access to ultrafast broadband among households and cities with greater number of people with higher education have significantly better results in crowdfunding. We also provide an overview of literature related to informational problems in crowdfunding, highlight gaps and controversial areas and provide some suggestions for future research.
Corporate Purpose and Corporate Competition
SSRN
The large American corporation faces ever-rising pressure to pursue a purpose that’s more than just for shareholder profit. This rising pressure interacts with sharp changes in industrial organization in a way that has not been comprehensively analyzed and is generally ignored. Firms’ capacity to accommodate pressure for a wider purpose is rising as well. Three changes are most relevant: the possibility of declining competition, the counter-possibility that what seems to be a competitive decline is really increasing winner-take-all competition, and the possibility that the ownership of the big firms has concentrated (even if the firms themselves have not) and thereby diluted competitive zeal. Consider competitive decline: In robustly competitive economies, firms cannot deviate much from profit maximization for expensive corporate purpose programs unless expanded purpose bolsters profitability (by branding the firm positively for consumers or by better motivating employees, for example). In economies with slack competition, in contrast, monopolistic and oligopolistic firms can accommodate purpose pressure, sometimes even expensive purpose pressure, from the profits they garner above what a competitive firm requires. In simplistic form, purpose can pressure such firms to redirect their excess profit from shareholders to stakeholdersâ€"to customers, employees, or the public goodâ€"in ways that firms in strongly competitive industries cannot. By most accounts, competition has been declining in the United States. By some accounts, it has declined precipitously.That decline suggests three possibilities: Oneâ€"the central thesis of this Articleâ€" purpose pressure has greater potential to succeed if competition has declined or rents have otherwise grown; in competitive markets, the profit-oriented purpose-pressured firm has no choice but to refuse the purpose pressure (or to give it only lip service), while in monopolistically-organized industries, the purpose-pressured firm has more room to maneuver. Two, the normative bases undergirding shareholder primacy, although still strong, are less powerful in monopolistic markets. Three, declining corporate competition and rising corporate profits create a lush field for social conflict inside the firm and the polity for shareholders and stakeholders to seek a share of those profits. The result can infuse basic corporate governance with social conflict. This new, or expanded, field for conflict can contribute to and exacerbate our rising political and social instability. Expanding purpose pressure is one manifestation of this conflict.
SSRN
The large American corporation faces ever-rising pressure to pursue a purpose that’s more than just for shareholder profit. This rising pressure interacts with sharp changes in industrial organization in a way that has not been comprehensively analyzed and is generally ignored. Firms’ capacity to accommodate pressure for a wider purpose is rising as well. Three changes are most relevant: the possibility of declining competition, the counter-possibility that what seems to be a competitive decline is really increasing winner-take-all competition, and the possibility that the ownership of the big firms has concentrated (even if the firms themselves have not) and thereby diluted competitive zeal. Consider competitive decline: In robustly competitive economies, firms cannot deviate much from profit maximization for expensive corporate purpose programs unless expanded purpose bolsters profitability (by branding the firm positively for consumers or by better motivating employees, for example). In economies with slack competition, in contrast, monopolistic and oligopolistic firms can accommodate purpose pressure, sometimes even expensive purpose pressure, from the profits they garner above what a competitive firm requires. In simplistic form, purpose can pressure such firms to redirect their excess profit from shareholders to stakeholdersâ€"to customers, employees, or the public goodâ€"in ways that firms in strongly competitive industries cannot. By most accounts, competition has been declining in the United States. By some accounts, it has declined precipitously.That decline suggests three possibilities: Oneâ€"the central thesis of this Articleâ€" purpose pressure has greater potential to succeed if competition has declined or rents have otherwise grown; in competitive markets, the profit-oriented purpose-pressured firm has no choice but to refuse the purpose pressure (or to give it only lip service), while in monopolistically-organized industries, the purpose-pressured firm has more room to maneuver. Two, the normative bases undergirding shareholder primacy, although still strong, are less powerful in monopolistic markets. Three, declining corporate competition and rising corporate profits create a lush field for social conflict inside the firm and the polity for shareholders and stakeholders to seek a share of those profits. The result can infuse basic corporate governance with social conflict. This new, or expanded, field for conflict can contribute to and exacerbate our rising political and social instability. Expanding purpose pressure is one manifestation of this conflict.
Corporate debt and unconventional monetary policy: The risk-taking channel with bond and loan contracts
SSRN
We investigate the effects of unconventional monetary policies on corporate debt through the risk-taking channel using corporate bond and syndicated loan contracts from 2000 to 2016 in Japan. In this period, the policy rate remained fixed near the zero bound. Using the daily changes in the yield curve on monetary policy meeting days, we identify one call rate shock and two unconventional monetary policy shocks that do not affect short-term rates. We find that QE shocks, which lower all medium-to-long-term rates, increase the maturity of debt contracts, especially for syndicated loans. In addition, such QE shocks decrease the size of corporate bonds with short maturity. On the other hand, QQE shocks, which raise medium-term rates and lower long-term rates, and decrease the size of loans and corporate bonds with longer maturity. These effects imply the existence of the risk-taking channel of unconventional monetary policy: it stimulates investment in longer-maturity assets and decreases investment in assets with lower yields. Our findings show that unconventional policies affect debt contracts even in an extremely low interest rate environment.
SSRN
We investigate the effects of unconventional monetary policies on corporate debt through the risk-taking channel using corporate bond and syndicated loan contracts from 2000 to 2016 in Japan. In this period, the policy rate remained fixed near the zero bound. Using the daily changes in the yield curve on monetary policy meeting days, we identify one call rate shock and two unconventional monetary policy shocks that do not affect short-term rates. We find that QE shocks, which lower all medium-to-long-term rates, increase the maturity of debt contracts, especially for syndicated loans. In addition, such QE shocks decrease the size of corporate bonds with short maturity. On the other hand, QQE shocks, which raise medium-term rates and lower long-term rates, and decrease the size of loans and corporate bonds with longer maturity. These effects imply the existence of the risk-taking channel of unconventional monetary policy: it stimulates investment in longer-maturity assets and decreases investment in assets with lower yields. Our findings show that unconventional policies affect debt contracts even in an extremely low interest rate environment.
Credibility of managers’ fair value assessments: evidence from smaller-than-expected goodwill impairments
SSRN
Goodwill impairment rules compel managers to convey their fair value assessments to investors. Several academic studies suggest that managers, on average, take advantage of discretion under these rules to opportunistically avoid or recognize smaller-than-expected goodwill impairments. We re-examine this conclusion and deliver three main findings. First, 44 percent of firms that avoid or record smaller-than-expected goodwill impairments are justified in doing so based on future stock price recovery. Second, the credibility of managers’ optimistic fair value assessments is positively associated with fundamental firm performance and strong external monitoring. Finally, a trading strategy long in firms that record smaller-than-expected impairments earns excess returns, suggesting that investors do not fully appreciate the signal embedded in these accounting decisions. We conclude that positive private information can be conveyed through smaller-than-expected goodwill impairments.
SSRN
Goodwill impairment rules compel managers to convey their fair value assessments to investors. Several academic studies suggest that managers, on average, take advantage of discretion under these rules to opportunistically avoid or recognize smaller-than-expected goodwill impairments. We re-examine this conclusion and deliver three main findings. First, 44 percent of firms that avoid or record smaller-than-expected goodwill impairments are justified in doing so based on future stock price recovery. Second, the credibility of managers’ optimistic fair value assessments is positively associated with fundamental firm performance and strong external monitoring. Finally, a trading strategy long in firms that record smaller-than-expected impairments earns excess returns, suggesting that investors do not fully appreciate the signal embedded in these accounting decisions. We conclude that positive private information can be conveyed through smaller-than-expected goodwill impairments.
DISTRICT-LEVEL CONVERGENCE AND PUBLIC BANKS IN INDIA
SSRN
This study updates previous findings on district level convergence in India and analyses the role of financial development on economic growth. Using a new nighttime light product as a proxy for economic activity, it finds an absolute rate of convergence of 2.4 percent from 2013 to 2019. Conditional on socioeconomic characteristics, the rate of convergence was 3.7 percent. Stronger initial financial development resulted in faster subsequent growth, with the effect being twice as large for credit extended by public banks compared to credit extended by private banks. For districts with below median nighttime light intensity in 2013, the impact of public credit was three times larger, indicating a strong developmental role of public banks in India.
SSRN
This study updates previous findings on district level convergence in India and analyses the role of financial development on economic growth. Using a new nighttime light product as a proxy for economic activity, it finds an absolute rate of convergence of 2.4 percent from 2013 to 2019. Conditional on socioeconomic characteristics, the rate of convergence was 3.7 percent. Stronger initial financial development resulted in faster subsequent growth, with the effect being twice as large for credit extended by public banks compared to credit extended by private banks. For districts with below median nighttime light intensity in 2013, the impact of public credit was three times larger, indicating a strong developmental role of public banks in India.
Deliberating the Managerial Approach towards Employee Participation in Management
SSRN
Today, Employee participation and involvement in management is the most crucial element for organizations. Employee participation in management is of immense value in an organization. It creates a sense of belongingness among the employees and makes them more responsible in their outlook and behavior in the organization. It reduces industrial unrest and promotes industrial peace. It helps in maintaining harmonious relations between the workers and the management. Employee involvement affects various factors related to employee and organization. This paper deliberates on the managerial approach towards employee participation in management. This is a descriptive study computed using the data collected from the managers using the structured questionnaire. The outcome of the paper emphasizes that employee participation and involvement in management affects productivity job satisfaction and helps in attaining self-realization for employees and reducing attrition peace for organizations.
SSRN
Today, Employee participation and involvement in management is the most crucial element for organizations. Employee participation in management is of immense value in an organization. It creates a sense of belongingness among the employees and makes them more responsible in their outlook and behavior in the organization. It reduces industrial unrest and promotes industrial peace. It helps in maintaining harmonious relations between the workers and the management. Employee involvement affects various factors related to employee and organization. This paper deliberates on the managerial approach towards employee participation in management. This is a descriptive study computed using the data collected from the managers using the structured questionnaire. The outcome of the paper emphasizes that employee participation and involvement in management affects productivity job satisfaction and helps in attaining self-realization for employees and reducing attrition peace for organizations.
Did Comprehensive Assessment (CA) 2014 and Stress Test Exercise (STE) 2016 resolve information asymmetry?
SSRN
The study investigates the informational value of the Comprehensive Assessment (CA) 2014 and the Stress Test Exercise (STE) 2016 by leveraging the literature on market reactions around scheduled announcements and by analyzing the trading patterns and volume-return co-movements around the announcements. We corroborate the theoretical implications from the literature and find a significant drop in trading for the whole sample before the CA 2014 results announcement illuminating the existence of information asymmetry. The significant rise in trading and volume-return correlations after the CA report indicates the resolution of the information asymmetry. The released information signaled the costs of the new regulatory regime by revealing the critical risk factors for the regulator. We find no characteristic trading patterns around the STE 2016 results announcement due to the specificity of the publication period, however observing only the price reactions, we uncover significant negative market reactions for the banks falling under the Single Supervisor Mechanism (SSM) umbrella suggesting the investors' awareness of the regulatory costs arising from the SSM. The study adds to the academic literature focused mainly on earning announcements by providing evidence for market reactions after regulatory announcements and delivers valuable implications for policymakers.
SSRN
The study investigates the informational value of the Comprehensive Assessment (CA) 2014 and the Stress Test Exercise (STE) 2016 by leveraging the literature on market reactions around scheduled announcements and by analyzing the trading patterns and volume-return co-movements around the announcements. We corroborate the theoretical implications from the literature and find a significant drop in trading for the whole sample before the CA 2014 results announcement illuminating the existence of information asymmetry. The significant rise in trading and volume-return correlations after the CA report indicates the resolution of the information asymmetry. The released information signaled the costs of the new regulatory regime by revealing the critical risk factors for the regulator. We find no characteristic trading patterns around the STE 2016 results announcement due to the specificity of the publication period, however observing only the price reactions, we uncover significant negative market reactions for the banks falling under the Single Supervisor Mechanism (SSM) umbrella suggesting the investors' awareness of the regulatory costs arising from the SSM. The study adds to the academic literature focused mainly on earning announcements by providing evidence for market reactions after regulatory announcements and delivers valuable implications for policymakers.
Direct Expected Quadratic Utility Maximization for Mean-Variance Controlled Reinforcement Learning
SSRN
Risk management is critical in decision-making, and \emph{mean-variance} (MV) trade-off is one of the most common criteria. However, in \emph{reinforcement learning} (RL) under a dynamic environment, MV control is not as easy as that under a static environment owing to computational difficulties. For MV controlled RL, this paper proposes direct expected quadratic utility maximization (EQUM), where a mean-variance efficient agent is given as its solution. This approach does not only avoid computational difficulties but also improves empirical performances. In experiments, we demonstrate the effectiveness of the proposed EQUM with benchmark settings.
SSRN
Risk management is critical in decision-making, and \emph{mean-variance} (MV) trade-off is one of the most common criteria. However, in \emph{reinforcement learning} (RL) under a dynamic environment, MV control is not as easy as that under a static environment owing to computational difficulties. For MV controlled RL, this paper proposes direct expected quadratic utility maximization (EQUM), where a mean-variance efficient agent is given as its solution. This approach does not only avoid computational difficulties but also improves empirical performances. In experiments, we demonstrate the effectiveness of the proposed EQUM with benchmark settings.
Direct and indirect transactions and requirements
arXiv
arXiv
The indirect transactions between sectors of an economic system has been a long-standing open problem. There have been numerous attempts to conceptually define and mathematically formulate this notion in various other scientific fields in literature as well. The existing direct and indirect effects formulations, however, can neither determine the direct and indirect transactions separately nor quantify these transactions between two individual sectors of interest in a multisectoral economic system. The novel concepts of the direct, indirect and transfer (total) transactions between any two sectors are introduced, and the corresponding requirements matrices and coefficients are systematically formulated relative to both final demands and gross outputs based on the system decomposition theory in the present manuscript. It is demonstrated theoretically and through illustrative examples that the proposed requirements matrices accurately define and correctly quantify the corresponding direct, indirect, and total interactions and relationships. The proposed requirements matrices for the US economy using aggregated input-output tables for multiple years are then presented and briefly analyzed.
Does the Legal Form Matter for Firm Performance in the MENA Region?
SSRN
This paper attempts to study the relationship between firm legal form and firm performance in the Middle East and North Africa Region (MENA) using the World Bank Enterprise Survey (WBES) database. Our analysis shows that open shareholding, closed shareholding, partnership, and limited partnership companies demonstrate an advantage in terms of annual sales and annual productivity growth rates over sole proprietorship firms, and that medium-sized and large-sized firms also demonstrate an advantage over small ones. Our analysis also shows that foreign ownership, exporting activities, the usage of the web in communication with clients and suppliers, and the presence of full-time workers positively affect firm performance. These findings are robust when running the analysis for firms with female participation in ownership. This paper provides directions for strategists targeting at improving the performance of firms.
SSRN
This paper attempts to study the relationship between firm legal form and firm performance in the Middle East and North Africa Region (MENA) using the World Bank Enterprise Survey (WBES) database. Our analysis shows that open shareholding, closed shareholding, partnership, and limited partnership companies demonstrate an advantage in terms of annual sales and annual productivity growth rates over sole proprietorship firms, and that medium-sized and large-sized firms also demonstrate an advantage over small ones. Our analysis also shows that foreign ownership, exporting activities, the usage of the web in communication with clients and suppliers, and the presence of full-time workers positively affect firm performance. These findings are robust when running the analysis for firms with female participation in ownership. This paper provides directions for strategists targeting at improving the performance of firms.
Does the market understand the ex ante risk of expropriation by controlling shareholders?
SSRN
We examine how the market values operating assets in the presence of time-varying ex ante risk that these assets may be tunneled away. We analyze pairs of Chinese publicly listed firms and their non-listed parents and examine the market valuation of current assets (cash balances, trade receivables, receivables due from the controlling shareholders, inventories) and fixed assets on the publicly listed firm’s balance sheet. Our results show that in periods when the risk of tunneling from the publicly listed firm to its controlling shareholder increases, operating assets that are easy to tunnel (cash and receivables due from the controlling shareholder) are valued at larger discounts, while operating assets that are not easy to tunnel (trade receivables, inventories, fixed assets) are not valued at such discounts.
SSRN
We examine how the market values operating assets in the presence of time-varying ex ante risk that these assets may be tunneled away. We analyze pairs of Chinese publicly listed firms and their non-listed parents and examine the market valuation of current assets (cash balances, trade receivables, receivables due from the controlling shareholders, inventories) and fixed assets on the publicly listed firm’s balance sheet. Our results show that in periods when the risk of tunneling from the publicly listed firm to its controlling shareholder increases, operating assets that are easy to tunnel (cash and receivables due from the controlling shareholder) are valued at larger discounts, while operating assets that are not easy to tunnel (trade receivables, inventories, fixed assets) are not valued at such discounts.
Driving Factors Behind the Social Role of Retail Centers on Recreational Activities
arXiv
arXiv
Retail centers can be considered as places for interactional and recreational activities and such social roles of retail centers contribute to the popularity of the retail centers. Therefore, the main objective of this study was to identify effective factors encouraging customers to engage with interactional activities and measure how these factors affect customer behavior. Accordingly, two hypotheses were raised illustrating that the travel time (i.e., the time it takes for a customer to reach the retail center) and the variety of shops (in a retail center) increase the percentage of people who spend their leisure time and recreational activities retail centers. Two case studies were conducted in two analogous retail centers, one in Tehran, Iran, and the other in Madrid, Spain. According to the results, there is an interaction between the travel time and the motivation for the presence of people in the retail center. Furthermore, the results revealed that half of both retail center goers who spend more than 10 minutes to reach the retail centers prefer to do leisure activities and browsing than shopping. In other words, the longer it takes a person to get to the center, the more likely he/she is to spend more time in the mall and do more leisure activities. It is also found that there is a significant relationship between the variety of shops in a retail center and the motivation of customers attending a retail center that encourages people to spend their leisure time in retail centers.
ESG 2.0: Measuring & Managing Investor Risks Beyond the Enterprise-level
SSRN
Do environmental, social, and governance (ESG) and impact investing practices in their current forms provide investors with sufficient tools to play a meaningful role in “Building Back Better†following the COVID-19 crisis? Many of our existing ESG and impact investing frameworks focus on issues at the portfolio company level, but they do not take into account potential negative impacts from capital structures and investors’ influence in shaping them. In this paper, the Predistribution Initiative (PDI) explores how the growth of institutional investors (asset owners and allocators) and certain asset allocation strategies can be in conflict with ESG objectives. The conflict materializes in various interconnected ways, particularly from institutional investors’ role in increasing global debt levels and fund manager and corporate consolidation, which in turn can create barriers for diverse fund managers and entrepreneurs, jeopardize quality jobs, erode the quality and affordability of goods and services, increase asset class correlations, reduce diversification opportunities, and ultimately fuel economic inequality and market instability. For long-term, diversified institutional investors, or “Universal Owners†of the market, these dynamics eventually translate into lower financial returns. For workers and communities, these dynamics translate into greater precarity and inequality.This paper encourages such investors to consider how their activities may contribute to these issues and how they can improve their own practices to better manage systemic and systematic risks. We review the issues and then propose several preliminary paths toward solutions that we intend to workshop and fine-tune with investors and other stakeholders. Potential solutions focus on diversifying asset allocation to more regenerative investment structures and asset classes, building an enabling environment through adjustments to team incentive structures, performance reviews, benchmarking and valuation methodologies, and field-building.
SSRN
Do environmental, social, and governance (ESG) and impact investing practices in their current forms provide investors with sufficient tools to play a meaningful role in “Building Back Better†following the COVID-19 crisis? Many of our existing ESG and impact investing frameworks focus on issues at the portfolio company level, but they do not take into account potential negative impacts from capital structures and investors’ influence in shaping them. In this paper, the Predistribution Initiative (PDI) explores how the growth of institutional investors (asset owners and allocators) and certain asset allocation strategies can be in conflict with ESG objectives. The conflict materializes in various interconnected ways, particularly from institutional investors’ role in increasing global debt levels and fund manager and corporate consolidation, which in turn can create barriers for diverse fund managers and entrepreneurs, jeopardize quality jobs, erode the quality and affordability of goods and services, increase asset class correlations, reduce diversification opportunities, and ultimately fuel economic inequality and market instability. For long-term, diversified institutional investors, or “Universal Owners†of the market, these dynamics eventually translate into lower financial returns. For workers and communities, these dynamics translate into greater precarity and inequality.This paper encourages such investors to consider how their activities may contribute to these issues and how they can improve their own practices to better manage systemic and systematic risks. We review the issues and then propose several preliminary paths toward solutions that we intend to workshop and fine-tune with investors and other stakeholders. Potential solutions focus on diversifying asset allocation to more regenerative investment structures and asset classes, building an enabling environment through adjustments to team incentive structures, performance reviews, benchmarking and valuation methodologies, and field-building.
Early Evidence on the Use of Foreign Cash Following the Tax Cuts and Jobs Act of 2017
SSRN
The Tax Cuts and Jobs Act of 2017 (TCJA) reduces U.S. multinational companies’ (MNC) internal capital market frictions related to repatriation costs by decreasing costs to access internal capital (i.e., foreign cash). This study examines MNCs’ responses to the TCJA and finds spending and investment behavior are dependent upon liquidity, investment opportunities, and borrowing costs. Domestic capital expenditures increased for MNCs with low domestic liquidity and high domestic investment opportunities. These firms also increased share repurchases. In contrast, MNCs with low domestic liquidity and low domestic investment opportunities increased dividends. MNCs with low domestic investment opportunities and high cost of debt reduced their outstanding debt. We also investigate responses to global intangible low-taxed income (GILTI) incentives and find that MNCs with more foreign cash and a greater likelihood of being affected by the GILTI regime increase their foreign but not domestic capital expenditures - a potential unintended consequence of TCJA.
SSRN
The Tax Cuts and Jobs Act of 2017 (TCJA) reduces U.S. multinational companies’ (MNC) internal capital market frictions related to repatriation costs by decreasing costs to access internal capital (i.e., foreign cash). This study examines MNCs’ responses to the TCJA and finds spending and investment behavior are dependent upon liquidity, investment opportunities, and borrowing costs. Domestic capital expenditures increased for MNCs with low domestic liquidity and high domestic investment opportunities. These firms also increased share repurchases. In contrast, MNCs with low domestic liquidity and low domestic investment opportunities increased dividends. MNCs with low domestic investment opportunities and high cost of debt reduced their outstanding debt. We also investigate responses to global intangible low-taxed income (GILTI) incentives and find that MNCs with more foreign cash and a greater likelihood of being affected by the GILTI regime increase their foreign but not domestic capital expenditures - a potential unintended consequence of TCJA.
Efficiency of communities and financial markets during the 2020 pandemic
arXiv
arXiv
This paper investigates the relationship between the spread of the COVID-19 pandemic, the state of the real economy, and the financial index performance across 20 countries. First, we analyse which countries behaved similarly in 2020 with respect to one of three multivariate time series: daily COVID-19 cases, community mobility data and national equity index price. Next, we study the trajectories of all three of these attributes in conjunction to determine which attributes exhibited greater similarity. Finally, we investigate whether financial or real economies responded quicker to surges in COVID-19 cases. Our results indicate that mobility data and financial indices exhibited the most similarity in their trajectories, with financial markets responding quicker. This suggests that financial market participants interpreted and responded to COVID-19 data more efficiently than governments. Thus, we suggest that efforts to study economic data as a leading indicator for financial market performance during the pandemic were misguided.
Equity Factors: To Short Or Not To Short, That Is The Question
arXiv
arXiv
What is the best market-neutral implementation of classical Equity Factors? Should one use the specific predictability of the short-leg to build a zero beta Long-Short portfolio, in spite of the specific costs associated to shorting, or is it preferable to ban the shorts and hedge the long-leg with -- say -- an index future? We revisit this question by focusing on the relative predictability of the two legs, the issue of diversification, and various sources of costs. Our conclusion is that, using the same Factors, a Long-Short implementation leads to superior risk-adjusted returns than its Hedged Long-Only counterpart, at least when Assets Under Management are not too large.
Exploration of Market Potential Towards Dental Material Brands: An Assessment with Preferences of Dentists in India
SSRN
Today, dental problems are a major public health issue in many developing countries. Now there are many changes in lifestyles, awareness, and perspectives about dental care. This growing awareness about dental hygiene and the rising prevalence of dental care is expected to drive the market. The dental supplies account for the largest share of the overall dental market encompassing material, implants, equipment, and services. The potential size of India’s dental market is immense and is anticipated to become one of the largest single-country markets for dental products and materials. The Indian market presents worthwhile and assorted opportunities for marketers with the right products, services, and commitment. This paper explores the market potential of dental material of various types and accesses the dentist’s preferences towards the dental material brands in India. The primary data is collected from 150 dentists from Pune city of India and discoursed the analysis towards the market potential, usage counts, distribution percent, and preference assessment of dentists for the dental material. The outcome of the paper highlights the market potential value for dental material brands, usage priorities trends, and dentist preferences for different elements. Furthermore, the study shows the association for the company brand, dental material, material requirement, and type of material for market implications for dental material manufacturers.
SSRN
Today, dental problems are a major public health issue in many developing countries. Now there are many changes in lifestyles, awareness, and perspectives about dental care. This growing awareness about dental hygiene and the rising prevalence of dental care is expected to drive the market. The dental supplies account for the largest share of the overall dental market encompassing material, implants, equipment, and services. The potential size of India’s dental market is immense and is anticipated to become one of the largest single-country markets for dental products and materials. The Indian market presents worthwhile and assorted opportunities for marketers with the right products, services, and commitment. This paper explores the market potential of dental material of various types and accesses the dentist’s preferences towards the dental material brands in India. The primary data is collected from 150 dentists from Pune city of India and discoursed the analysis towards the market potential, usage counts, distribution percent, and preference assessment of dentists for the dental material. The outcome of the paper highlights the market potential value for dental material brands, usage priorities trends, and dentist preferences for different elements. Furthermore, the study shows the association for the company brand, dental material, material requirement, and type of material for market implications for dental material manufacturers.
Extracting Convenience Yield Free Short-Term Interest Rates from Equity Derivatives
SSRN
In this paper we use risk-free short-term interest rates (OISTIRs) derived from equity derivatives prices to make the following four contributions: (i) We introduce and compare different methods how to extract these rates and show that a method based on box spreads performs best. (ii) We compare the results with other benchmark short-term interest rates and show that OISTIRs are higher than BUND rates (30 bps for 3-month tenors), lower than EURIBOR rates (16 bps for 3-month tenors), and almost equal to EUREX repo rates. (iii) In terms of informational sensitivity we find OISTIRs to Granger-cause EURIBOR rates, at least since the year 2013. (iv) We use OISTIRs to de- rive the BUND convenience yield. We identify bond offerings and expansive monetary policy decision to negatively impact these yields, while the risk-free maturity premium has a positive impact. Finally, we think this paper may also contribute to the discussion on how to further develop EURIBOR rates.
SSRN
In this paper we use risk-free short-term interest rates (OISTIRs) derived from equity derivatives prices to make the following four contributions: (i) We introduce and compare different methods how to extract these rates and show that a method based on box spreads performs best. (ii) We compare the results with other benchmark short-term interest rates and show that OISTIRs are higher than BUND rates (30 bps for 3-month tenors), lower than EURIBOR rates (16 bps for 3-month tenors), and almost equal to EUREX repo rates. (iii) In terms of informational sensitivity we find OISTIRs to Granger-cause EURIBOR rates, at least since the year 2013. (iv) We use OISTIRs to de- rive the BUND convenience yield. We identify bond offerings and expansive monetary policy decision to negatively impact these yields, while the risk-free maturity premium has a positive impact. Finally, we think this paper may also contribute to the discussion on how to further develop EURIBOR rates.
FinTech Development in Greater Manchester: An Overview
SSRN
This article analyzes the patterns of Fintech development in Greater Manchester, UK. Manchester is often called a northern capital of Fintech. We analyze different subsectors of FinTech and find that such sectors as payments, fintech loans, debt-based, reward-based and real-estate-based crowdfunding, big data analytics, data security, insurtech and regtech are the most growing areas. We also compare the Fintech structure in Manchester with that in London and other major cities in the UK and identify similarities and differences.
SSRN
This article analyzes the patterns of Fintech development in Greater Manchester, UK. Manchester is often called a northern capital of Fintech. We analyze different subsectors of FinTech and find that such sectors as payments, fintech loans, debt-based, reward-based and real-estate-based crowdfunding, big data analytics, data security, insurtech and regtech are the most growing areas. We also compare the Fintech structure in Manchester with that in London and other major cities in the UK and identify similarities and differences.
Foreign Tax Holiday Participation and U.S. Employment and Investment Loss
SSRN
This paper examines the consequences of foreign tax holiday participation for U.S. economic activities. Chow, Hoopes, and Maydew (2020) present the first evidence of U.S. multinational companies’ (MNCs) participation in foreign tax holidays and find significant involvement in recent decades. We add to their study and investigate whether tax holiday participation among MNCs is associated with the offshoring of U.S. employment and other domestic investment activities. We find that tax holiday participation is positively associated with the offshoring of U.S. jobs and the decrease (increase) of domestic (foreign) investment, as proxied by capital expenditures and R&D activity, which suggests that temporary foreign tax relief can negatively affect the U.S. economy. These findings increase our understanding of the influence of tax incentives on the allocation of firm resources and the potential consequences of international tax competition.
SSRN
This paper examines the consequences of foreign tax holiday participation for U.S. economic activities. Chow, Hoopes, and Maydew (2020) present the first evidence of U.S. multinational companies’ (MNCs) participation in foreign tax holidays and find significant involvement in recent decades. We add to their study and investigate whether tax holiday participation among MNCs is associated with the offshoring of U.S. employment and other domestic investment activities. We find that tax holiday participation is positively associated with the offshoring of U.S. jobs and the decrease (increase) of domestic (foreign) investment, as proxied by capital expenditures and R&D activity, which suggests that temporary foreign tax relief can negatively affect the U.S. economy. These findings increase our understanding of the influence of tax incentives on the allocation of firm resources and the potential consequences of international tax competition.
Future of work: ethics
arXiv
arXiv
Work must be reshaped in the upcoming new era characterized by new challenges and the presence of new technologies and computational tools. Over-automation seems to be the driver of the digitalization process. Substitution is the paradigm leading Artificial Intelligence and robotics development against human cognition. Digital technology should be designed to enhance human skills and make more productive use of human cognition and capacities. Digital technology is characterized also by scalability because of its easy and inexpensive deployment. Thus, automation can lead to the absence of jobs and scalable negative impact in human development and the performance of business. A look at digitalization from the lens of Sustainable Development Goals can tell us how digitalization impact in different sectors and areas considering society as a complex interconnected system. Here, reflections on how AI and Data impact future of work and sustainable development are provided grounded on an ethical core that comprises human-level principles and also systemic principles.
Identification Cold start Problem Start in Matrix Factorization Method for Online Web Recommendation Systems
SSRN
Online prediction based on user profile or personal history is very essential to increase the revenue in E-commerce. To identify the potential users from a large amount of data and provide effective recommendation it is a very tedious task in data mining approach. Various researchers have already done dissimilar systems using various classification mining algorithms. The basic problem all the systems having a space complexity and heavy resources required to mine that much large data. Sometimes recommendations also generate different problems life redundant recommendations, cold start Matrix factorization, duplicate frequent itemset generation, etc. To eliminate such problems we propose a detection strategy of cold start Matrix factorization method during recommendation. This approach basically designs to increase online business using effective recommendations. This research also illustrates how the system carried out from business to business as well as business to customer recommendation using the proposed recommendation algorithm. Experiment analysis has done with a large amount of transactional data and generates the recommendation to the individual user. To calculate the effectiveness of the system using different Kappa statistical analyses and shows the accuracy of recommendation in Big Data environment. After identifying previous work gaps, we proposed effective recommendations to runtime users and generate the recommendation from real-world data from actual customer-product interaction events. This research basically a combination of a data mining approach and e-commerce management with a recommender system.
SSRN
Online prediction based on user profile or personal history is very essential to increase the revenue in E-commerce. To identify the potential users from a large amount of data and provide effective recommendation it is a very tedious task in data mining approach. Various researchers have already done dissimilar systems using various classification mining algorithms. The basic problem all the systems having a space complexity and heavy resources required to mine that much large data. Sometimes recommendations also generate different problems life redundant recommendations, cold start Matrix factorization, duplicate frequent itemset generation, etc. To eliminate such problems we propose a detection strategy of cold start Matrix factorization method during recommendation. This approach basically designs to increase online business using effective recommendations. This research also illustrates how the system carried out from business to business as well as business to customer recommendation using the proposed recommendation algorithm. Experiment analysis has done with a large amount of transactional data and generates the recommendation to the individual user. To calculate the effectiveness of the system using different Kappa statistical analyses and shows the accuracy of recommendation in Big Data environment. After identifying previous work gaps, we proposed effective recommendations to runtime users and generate the recommendation from real-world data from actual customer-product interaction events. This research basically a combination of a data mining approach and e-commerce management with a recommender system.
Index Design: Hedging and Manipulation
SSRN
This paper studies optimal index design to both facilitate hedging and alleviate illegal manipulation in a competitive equilibrium paradigm, modified to deal with manipulation. Specifically, a large trader is trading both derivatives and stocks, and effectively hides her trades behind the competitive market clearing mechanism. Unlike the strategic game paradigm, a volume-weighted average pricing (VWAP) index both introduces basis risk and encourages manipulation because of the additional randomness in volume weight and the greater price impact enjoyed by the large trader. In contrast, an equal-weighted average pricing (EWAP) index both preserves market completeness and discourages manipulation.
SSRN
This paper studies optimal index design to both facilitate hedging and alleviate illegal manipulation in a competitive equilibrium paradigm, modified to deal with manipulation. Specifically, a large trader is trading both derivatives and stocks, and effectively hides her trades behind the competitive market clearing mechanism. Unlike the strategic game paradigm, a volume-weighted average pricing (VWAP) index both introduces basis risk and encourages manipulation because of the additional randomness in volume weight and the greater price impact enjoyed by the large trader. In contrast, an equal-weighted average pricing (EWAP) index both preserves market completeness and discourages manipulation.
Informational Efficiency of Cryptocurrency Markets
SSRN
The trading of cryptocurrencies on unregulated markets provides a natural platform to examine how price discovery occurs in these markets. Using variance ratio (VR) methodology to measure information efficiency over time, we find that Initial Coin Offerings (ICOs) exhibit significant inefficiencies with an average VR of .76 after 100 days, compared to similar market capitalization stocks following an IPO where prices are efficient (VR=1) within a month after the firm starts trading on regulated exchanges. The VRs for ICOs remain below 0.7 for more than three years. The VRs for Bitcoin and Ethereum, the most widely traded cryptocurrencies, approach one only after a year of trading. Using VR methodology, we also compare ICOs to Initial Exchange Offerings (IEOs), which are underwritten by major cryptocurrency platforms (for example, Binance). The IEOs exhibit inefficiencies up to 100 days from the start of trading. However, they are consistently more efficient than ICOs during the first 200 days, suggesting that due diligence by platforms can lead to better price discovery and more efficient prices. The efficiency of ICOs improves with maturity, turnover, market value, and higher prices, measures that are also important determinants of market liquidity and efficiency of stocks traded on regulated exchanges. Other unique features of ICOs that improve efficiency are the four platform types: Ethereum, Neo, and Wave. Crypto algorithm Ethash decreases efficiency. Further, we find that social media activity has a significant impact on the efficiency of ICOs, with the number of subscribers and the number of positive comments leading to more efficient prices.
SSRN
The trading of cryptocurrencies on unregulated markets provides a natural platform to examine how price discovery occurs in these markets. Using variance ratio (VR) methodology to measure information efficiency over time, we find that Initial Coin Offerings (ICOs) exhibit significant inefficiencies with an average VR of .76 after 100 days, compared to similar market capitalization stocks following an IPO where prices are efficient (VR=1) within a month after the firm starts trading on regulated exchanges. The VRs for ICOs remain below 0.7 for more than three years. The VRs for Bitcoin and Ethereum, the most widely traded cryptocurrencies, approach one only after a year of trading. Using VR methodology, we also compare ICOs to Initial Exchange Offerings (IEOs), which are underwritten by major cryptocurrency platforms (for example, Binance). The IEOs exhibit inefficiencies up to 100 days from the start of trading. However, they are consistently more efficient than ICOs during the first 200 days, suggesting that due diligence by platforms can lead to better price discovery and more efficient prices. The efficiency of ICOs improves with maturity, turnover, market value, and higher prices, measures that are also important determinants of market liquidity and efficiency of stocks traded on regulated exchanges. Other unique features of ICOs that improve efficiency are the four platform types: Ethereum, Neo, and Wave. Crypto algorithm Ethash decreases efficiency. Further, we find that social media activity has a significant impact on the efficiency of ICOs, with the number of subscribers and the number of positive comments leading to more efficient prices.
Investors’ Judgment and Decisions after a Cybersecurity Breach: Understanding the Value Relevance of Cybersecurity Risk Management Assurance
SSRN
This study investigates how voluntary cybersecurity risk management (CyRM) assurance affects non-professional investors’ judgments and decisions. The study also examines how the value relevance of CyRM assurance is altered when having such assurance is expected/unexpected. Employing an experimental approach, we find that after a cyber-breach occurs, companies previously engaging in voluntary CyRM assurance receive more favorable investor assessments of management credibility and, in turn, higher stock valuations. We also find that investors’ assessments of management credibility and stock valuations are more extreme for companies that engage (do not engage) in CyRM assurance in industries where such assurance is not (is) the norm. This study begins to address the question of whether there is a demand for CyRM assurance offered by audit firms, particularly given lingering concerns in research and practice as to the viability of IT-related assurance services. Our research reinforces the profession’s position that management and boards need to recognize that cyber risk will differ by industry and that investors will react to violations of implicit industry standards for cyber risk management. The results also demonstrate the value to management credibility of having prior CyRM assurance after a cyber-breach; the reputation and damage control is important for both management and the company.
SSRN
This study investigates how voluntary cybersecurity risk management (CyRM) assurance affects non-professional investors’ judgments and decisions. The study also examines how the value relevance of CyRM assurance is altered when having such assurance is expected/unexpected. Employing an experimental approach, we find that after a cyber-breach occurs, companies previously engaging in voluntary CyRM assurance receive more favorable investor assessments of management credibility and, in turn, higher stock valuations. We also find that investors’ assessments of management credibility and stock valuations are more extreme for companies that engage (do not engage) in CyRM assurance in industries where such assurance is not (is) the norm. This study begins to address the question of whether there is a demand for CyRM assurance offered by audit firms, particularly given lingering concerns in research and practice as to the viability of IT-related assurance services. Our research reinforces the profession’s position that management and boards need to recognize that cyber risk will differ by industry and that investors will react to violations of implicit industry standards for cyber risk management. The results also demonstrate the value to management credibility of having prior CyRM assurance after a cyber-breach; the reputation and damage control is important for both management and the company.
Is Democracy Good for Corporate Investment?
SSRN
Using corporate data in 19 countries that experienced democracy status transitions between 1983 and 2017, we find that firm investment decreases by over 30% following democratization. This negative democracy-investment relationship is driven by higher employee welfare and regulatory costs and is stronger for politically connected firms, financially unconstrained firms and in less corrupted countries. The firm investment drop is also due primarily to the reduced investment inefficiency that accompanies higher post-democratization firm profitability, valuation, and stock return. The initial drop has a duration of only two years, and firm investment eventually increases in the fifth year after democratization. Several robustness tests and IV regressions further confirm our main results.
SSRN
Using corporate data in 19 countries that experienced democracy status transitions between 1983 and 2017, we find that firm investment decreases by over 30% following democratization. This negative democracy-investment relationship is driven by higher employee welfare and regulatory costs and is stronger for politically connected firms, financially unconstrained firms and in less corrupted countries. The firm investment drop is also due primarily to the reduced investment inefficiency that accompanies higher post-democratization firm profitability, valuation, and stock return. The initial drop has a duration of only two years, and firm investment eventually increases in the fifth year after democratization. Several robustness tests and IV regressions further confirm our main results.
Lehman's Lemons: Do Career Disruptions Matter for the Top 5%?
SSRN
How resilient are high-skilled, white collar workers? We exploit a uniquely comprehensive dataset of individual-level resumes of bank employees and the setting of the Lehman Brothers bankruptcy to estimate the effect of an unanticipated shock on the career paths of mobile and high skilled labor. We find evidence of short-term effects that largely dissipate over the course of the decade and that touch only the senior-most employees. We match each employee of Lehman Brothers in January 2008 to the most similar employees at Goldman Sachs, Morgan Stanley, Deutsche Bank, and UBS based on job positions, skills, education, and demographics. By 2019, the former Lehman Brothers employees are 2% more likely to have experienced at least a six-months-long break from reported employment and 3% more likely to have left the financial services industry. However, these effects concentrate among the senior individuals such as vice presidents and managing directors and are absent for junior employees such as analysts and associates. Furthermore, in terms of subsequent career growth, junior employees of Lehman Brothers fare no worse than their counterparts at the other banks. Analysts and associates employed at Lehman Brothers in January 2008 have equal or greater likelihoods of achieving senior roles such as managing director in existing enterprises by January 2019 and are more likely to found their own businesses.
SSRN
How resilient are high-skilled, white collar workers? We exploit a uniquely comprehensive dataset of individual-level resumes of bank employees and the setting of the Lehman Brothers bankruptcy to estimate the effect of an unanticipated shock on the career paths of mobile and high skilled labor. We find evidence of short-term effects that largely dissipate over the course of the decade and that touch only the senior-most employees. We match each employee of Lehman Brothers in January 2008 to the most similar employees at Goldman Sachs, Morgan Stanley, Deutsche Bank, and UBS based on job positions, skills, education, and demographics. By 2019, the former Lehman Brothers employees are 2% more likely to have experienced at least a six-months-long break from reported employment and 3% more likely to have left the financial services industry. However, these effects concentrate among the senior individuals such as vice presidents and managing directors and are absent for junior employees such as analysts and associates. Furthermore, in terms of subsequent career growth, junior employees of Lehman Brothers fare no worse than their counterparts at the other banks. Analysts and associates employed at Lehman Brothers in January 2008 have equal or greater likelihoods of achieving senior roles such as managing director in existing enterprises by January 2019 and are more likely to found their own businesses.
Longevity Risk and Capital Markets: The 2019-20 Update
SSRN
This Special Issue of the Insurance: Mathematics and Economics contains 16 contributions to the academic literature all dealing with longevity risk and capital markets. Draft versions of the papers were presented at Longevity 15: The Fifteenth International Longevity Risk and Capital Markets Solutions Conference that was held in Washington DC on 12-13 September 2019. It was hosted by the Pensions Institute at City, University of London.Longevity risk and related capital market solutions have grown increasingly important in recent years, both in academic research and in the markets we refer to as the Life Market, i.e., the capital market that trades longevity-linked assets and liabilities. Mortality improvements around the world are putting more and more pressure on governments, pension funds, life insurance companies, as well as individuals, to deal with the longevity risk they face. At the same time, capital markets can, in principle, provide vehicles to hedge longevity risk effectively and transfer the risk from those unwilling or unable to manage it to those willing to invest in this risk in exchange for appropriate risk-adjusted returns or to those who have a counterpoising risk that longevity risk can hedge, e.g., life offices and reinsurers with mortality risk on their books. Many new investment products have been created both by the insurance/reinsurance industry and by the capital markets. Mortality catastrophe bonds are an early example of a successful insurance-linked security. Some new innovative capital market solutions for transferring longevity risk include longevity (or survivor) bonds, longevity (or survivor) swaps, mortality (or q-) forward contracts and reinsurance sidecars. The aim of the International Longevity Risk and Capital Markets Solutions Conferences is to bring together academics and practitioners from all over the world to discuss and analyze these exciting new developments.
SSRN
This Special Issue of the Insurance: Mathematics and Economics contains 16 contributions to the academic literature all dealing with longevity risk and capital markets. Draft versions of the papers were presented at Longevity 15: The Fifteenth International Longevity Risk and Capital Markets Solutions Conference that was held in Washington DC on 12-13 September 2019. It was hosted by the Pensions Institute at City, University of London.Longevity risk and related capital market solutions have grown increasingly important in recent years, both in academic research and in the markets we refer to as the Life Market, i.e., the capital market that trades longevity-linked assets and liabilities. Mortality improvements around the world are putting more and more pressure on governments, pension funds, life insurance companies, as well as individuals, to deal with the longevity risk they face. At the same time, capital markets can, in principle, provide vehicles to hedge longevity risk effectively and transfer the risk from those unwilling or unable to manage it to those willing to invest in this risk in exchange for appropriate risk-adjusted returns or to those who have a counterpoising risk that longevity risk can hedge, e.g., life offices and reinsurers with mortality risk on their books. Many new investment products have been created both by the insurance/reinsurance industry and by the capital markets. Mortality catastrophe bonds are an early example of a successful insurance-linked security. Some new innovative capital market solutions for transferring longevity risk include longevity (or survivor) bonds, longevity (or survivor) swaps, mortality (or q-) forward contracts and reinsurance sidecars. The aim of the International Longevity Risk and Capital Markets Solutions Conferences is to bring together academics and practitioners from all over the world to discuss and analyze these exciting new developments.
Merton Investment Problems in Finance and Insurance for the Hawkes-based Models
arXiv
arXiv
We show how to solve Merton optimal investment stochastic control problem for Hawkes-based models in finance and insurance, i.e., for a wealth portfolio X(t) consisting of a bond and a stock price described by general compound Hawkes process (GCHP), and for a capital R(t) of an insurance company with the amount of claims described by the risk model based on GCHP. The novelty of the results consists of the new Hawkes-based models and in the new optimal investment results in finance and insurance for those models.
New Venture Financing and Venture Capital `Funding Hole'
SSRN
An entrepreneur usually chooses to receive seed funding for a new project from an angel investor (angel) or a venture capitalist (VC), a choice complicated by the implications of follow-on financing required at the next stage of the venture. The size of the follow-on round is typically much larger than the seed round and the first-stage investors, including the angel almost certainly, and the VC with a significant probability, do not extend follow-on financing. A project released by the original investor faces unfavorable valuation risk from a new financier at the second stage due to asymmetric information, and may even be denied funding and disappear into a ``funding hole." We show theoretically and empirically that the risks are asymmetric for initially angel-funded and initially VC-funded but otherwise identical projects. The risk is elevated with initially VC-backed projects because the original venture capitalist is presumed to decline further financing to all negative-NPV projects in her stable, along with some positive-NPV projects depending on her other opportunities, while an angel declines in all cases. Thus, a positive-NPV project released by a VC enters a diluted pool with more negative-NPV projects than a project released by an angel. On the other hand, the original venture capitalist adds value to all projects in the first period with her guidance and advice and projects that receive follow-on funding have no valuation risk due to asymmetric information. We show that an entrepreneur should choose seed funding from a VC when the follow-on rate of the VC is low or high, but select angel financing for intermediate follow-on rates. We examine seed fundings by the top US angel investors and venture capitalists from 2010-2015 and show that projects released by venture capitalists are less successful raising funds after release, and that follow-on rates by venture capitalists tend to be either high or low, supporting our theoretical findings. Our results are new to the existing literature and offer interesting implications, including that angel financing and VC financing are sometimes complementary, and not always substitutes as in conventional thinking. Angel financing may rescue an entrepreneur when VC financing leads to a funding hole.
SSRN
An entrepreneur usually chooses to receive seed funding for a new project from an angel investor (angel) or a venture capitalist (VC), a choice complicated by the implications of follow-on financing required at the next stage of the venture. The size of the follow-on round is typically much larger than the seed round and the first-stage investors, including the angel almost certainly, and the VC with a significant probability, do not extend follow-on financing. A project released by the original investor faces unfavorable valuation risk from a new financier at the second stage due to asymmetric information, and may even be denied funding and disappear into a ``funding hole." We show theoretically and empirically that the risks are asymmetric for initially angel-funded and initially VC-funded but otherwise identical projects. The risk is elevated with initially VC-backed projects because the original venture capitalist is presumed to decline further financing to all negative-NPV projects in her stable, along with some positive-NPV projects depending on her other opportunities, while an angel declines in all cases. Thus, a positive-NPV project released by a VC enters a diluted pool with more negative-NPV projects than a project released by an angel. On the other hand, the original venture capitalist adds value to all projects in the first period with her guidance and advice and projects that receive follow-on funding have no valuation risk due to asymmetric information. We show that an entrepreneur should choose seed funding from a VC when the follow-on rate of the VC is low or high, but select angel financing for intermediate follow-on rates. We examine seed fundings by the top US angel investors and venture capitalists from 2010-2015 and show that projects released by venture capitalists are less successful raising funds after release, and that follow-on rates by venture capitalists tend to be either high or low, supporting our theoretical findings. Our results are new to the existing literature and offer interesting implications, including that angel financing and VC financing are sometimes complementary, and not always substitutes as in conventional thinking. Angel financing may rescue an entrepreneur when VC financing leads to a funding hole.
Partial Equilibrium Thinking in General Equilibrium
SSRN
We develop a theory of "Partial Equilibrium Thinking" (PET), whereby agents fail to understand the general equilibrium consequences of their actions when inferring information from endogenous outcomes. PET generates a two-way feedback effect between outcomes and beliefs, which can lead to arbitrarily large deviations from fundamentals. In financial markets, PET equilibrium outcomes exhibit over-reaction, excess volatility, high trading volume, and return predictability. We extend our model to allow for rationality of higher-order beliefs, general forms of model misspecification, and heterogenous agents. We show that more sophisticated agents may contribute to greater departures from rationality. We also draw a distinction between models of misinference and models with biases in Bayesian updating, and study how these two departures from rationality interact. Misinference from mistakenly assuming the world is rational amplifies biases in Bayesian updating.
SSRN
We develop a theory of "Partial Equilibrium Thinking" (PET), whereby agents fail to understand the general equilibrium consequences of their actions when inferring information from endogenous outcomes. PET generates a two-way feedback effect between outcomes and beliefs, which can lead to arbitrarily large deviations from fundamentals. In financial markets, PET equilibrium outcomes exhibit over-reaction, excess volatility, high trading volume, and return predictability. We extend our model to allow for rationality of higher-order beliefs, general forms of model misspecification, and heterogenous agents. We show that more sophisticated agents may contribute to greater departures from rationality. We also draw a distinction between models of misinference and models with biases in Bayesian updating, and study how these two departures from rationality interact. Misinference from mistakenly assuming the world is rational amplifies biases in Bayesian updating.
Partisan Investment Cycles
SSRN
I show that an alignment in partisan affiliation between a firm's management and the president in power is associated with higher investment levels. Using insider trading data, I find that managers become more optimistic about their companies' prospects when their preferred party is in power. This optimism-driven increase in investment is associated with lower profitability and stock returns. Overall, managers' partisan beliefs produce heterogeneous expectations about future cash flows and distort investment decisions.
SSRN
I show that an alignment in partisan affiliation between a firm's management and the president in power is associated with higher investment levels. Using insider trading data, I find that managers become more optimistic about their companies' prospects when their preferred party is in power. This optimism-driven increase in investment is associated with lower profitability and stock returns. Overall, managers' partisan beliefs produce heterogeneous expectations about future cash flows and distort investment decisions.
Power Grab: Activists, Short Sellers, and Disagreement
SSRN
We study events in which activist hedge funds and short sellers target the same stock, using European data on activism and mandatory disclosures of large short positions. The likelihood of activist targeting and the probability of a successful campaign are higher in the presence of large short sellers, with an even larger effect when investor disagreement is high. However, hedge fund activism does not affect the likelihood of a large short position. Using a calendar-time portfolio approach, we show that hedge fund activism generates higher abnormal returns when large short sellers are present, especially when activists achieve their stated goals.
SSRN
We study events in which activist hedge funds and short sellers target the same stock, using European data on activism and mandatory disclosures of large short positions. The likelihood of activist targeting and the probability of a successful campaign are higher in the presence of large short sellers, with an even larger effect when investor disagreement is high. However, hedge fund activism does not affect the likelihood of a large short position. Using a calendar-time portfolio approach, we show that hedge fund activism generates higher abnormal returns when large short sellers are present, especially when activists achieve their stated goals.
Pricing without no-arbitrage condition in discrete time
arXiv
arXiv
In a discrete time setting, we study the central problem of giving a fair price to some financial product. For several decades, the no-arbitrage conditions and the martingale measures have played a major role for solving this problem. We propose a new approach for estimating the super-replication cost based on convex duality instead of martingale measures duality: The prices are expressed using Fenchel conjugate and bi-conjugate without using any no-arbitrage condition.The super-hedging problem resolution leads endogenously to a weak no-arbitrage condition called Absence of Instantaneous Profit (AIP) under which prices are finite. We study this condition in details, propose several characterizations and compare it to the no-arbitrage condition.
Product Market Threats and Leases
SSRN
We document that product market threats increase the use of leased capital, an effect that is robust to endogeneity considerations. We further show that the positive relation between product market threats and leases is larger for firms that are financially constrained, operate in volatile environments, and likely face predation risk. In additional analyses, we find that the increased use of leases in the presence of product market threats mitigates the effects of product market threats on growth and profitability. Collectively, the findings identify product market threats as a non-tax rate factor that increases the use of leased capital.
SSRN
We document that product market threats increase the use of leased capital, an effect that is robust to endogeneity considerations. We further show that the positive relation between product market threats and leases is larger for firms that are financially constrained, operate in volatile environments, and likely face predation risk. In additional analyses, we find that the increased use of leases in the presence of product market threats mitigates the effects of product market threats on growth and profitability. Collectively, the findings identify product market threats as a non-tax rate factor that increases the use of leased capital.
Pseudo-Hermiticity, Martingale Processes and Non-Arbitrage Pricing
arXiv
arXiv
Financial models based on the Wick product, and White Noise formalism have previously been suggested in order to incorporate integrals with respect to fractional Brownian motion. It has also been pointed out that this leads naturally to a quantum mechanical interpretation of the financial market. In this article we pursue this idea further, and in particular show how the framework of quantum probability can be used to construct Martingales, without relying on Brownian integrals. We go on to suggest benefits of doing so, and avenues for future work.
REDEFINING SKILL-SET IN THE ERA OF DIGITIZATION - A CONCEPTUAL STUDY
SSRN
In today‟s world, it is imperative to ensure that society, regions, countries, economies, and humans at large adapt to the new age of existence. The year 2020 has demonstrated this very distinctively due to the “new normal†way. In 2020, we have consumed more information by way of digital data and video in-home, in-hand, and on-demand. Information and Communication Technology (ICT) has contributed in a large way to making this rapid change. The first step to ensure this digital transformation is to "digitize" the data. This Digitization (“digitize†the data) process has encompassed the entire business ecosystem, and thereby investing in Digitization and implementing it correctly within the organization has become a need of the hour. This transformation can be a critical proposition since organizations look for specialized skill-set within their workforce to achieve their business objectives and to increase business value. Sourcing people with a specific skill-set can be a considerable challenge for an organization. Digitization will bring growth to the business but requires support from individuals with the appropriate skill set. This study will focus on the importance of the new skill-sets that will shape the Digitization within an organization and how the correct type of skill-set will be the key to success. The study of redefining skill-set in the era of digitation will also throw light on how it will impact organizational performance and how it will mutually benefit both the organization and its people.
SSRN
In today‟s world, it is imperative to ensure that society, regions, countries, economies, and humans at large adapt to the new age of existence. The year 2020 has demonstrated this very distinctively due to the “new normal†way. In 2020, we have consumed more information by way of digital data and video in-home, in-hand, and on-demand. Information and Communication Technology (ICT) has contributed in a large way to making this rapid change. The first step to ensure this digital transformation is to "digitize" the data. This Digitization (“digitize†the data) process has encompassed the entire business ecosystem, and thereby investing in Digitization and implementing it correctly within the organization has become a need of the hour. This transformation can be a critical proposition since organizations look for specialized skill-set within their workforce to achieve their business objectives and to increase business value. Sourcing people with a specific skill-set can be a considerable challenge for an organization. Digitization will bring growth to the business but requires support from individuals with the appropriate skill set. This study will focus on the importance of the new skill-sets that will shape the Digitization within an organization and how the correct type of skill-set will be the key to success. The study of redefining skill-set in the era of digitation will also throw light on how it will impact organizational performance and how it will mutually benefit both the organization and its people.
Regional GDP Distortion, Information Advantages, and Analyst Forecast Accuracy
SSRN
The reliability of China’s GDP data has been questioned for a long time. Prior studies have discussed the causes of GDP distortion in China, but the evidence on the economic consequences is scant. This paper examines the economic consequences of regional GDP distortion from the perspective of analyst forecasts. We find that regional GDP distortion leads to lower analyst forecast accuracy, and this result is robust to potential endogeneity. Further investigations show that analysts with information advantages have the ability to resist the distorted GDP data and issue accurate forecasts. Political pressure is another factor leading to inaccurate analyst forecasts. Our paper contributes to the literature by highlighting the importance of the reliability of GDP figures as a determinant of analyst forecast accuracy.
SSRN
The reliability of China’s GDP data has been questioned for a long time. Prior studies have discussed the causes of GDP distortion in China, but the evidence on the economic consequences is scant. This paper examines the economic consequences of regional GDP distortion from the perspective of analyst forecasts. We find that regional GDP distortion leads to lower analyst forecast accuracy, and this result is robust to potential endogeneity. Further investigations show that analysts with information advantages have the ability to resist the distorted GDP data and issue accurate forecasts. Political pressure is another factor leading to inaccurate analyst forecasts. Our paper contributes to the literature by highlighting the importance of the reliability of GDP figures as a determinant of analyst forecast accuracy.
Regulatory Examinations and Life Insurance Development
SSRN
The solvency and market conduct regulations play a crucial role in supporting life insurance development by boosting consumer confidence and securing a stable environment for insurers to write business. The regulation encapsulates not only the legal framework but also its enforcement. We focus on the latter and investigate the impact of solvency and market conduct examinations on life insurance development within a homogenous legal environment in the USA. The results show that more stringent regulators with respect to solvency examinations deter life insurers from their markets and channel to those markets with lenient examiners, hurting the development of life insurance in the stringent states. Additionally, regulators boost consumer confidence by providing robust market conduct practices which results in higher life insurance demand. The study has implications for the debates about the pros and cons of the current state-led regulation in the USA, the substitutability between market discipline and regulation, and the general benefits/costs of regulation for insurance market development.
SSRN
The solvency and market conduct regulations play a crucial role in supporting life insurance development by boosting consumer confidence and securing a stable environment for insurers to write business. The regulation encapsulates not only the legal framework but also its enforcement. We focus on the latter and investigate the impact of solvency and market conduct examinations on life insurance development within a homogenous legal environment in the USA. The results show that more stringent regulators with respect to solvency examinations deter life insurers from their markets and channel to those markets with lenient examiners, hurting the development of life insurance in the stringent states. Additionally, regulators boost consumer confidence by providing robust market conduct practices which results in higher life insurance demand. The study has implications for the debates about the pros and cons of the current state-led regulation in the USA, the substitutability between market discipline and regulation, and the general benefits/costs of regulation for insurance market development.
Rodeo or Ascot: which hat to wear at the crypto race?
SSRN
This paper sheds light on the dynamics of the cryptocurrency (CC) sector. Bymodeling its dynamics via a stochastic volatility with correlated jumps (SVCJ)model in combination with several rolling windows, it is possible to capturethe extreme ups and downs of the CC market and to understand its dynamics.Through this approach, we obtain time series for each parameter of the model.Even though parameter estimates change over time and depend on the windowsize, several recurring patterns are observable which are robust to changes ofthe window size and supported by clustering of parameter estimates: duringbullish periods, volatility stabilizes at low levels and the size and volatility ofjumps in mean decreases. In bearish periods though, volatility increases andtakes longer to return to its long-run trend. Furthermore, jumps in mean andjumps in volatility are independent. With the rise of the CC market in 2017, alevel shift of the volatility of volatility occurred. All codes are available onQuantlet.com
SSRN
This paper sheds light on the dynamics of the cryptocurrency (CC) sector. Bymodeling its dynamics via a stochastic volatility with correlated jumps (SVCJ)model in combination with several rolling windows, it is possible to capturethe extreme ups and downs of the CC market and to understand its dynamics.Through this approach, we obtain time series for each parameter of the model.Even though parameter estimates change over time and depend on the windowsize, several recurring patterns are observable which are robust to changes ofthe window size and supported by clustering of parameter estimates: duringbullish periods, volatility stabilizes at low levels and the size and volatility ofjumps in mean decreases. In bearish periods though, volatility increases andtakes longer to return to its long-run trend. Furthermore, jumps in mean andjumps in volatility are independent. With the rise of the CC market in 2017, alevel shift of the volatility of volatility occurred. All codes are available onQuantlet.com
SEC v. Telegram: A Global Message
SSRN
In 2020, pursuant to a request by the U.S. Securities and Exchange Commission (SEC) in SEC v. Telegram, Judge Castel of the Southern District of New York ordered a global preliminary injunction against the sale of a new cryptoasset. Although the order was issued prior to trial, the proposed issuer’s eventual decision not to appeal means that this order is the latest judicial pronouncement about the global impact of U.S. securities laws in the rapidly developing cryptoasset ecosystem.While there are potentially valid reasons to apply U.S. securities laws extraterritorially, there are even more that make this approach problematic. Not only is the U.S. approach based on a statute that dates back nearly 90 years, but the test being used to determine application of that statute dates back to 1946. Neither the statute nor the test were developed with the special attributes of cryptoassets in mind, yet the SEC has insisted on a relatively aggressive and nearly monolithic response to crypto offerings, saying that only Bitcoin, Ethereum, and a few non-convertible forms of crypto should be beyond the securities law requirements.By insisting on application of the U.S. law to assets sold by foreign issuers to foreign investors, the U.S. is running the risk of decreasing the possibility of international consensus, diminishing the international influence of the U.S., and reducing potential support for otherwise valid and viable business operations for both investors and entrepreneurs. This article makes the case that it is unwise to demand such a wide extraterritorial application of U.S. law. Instead, it suggests that the SEC change its operational focus, or that courts choose not to follow the rule announced in SEC v. Telegram. If neither of those occurs, Congress should step in to redirect such efforts in the future.
SSRN
In 2020, pursuant to a request by the U.S. Securities and Exchange Commission (SEC) in SEC v. Telegram, Judge Castel of the Southern District of New York ordered a global preliminary injunction against the sale of a new cryptoasset. Although the order was issued prior to trial, the proposed issuer’s eventual decision not to appeal means that this order is the latest judicial pronouncement about the global impact of U.S. securities laws in the rapidly developing cryptoasset ecosystem.While there are potentially valid reasons to apply U.S. securities laws extraterritorially, there are even more that make this approach problematic. Not only is the U.S. approach based on a statute that dates back nearly 90 years, but the test being used to determine application of that statute dates back to 1946. Neither the statute nor the test were developed with the special attributes of cryptoassets in mind, yet the SEC has insisted on a relatively aggressive and nearly monolithic response to crypto offerings, saying that only Bitcoin, Ethereum, and a few non-convertible forms of crypto should be beyond the securities law requirements.By insisting on application of the U.S. law to assets sold by foreign issuers to foreign investors, the U.S. is running the risk of decreasing the possibility of international consensus, diminishing the international influence of the U.S., and reducing potential support for otherwise valid and viable business operations for both investors and entrepreneurs. This article makes the case that it is unwise to demand such a wide extraterritorial application of U.S. law. Instead, it suggests that the SEC change its operational focus, or that courts choose not to follow the rule announced in SEC v. Telegram. If neither of those occurs, Congress should step in to redirect such efforts in the future.
Shifting Contour of Data Sharing in Financial Market and Regulatory Responses: the UK and Australian Models
SSRN
Since the EU passed the PSD II, countries across the world have or are contemplating a new framework to govern data sharing among different players in financial marketsâ€"a trend called ‘Open Banking’ that requires or encourages banks to share consumer-permissioned banking data with third parties. This concept has been diffused from the EU, UK, to elsewhere. The current Open Banking trend raises a set of intriguing questions: is data sharing a novel thing in the banking sector? Before Open Banking, would banks share their data with third parties, and if so, how? If data sharing did exist in the pre-Open Banking world, why would governments ever bother to introduce Open Banking at all? What are the rationales justifying such regulatory intervention? What do these regulatory responses look like and how effective are they in reacting to concerns? This Article seeks to contribute to the existing literature by systemically contrasting the regulatory models adopted in the UK and Australia. Analyzing key aspects of the regulatory designs of these two models not only underscores the major differences and the rationales underpinning them but helps inform other countries to configure or reflect upon their regulatory designs when introducing similar initiatives.
SSRN
Since the EU passed the PSD II, countries across the world have or are contemplating a new framework to govern data sharing among different players in financial marketsâ€"a trend called ‘Open Banking’ that requires or encourages banks to share consumer-permissioned banking data with third parties. This concept has been diffused from the EU, UK, to elsewhere. The current Open Banking trend raises a set of intriguing questions: is data sharing a novel thing in the banking sector? Before Open Banking, would banks share their data with third parties, and if so, how? If data sharing did exist in the pre-Open Banking world, why would governments ever bother to introduce Open Banking at all? What are the rationales justifying such regulatory intervention? What do these regulatory responses look like and how effective are they in reacting to concerns? This Article seeks to contribute to the existing literature by systemically contrasting the regulatory models adopted in the UK and Australia. Analyzing key aspects of the regulatory designs of these two models not only underscores the major differences and the rationales underpinning them but helps inform other countries to configure or reflect upon their regulatory designs when introducing similar initiatives.
Stock price informativeness and the propagation of idiosyncratic shocks by institutional investors
SSRN
We study the market efficiency implications of the propagation of idiosyncratic shocks by institutional investors. We show that a stock's price informativeness decreases due to non-fundamental reasons when its institutional investors are exposed to stocks hit by natural disasters. Results are consistent with disaster-exposed investors shifting their attention towards disaster-hit stocks. The decrease in informativeness feeds into a lower sensitivity of corporate investment to stock prices. We also document that disaster exposed institutional investors mostly shift attention away from stocks that represent a small portfolio weight, while they tilt portfolios towards stocks with high portfolio weight, which experience an increase of their price informativeness.
SSRN
We study the market efficiency implications of the propagation of idiosyncratic shocks by institutional investors. We show that a stock's price informativeness decreases due to non-fundamental reasons when its institutional investors are exposed to stocks hit by natural disasters. Results are consistent with disaster-exposed investors shifting their attention towards disaster-hit stocks. The decrease in informativeness feeds into a lower sensitivity of corporate investment to stock prices. We also document that disaster exposed institutional investors mostly shift attention away from stocks that represent a small portfolio weight, while they tilt portfolios towards stocks with high portfolio weight, which experience an increase of their price informativeness.
TOWARDS A (HUMBLE) STANDARD SOCIAL VALUE METRIC
SSRN
In literature, several approaches have been adopted to define and measure the value that companies generate to society. However, none of this research lines have yet produced a metric that could be considered standard and social to measure and compare the social value generated for companies, regardless of their size, industry and geography.Our research aims to contribute in filling this gap. To do so, we try to grasp what corporate standard social value should represent and analyze how some prominent, previous lines of work in the field of economic and social value fit into it. Based on the study of these approaches, we build up a proposal of our own, that can provide useful information for primary stakeholders, beyond shareholders and financial analysts, upon which they can take action.
SSRN
In literature, several approaches have been adopted to define and measure the value that companies generate to society. However, none of this research lines have yet produced a metric that could be considered standard and social to measure and compare the social value generated for companies, regardless of their size, industry and geography.Our research aims to contribute in filling this gap. To do so, we try to grasp what corporate standard social value should represent and analyze how some prominent, previous lines of work in the field of economic and social value fit into it. Based on the study of these approaches, we build up a proposal of our own, that can provide useful information for primary stakeholders, beyond shareholders and financial analysts, upon which they can take action.
Technology Adoption and Leapfrogging: Racing for Mobile Payments
SSRN
Paying with a mobile phone is a cutting-edge innovation transforming the global payment industry. However, some advanced economies like the U.S. are lagging behind in mobile payment adoption. We construct a dynamic model with sequential payment innovations to explain this puzzle, which uncovers how advanced economies’ past success in adopting card payment drags their feet in the mobile payment race. Our calibrated model matches the cross-country adoption patterns of card and mobile payments, and also explains why advanced and developing countries favor different mobile payment solutions. Based on the model, we conduct several quantitative exercises for welfare and policy analyses.
SSRN
Paying with a mobile phone is a cutting-edge innovation transforming the global payment industry. However, some advanced economies like the U.S. are lagging behind in mobile payment adoption. We construct a dynamic model with sequential payment innovations to explain this puzzle, which uncovers how advanced economies’ past success in adopting card payment drags their feet in the mobile payment race. Our calibrated model matches the cross-country adoption patterns of card and mobile payments, and also explains why advanced and developing countries favor different mobile payment solutions. Based on the model, we conduct several quantitative exercises for welfare and policy analyses.
The Business Cycle and the Cycles of Behavioral Economics
SSRN
Business cycles have historically been an important topic for behaviorally orientedeconomists. The concept of an economic and financial cycle based on interlocking mechanismsleading from the recession to the boom was developed in the 18th and 19th century. The earlybehavioral economics of the cycle came in the form of human foibles affecting business peopleand investors, such as the tendencies towards mania (excitement in the boom) and panic in thecrisis. The turn to the 20th century brings an explicit treatment of the notions of time anduncertainty in economic decisions. Hence, the view of businesses as forecasters and the notionof optimism and pessimism take center stage in business cycle theory. As mathematics entersbusiness cycle economics around the 1930s, expectations become an ever more important topic.Starting with notions of simple extrapolation, it becomes possible to make explicit thecumulative mechanisms behind economic tides. The 1960s see rising tensions between viewsof rationality and lead to the introduction of rational expectations. This development in turninitiates important work on bounded rationality. Interestingly, this competition of views onrationality is historically intertwined with the business cycle itself. Times of deep recessionsand crises are also times when economics becomes receptive for psychological views on humandecision making.
SSRN
Business cycles have historically been an important topic for behaviorally orientedeconomists. The concept of an economic and financial cycle based on interlocking mechanismsleading from the recession to the boom was developed in the 18th and 19th century. The earlybehavioral economics of the cycle came in the form of human foibles affecting business peopleand investors, such as the tendencies towards mania (excitement in the boom) and panic in thecrisis. The turn to the 20th century brings an explicit treatment of the notions of time anduncertainty in economic decisions. Hence, the view of businesses as forecasters and the notionof optimism and pessimism take center stage in business cycle theory. As mathematics entersbusiness cycle economics around the 1930s, expectations become an ever more important topic.Starting with notions of simple extrapolation, it becomes possible to make explicit thecumulative mechanisms behind economic tides. The 1960s see rising tensions between viewsof rationality and lead to the introduction of rational expectations. This development in turninitiates important work on bounded rationality. Interestingly, this competition of views onrationality is historically intertwined with the business cycle itself. Times of deep recessionsand crises are also times when economics becomes receptive for psychological views on humandecision making.
Time-varying risk aversion and currency excess returns
SSRN
This paper documents an economically significant risk premium associated with a currency’s sensitivity to time-varying risk aversion. Consequently, an investment strategy that takes a long (short) position in currencies with high (low) sensitivity to the aggregate market risk aversion yields significantly positive excess returns. While advanced market currencies including the Euro, Yen and Swiss Francs dominate the short end of these portfolios with low sensitivity to risk aversion, emerging market currencies including the Brazilian Real, Mexican Peso and Turkish Lira are found to be the most sensitive currencies to risk aversion. The excess returns from the proposed strategy are significant even after controlling for systematic equity market risk factors as well as liquidity risk and cannot be explained by measures of economic conditions or uncertainty. Interestingly the excess returns generated by the risk aversion based strategy are found to have significant loadings on global momentum, suggesting possible commonality in the behavioral drivers of anomalies in the global equity and currency markets. The findings highlight the role of behavioral factors as predictor of currency excess returns with significant investment implications.
SSRN
This paper documents an economically significant risk premium associated with a currency’s sensitivity to time-varying risk aversion. Consequently, an investment strategy that takes a long (short) position in currencies with high (low) sensitivity to the aggregate market risk aversion yields significantly positive excess returns. While advanced market currencies including the Euro, Yen and Swiss Francs dominate the short end of these portfolios with low sensitivity to risk aversion, emerging market currencies including the Brazilian Real, Mexican Peso and Turkish Lira are found to be the most sensitive currencies to risk aversion. The excess returns from the proposed strategy are significant even after controlling for systematic equity market risk factors as well as liquidity risk and cannot be explained by measures of economic conditions or uncertainty. Interestingly the excess returns generated by the risk aversion based strategy are found to have significant loadings on global momentum, suggesting possible commonality in the behavioral drivers of anomalies in the global equity and currency markets. The findings highlight the role of behavioral factors as predictor of currency excess returns with significant investment implications.
Towards Financial Inclusion in South Asia: A Youth and Gender Perspective
SSRN
The youthful population of South Asia, having almost one-third of the population below the age of 15 years old, seems also to have a great share in the future alongside the risk of being NEET with a persisting gender gap. This makes important for South Asian countries to put a gender- responsive policy framework for the youth empowerment at the heart of their efforts towards the 2030 Agenda. Increasing youth’s financial inclusion at the individual level would also provide development benefits especially for developing and least developed countries. This paper, after constructing a multidimensional financial inclusion index, shows evidence on how to increase the formal financial inclusion among the South Asian youth considering also gendered effects and it provides policy recommendations accordingly.
SSRN
The youthful population of South Asia, having almost one-third of the population below the age of 15 years old, seems also to have a great share in the future alongside the risk of being NEET with a persisting gender gap. This makes important for South Asian countries to put a gender- responsive policy framework for the youth empowerment at the heart of their efforts towards the 2030 Agenda. Increasing youth’s financial inclusion at the individual level would also provide development benefits especially for developing and least developed countries. This paper, after constructing a multidimensional financial inclusion index, shows evidence on how to increase the formal financial inclusion among the South Asian youth considering also gendered effects and it provides policy recommendations accordingly.
Trading and market efficiency in summer
SSRN
The fall in stock-market trading during summer has real effects on stock-market efficiency. I examine the market efficiency of momentum, post-announcement earnings drift, and idiosyncratic volatility (IVOL). The profitability of a momentum winner-loser strategy is significantly enhanced in summer, thus accentuating momentum-related inefficiency. For positive unexpected earnings in summer, market inefficiency is attenuated, but for negative unexpected earnings market inefficiency is accentuated. The IVOL inefficiency is an exclusively summer effect. Once this effect is controlled for, a positive relation emerges between IVOL quintiles and alphas. Overall, market inefficiency appears to be accentuated in summer due to the fall in trading.
SSRN
The fall in stock-market trading during summer has real effects on stock-market efficiency. I examine the market efficiency of momentum, post-announcement earnings drift, and idiosyncratic volatility (IVOL). The profitability of a momentum winner-loser strategy is significantly enhanced in summer, thus accentuating momentum-related inefficiency. For positive unexpected earnings in summer, market inefficiency is attenuated, but for negative unexpected earnings market inefficiency is accentuated. The IVOL inefficiency is an exclusively summer effect. Once this effect is controlled for, a positive relation emerges between IVOL quintiles and alphas. Overall, market inefficiency appears to be accentuated in summer due to the fall in trading.
Transformation of Business in Developing Distribution Strategy for Rural Market
SSRN
In the Indian market, marketing attains a principally urban preconception. Therefore, there was especially less attempt from industries to make goods and services available to fulfill rural market requirements. An unconcerned attitude moreover because of the hypothesis that the rural customer is not having purchasing capacity to buy luxurious or branded products as they are financially poor. Moreover, the lacks of transportation and communication links were also responsible for the neglect of the rural market by the business firms.In the coming decade, agriculture sector development will contribute well to the overall development of the rural economy. These developments in the rural areas led several industries to take curiosity in the country markets and demanding to reach the rural communities. This transformative role of business in developing a distribution network strategically will satisfy the basic motto of marketing i.e. making goods and services available to the customer.
SSRN
In the Indian market, marketing attains a principally urban preconception. Therefore, there was especially less attempt from industries to make goods and services available to fulfill rural market requirements. An unconcerned attitude moreover because of the hypothesis that the rural customer is not having purchasing capacity to buy luxurious or branded products as they are financially poor. Moreover, the lacks of transportation and communication links were also responsible for the neglect of the rural market by the business firms.In the coming decade, agriculture sector development will contribute well to the overall development of the rural economy. These developments in the rural areas led several industries to take curiosity in the country markets and demanding to reach the rural communities. This transformative role of business in developing a distribution network strategically will satisfy the basic motto of marketing i.e. making goods and services available to the customer.
Unbiased deep solvers for parametric PDEs
arXiv
arXiv
We develop several deep learning algorithms for approximating families of parametric PDE solutions. The proposed algorithms approximate solutions together with their gradients, which in the context of mathematical finance means that the derivative prices and hedging strategies are computed simulatenously. Having approximated the gradient of the solution one can combine it with a Monte-Carlo simulation to remove the bias in the deep network approximation of the PDE solution (derivative price). This is achieved by leveraging the Martingale Representation Theorem and combining the Monte Carlo simulation with the neural network. The resulting algorithm is robust with respect to quality of the neural network approximation and consequently can be used as a black-box in case only limited a priori information about the underlying problem is available. We believe this is important as neural network based algorithms often require fair amount of tuning to produce satisfactory results. The methods are empirically shown to work for high-dimensional problems (e.g. 100 dimensions). We provide diagnostics that shed light on appropriate network architectures.
Volmageddon and the Failure of Short Volatility Products
SSRN
The rapid growth of exchange traded products (ETPs) has raised concerns about their implications for financial stability. A case in point is the abrupt market crash of short volatility strategies on February 5th 2018. In this paper, we describe this “Volmageddon†event and illustrate the risks associated with hedge and leverage rebalancing when markets are highly concentrated and volatile. The Volmageddon episode provides valuable risk management lessons because it illustrates the pitfalls of hedge and leverage rebalancing and is reminiscent of the losses incurred through portfolio insurance schemes.
SSRN
The rapid growth of exchange traded products (ETPs) has raised concerns about their implications for financial stability. A case in point is the abrupt market crash of short volatility strategies on February 5th 2018. In this paper, we describe this “Volmageddon†event and illustrate the risks associated with hedge and leverage rebalancing when markets are highly concentrated and volatile. The Volmageddon episode provides valuable risk management lessons because it illustrates the pitfalls of hedge and leverage rebalancing and is reminiscent of the losses incurred through portfolio insurance schemes.
When Two Become One: Foreign Capital and Household Credit Expansion
SSRN
We employ data from financial accounts for 31 countries to trace the flow of financial capital through the economy and identify the ultimate sources of funds behind credit expansions. Removing the veil of financial intermediation reveals that foreign capital has financed most of the secular increase in credit-to-GDP ratios between 1980 and today. In the medium term, household credit financed with foreign capital is the crucial link between credit expansions and future economic performance. An increase in household credit financed from abroad is associated with a contemporaneous reallocation from the tradable to the non-tradable sector, and it predicts lower output and higher unemployment over the following years. Foreign-financed household credit expansion also predicts low returns on bank equities and housing. On the other hand, domestically financed credit neither predicts business cycle dynamics nor returns. Furthermore, household credit financed from abroad is a robust predictor of financial crises and the flight of foreign capital is the major force behind low credit growth after crises.
SSRN
We employ data from financial accounts for 31 countries to trace the flow of financial capital through the economy and identify the ultimate sources of funds behind credit expansions. Removing the veil of financial intermediation reveals that foreign capital has financed most of the secular increase in credit-to-GDP ratios between 1980 and today. In the medium term, household credit financed with foreign capital is the crucial link between credit expansions and future economic performance. An increase in household credit financed from abroad is associated with a contemporaneous reallocation from the tradable to the non-tradable sector, and it predicts lower output and higher unemployment over the following years. Foreign-financed household credit expansion also predicts low returns on bank equities and housing. On the other hand, domestically financed credit neither predicts business cycle dynamics nor returns. Furthermore, household credit financed from abroad is a robust predictor of financial crises and the flight of foreign capital is the major force behind low credit growth after crises.
Wild Randomness, and the application of Hyperbolic Diffusion in Financial Modelling
arXiv
arXiv
The application of the Cauchy distribution has often been discussed as a potential model of the financial markets. In particular the way in which single extreme, or "Black Swan", events can impact long term historical moments, is often cited. In this article we show how one can construct Martingale processes, which have marginal distributions that tend to the Cauchy distribution in the large volatility limit. This provides financial justification to approaches discussed by other authors, and highlights an example of how quantum probability can be used to construct non-Gaussian Martingales. We go on to illustrate links with hyperbolic diffusion, and discuss the insight this provides.
