Research articles for the 2021-04-09

Long, Cheng,Lucey, Brian M.,Yarovaya, Larisa
This paper investigates the role, if any, played by the social media platform Reddit, in the events around the GameStop short squeeze in early 2021. In particular, we analyse the impact of discussions on the r/WallStreetBets subreddit on the price dynamics of the American online retailer GameStop. We perform textual analysis on 10.8m comments and surface the relationships between the comment sentiments and 1-min GameStop returns. Results indicate that both \textit{tone} and number of comments influence GME intraday returns. Sentiments extracted from longer threads have a greater influence. Fear is the dominant sentiment in all comments, while comments that express a Sad sentiment show the most significant impact. While investors may just like the stock, it appears that fear and loathing also are important.

A GPS Navigator to Monitor Risks in Emerging Economies: The Vulnerability Dashboard
Alonso Alvarez, Irma,Molina, Luis
This paper presents a simple, transparent and model-free framework for monitoring the build-up of vulnerabilities in emerging economies that may affect financial stability in Spain through financial, foreign direct investment or trade linkages, or via global turbulences. The vulnerability dashboards proposed are based on risk percentiles for a set of 34 key indicators according to their historical and cross-section frequency distributions. The framework covers financial market variables, macroeconomic fundamentals â€"which are grouped into real, fiscal, banking and external variablesâ€" and institutional quality and political indicators. This methodology is a valuable complement to other existing tools such as the Basel credit-to-GDP gap and vulnerability indices.

An Analysis of Volatility Clustering of Equity Factor Strategies
Vojtko, Radovan,Cisár, Dominik
Volatility clustering is a well-known effect in equity markets. In simple meaning, volatility clustering refers to a tendency of large changes in asset prices to follow large changes and small changes in asset prices to follow small changes. We tested two hypotheses: (1) firstly, if there is a volatility clustering present in equity factor strategies, (2) secondly, whether past factor volatility predicts future factor performance. We were able to confirm the first hypothesis. However, a factor allocation trading strategy based on volatility predictability doesn’t perform well.

Board Conduct in Banks
Agarwal, Samanvaya,Kamath, Saipriya,Subramanian, Krishnamurthy,, Prasanna
We examine private and confidential minutes of board meetings of a majority of Indian banks, and offer insights into the issues tabled and discussed in bank boards. We find that risk issues account for only 10% of the issues tabled with regulation and compliance accounting for the most (41%) followed by business strategy (31%). Only 18% of the issues are deliberated in detail. Examining the minutes of risk management committee meetings, we find that only 31% of the issues tabled are forward-looking. Using a simple model, we infer that bank boards under-invest in risk and over-invest in regulation and compliance.

Common Ownership and Merger Control Enforcement
Azar, José,Tzanaki, Anna
Common ownership fundamentally upsets the well-settled merger enforcement ecosystem. Not only it challenges basic principles informing merger policy such as the presumed profitability of mergers for the merging firms and the merger-specificity of potential efficiencies but also it works against implementing tools and presumptions in merger practice such as concentration indices for screening out unproblematic from potentially harmful mergers. The incremental effect of a merger taking place in an environment of common ownership may be either smaller or larger by comparison to a counterfactual with no common ownership. The sign and size of the merger effect will depend on the relative post-merger stakes of the common shareholders in the merging firms vis-à-vis any stakes in non-merging rivals in the same industry and on the specific financial structure of the merger deal. Accordingly, merger enforcement should shift towards more fact-specific analysis and antitrust authorities may want to consider developing guidelines.

Estimating Financial Networks by Realized Interdependencies: A Restricted Autoregressive Approach
Caporin, Massimiliano,Erdemlioglu, Deniz,Nasini, Stefano
We develop a network-based vector autoregressive approach to uncover the interactions amongfinancial assets by integrating multiple realized measures based on high-frequency data. Undera restricted parameter structure, our approach allows the capture of cross-sectional and time ependencies embedded in a large panel of assets through the decomposition of these two blocks ofdependencies. We propose a block coordinate descent (BCD) procedure for the least square estimation and investigate its theoretical properties. By integrating realized returns, realized volume, and realized volatilities of 1095 individual U.S. stocks over fifteen years, we illustrate that our approach identifies a large array of interdependencies with a limited computational effort. As a direct consequence of the estimated model, we provide a new ranking for the systemically important financial institutions (SIFIs) and carry out an impulse-response analysis to quantify the effects of adverse shocks on the financial system.

Exploration of IPO motives, oversubscription and flotation costs: Evidence from Bangladesh
Rahman, Md. Tahidur,Hossain, Syed Zabid,Haque, Md. Anwarul,Ashik, Md. Abu Hanif
This study intended to explore the IPO motives and the factors that contributed to IPO oversubscription in Bangladesh. Based on hand-collected data from 101 sample IPO prospectus during 2010â€"19, the study found an average of 10 IPOs per year, mostly (90%) through the fixed-price method. Among the sample companies, 34.7% were in the textile sector, followed by 17.8% in the engineering sector and 12.9% in the pharmaceuticals & chemical sector. This study observed an average subscription times of 23.41, which was much lower than in some other South Asian countries. Regarding the use of IPO proceeds, loan settlement was the prime motive, followed by capital expenditure, and working capital financing. Companies expensed around 6% of the total IPO proceeds as flotation cost. Although the detailed disclosure of the use of IPO proceeds in the prospectus is a common and expected feature, it was found absent in around 12% of companies. The logistic regression model found a statistically significant influence of lot size (LOT), post-IPO capital (PIC), and flotation cost (FTC) on oversubscription times (OST). The contribution of FTC to OST was a novel finding of this study. The study also found the absence of large and reputed domestic and multinational conglomerates in the listing through IPOs. Thus, the current study recommends regulators should take proper drives to customize and familiarize the book-building method, which can entice good companies for listing in stock exchanges through IPO.

Fighting Failure: The Persistent Real Effects of Resolving Distressed Banks
Ivanov, Ivan,Karolyi, Stephen A.
We study the real effects of resolving distressed banks using quasi-experimental variation in resolutions introduced by a threshold-based rule of the FDIC Improvement Act. Our fuzzy regression discontinuity estimates indicate that resolutions lead to reductions in employment and establishments growth of up to six percentage points. These effects are concentrated in small, less urban counties, and translate to large declines in SME lending and increases in corporate bankruptcies. These results imply that large acquiring banks restrict lending to the small business borrowers of distressed target banks. Overall, current bank resolution policy may have costly externalities for local economic activity.

Financial Intermediaries and Agency Problems With and Without Vertical Incentives
Lee, Yeonjoon
I study agency problems between brokers and investors in the retail bond market. Thepresence of suitability or fiduciary regulations, which govern transactions in this setting, canlead to tensions for brokers between maximizing their own profit and acting in the best interestsof their customers. This paper measures the degree to which these conflicting incentivesinfluence brokers by examining the U.S. reverse convertible bond market. While brokers doconsider the profits of investors when making decisions, I estimate that their own profits areroughly three times more important, suggesting the existence of severe agency problems thatreduce consumer welfare.

Functional quantization of rough volatility and applications to the VIX
Bonesini, Ofelia,Callegaro, Giorgia,Jacquier, Antoine (Jack)
We develop a product functional quantization of rough volatility. Since the quantizers can be computed offline, this new technique, built on the insightful works by Luschgy and Pages, becomes a strong competitor in the new arena of numerical tools for rough volatility. We concentrate our numerical analysis to pricing VIX Futures in the rough Bergomi model and compare our results to other recently suggested benchmarks.

Impact of the Dividend Distribution Restriction on the Flow of Credit to Non-Financial Corporations in Spain
Martinez-Miera, David,Sánchez, Raquel Vegas
This article analyses the impact of Recommendation ECB/2020/19 (to credit institutions to refrain from making dividend distributions and performing share buy-backs aimed at remunerating shareholders) on lending by Spanish banks between January and September 2020. Specifically, we use a sample of Spanish banks and exploit the fact that only some of them (those that had already approved dividend pay-outs before the recommendation) were able to pay dividends during the first few months of the pandemic. This quasi-natural experiment allowed us to analyse the impact of dividend restrictions on lending. Banks that limited their dividend distributions during the period analysed extended significantly more credit (12% to 23% more than banks that did not limit them) to non-financial corporations after the entry into force of the recommendation. At the same time, firms that received loans with public guarantees, such as, for example, loans that benefit from the ICO’s guarantee facilities established in response to the COVID-19 pandemic, received more credit from banks that did not make dividend distributions than from those that did, which suggests that these two measures may complement one another.

Intraday Return Predictability in the Crude Oil Market: The Role of EIA Inventory Announcements
Indriawan, Ivan,Lien, Donald D.,Wen, Zhuzhu,Xu, Yahua
We study the impact of the announcements released by the US Energy Information Administration (EIA) crude oil storage every Wednesday at 10:30 ET (the beginning of the third half-hour interval) on intraday return predictability, that is, intraday momentum. Our results indicate that returns on both the first half-hour and third half-hour on EIA announcement days can significantly and positively predict the returns in the last half-hour, whereas, on non-EIA announcement days, only returns in the first half-hour have significant predictability. The dominant source of prediction in the first half-hour return also differs between EIA announcement and non-announcement groups, the market open and overnight component, respectively. EIA announcements contribute to intraday momentum because they attract more informed traders and because the period surrounding their release is often associated with a reduction in liquidity. Substantial economic gains can be made by using efficient intraday predictors as trading signals.

Personal Loan Rates and Household Characteristics: Spain Compared with Other Euro Area Countries
Barcelo, Cristina,Villanueva, Ernesto,Vozmediano, Elena
Interest rates on new lending to households for purposes other than house purchase are generally higher in Spain than in other euro area countries. This may be because borrowers have different characteristics, or because Spanish households pay higher interest rates than similar households in other countries, owing to regulatory aspects, different competition levels or other factors.Data from the Eurosystem’s Household Finance and Consumption Survey, which compiles data on household wealth, debts and income in each euro area country, show that borrowers in Spain have fewer assets and are more likely to be unemployed than those in the other countries analysed. However, these differences between borrowers explain only a small part of the difference between Spanish personal loan rates and those applied in the other euro area countries. In consequence, most of the difference is due to the different way in which Spanish financial institutions assess household characteristics. One possible explanation for the higher interest rates in Spain is that, even when comparing employed persons with similar characteristics, Spanish households have a higher risk of job loss than German and French households and, for the same income level, greater income instability than German households. The survey data also show that Spanish indebted households that pay higher interest rates are also more likely subsequently to fall behind in their debt payments and to experience income declines. In Spain, therefore, high interest rates reflect this greater future income instability.

Spending Like You'll Live Forever
White, James,Haghani, Victor
A sound policy for spending wealth over time is as important as a sensible investment policy. It's a complex problem for taxable individuals with finite, uncertain longevity. A good start is thinking about the simpler problem of how one would spend if immortal. This is exactly the real problem faced by endowments, foundations and other long-lived pools of capital. In this article, we will explain and apply a framework first proposed by Robert C. Merton (1969) to this problem. We will also discuss the important and fascinating result that, under most reasonable sets of assumptions, it is optimal to spend substantially less than the expected real return of the endowment's investment portfolio. We will also give a summary description of some of the key extensions of this model since first introduced.

The Capital Structure of Co-operative Firms: An International Comparative Study
Bazzana, Flavio,Catturani, Ivana
Anecdotal evidence describes how co-operatives are facing a financial crunch, particularly since the economic crash of 2008. Co-operatives are considered to be at greater risk and less profitable than other companies because of the constraints on redistribution of profits and the choice to employ the most vulnerable workers. Moreover, in most countries, there are no specific policies or regulatory frameworks. Thus, the access public funds is hindered. Business, social and governance dimensions affects (mainly negatively) their access to external finance. The role of external financing becomes pivotal for initial success and further development of the co-operative. However, these firms may be able to count on internal sources, including capital from the social base and from management. Unlike other firms, the use of internal sources is not related to the redistribution of profits to owners. The balance between internal and external sources is a focal discussion point. This paper aims to analyse the composition of the capital of co-operatives. In particular, it focusses on the share of internal and external financing and tries to understand the similarities and differences among various typologies of co-operatives established in different countries and operating in different industries.

The Grass is Greener on the Other Side: Comparison of For-Profit and Blended-Value Debt Securities
Danisoglu, Seza
This study compares the yield to maturities on green versus brown corporate bonds on their issue dates. Comparisons are made by taking into account market, firm, bond, and currency characteristics in addition to the green status of the bonds. Analyses show that if these characteristics are not taken into consideration, it is possible to find support for the existence of a ‘greenium’ at a magnitude of about 25 basis points. However, when all yield factors are included in the models, results completely change and indicate that issuers do not necessarily enjoy any cost advantage when they issue green instead of brown bonds. Failure to consider the interactions among all control factors may lead to biased findings regarding the existence of a greenium.

The Legal Criteria for Suitability in MiFID II: Integrating the Client's Sustainability Preferences in the Provision of Investment Services
Mezzanotte, Félix E.
Doubts and uncertainty have persisted in EU sustainable finance policy as to the role that the MiFID II suitability requirements will play in making sure that advisors and portfolio managers adequately satisfy their client’s sustainability preferences. This article sheds light on the link between sustainability preferences and the legal criteria for suitability as set out in article 25(2) MiFID II. More specifically, it offers a critical analysis of whether a client’s ‘sustainability preferences’ should be subsumed into the definition of a client’s ‘investment objectives’ in article 25(2) MiFID II. The European Commission has proposed an approach that conceptually bifurcates, instead of merging, these two concepts. It is argued that the Commission’s approach is suboptimal. It connotes a more fragile model for investor protection insofar as it weakens incentives by investment firms to treat the sustainability preferences of their clients accountably. Conversely, aligning sustainability preferences with investment objectives in article 25(2) MiFID II will ensure that the suitability requirements operate more effectively in safeguarding the interests of investors demanding sustainable finance products. The discussion presented in this article helps us delineate MiFID II investor protection standards in sustainable finance policy.

The impact of Shariah supervisory board and Shariah audit committee on CSR adoption at Islamic banks
Islam, K. M. Anwarul ,Sadekin, Mohammad Shamsus,Rahman, Md. Tahidur,Chowdhury, Md. Ariful Haque
Although corporate social responsibility (CSR) is an extensively studied topic, its determinants in the field of Islamic banking are scarce. In Bangladesh, CSR plays a vital role in gaining customer loyalty and confidence. Therefore, this research aims to identify and analyze the influence of the Shariah Supervisory Board (SSB) and the Shariah Audit Committee (SAC) on CSR adoption in Islamic banks in Bangladesh. The study population is managers and second managers of 160 Islamic bank branches of different commercial banks in Dhaka, Bangladesh. The sampling technique used is convenience sampling where the first available primary data source was used for the research without additional requirements. The study developed a survey questionnaire from examining previous related studies in Islamic banking and CSR context. The final sample size in this research was n = 309, indicating the survey response rate was about 97%. The study used SPSS 23.0 software to interpret the statistical findings, and the findings revealed that support from the SSB and the presence of a strong and effective SAC has a strong correlation with CSR adoption and significantly influence CSR adoption in Islamic banks in Bangladesh. Finally, the study proposes several significant and crucial policy guidelines for Islamic bank branches to adopt CSR activities.

The relationship between announcements of complete mergers and acquisitions and acquirers' abnormal CDS spread changes
Hippert, Benjamin,Uhde, André
Employing a sample of 492 merger and acquisition (M&A) announcements from284 acquirers across North America and Europe between 2005 and 2018, this studyanalyzes the impact of M&A announcements on an acquirers abnormal CDS spreadchanges. We nd that spreads from CDS which are written on acquirers increaseby 310 bps during a symmetric ve-day event window suggesting that investorsexpect an increase in the acquirers credit risk exposure due to M&As. Next tothis baseline nding, we conduct a large variety of sensitivity analyses to gain moreinsight into the driving factors of the rising risk perception of CDS investors due toM&A announcements.

Timing, Recurrence, and Effects of Fixed Assets Revaluation: Evidence from Bangladesh
Rahman, Md. Tahidur,Hossain, Syed Zabid,Haque, Md. Anwarul
This study intended to explore when and how often fixed asset revaluation (FAR) is practiced in Bangladesh and explain the impacts of FAR on net asset value (NAV), stock prices, and debts of companies. Based on 175 listed companies on the Dhaka Stock Exchange, this study found increasing use of the revaluation model where the textile industry witnessed the highest number of revaluations. Most of the listed companies were irregular revaluer, and they performed FAR during the bull market in 2010. Most newly listed companies did it just before their initial public offerings (IPO). The results of the Wilcoxon signed-rank test imply that the changes in NAV, stock prices, and total debts after revaluation were statistically significant. This study found evidence of enhancing debt capacity and stock prices of several companies through improved NAV. The findings will assist regulators to recognize the consequence of revaluation and enable them to take an appropriate stance for controlling abusive and creative reporting. The study will also make investors cautious about companies with revaluation induced assets. This study suggests that companies practicing the revaluation model should perform FAR on regular intervals to reduce information asymmetry about assets’ value and thus help improve investors’ confidence.

Uncertainty and Stock Returns in Energy Markets: A Quantile Regression Approach
Cedic, Samir,Mahmoud, Alwan,Manera, Matteo,Uddin, Gazi Salah
The aim of this paper is to analyze the relationship between different types of uncertainty and stock returns of the renewable energy and the oil & gas sectors. We use the quantile regression approach developed by Koenker and d’Orey (1987; 1994) to assess which uncertainties are the potential drivers of stock returns under different market conditions. We find that the bioenergy and the oil & gas sectors are most sensitive to uncertainties. Both sectors are affected by financial, euro currency, geopolitical and economic policy uncertainties. Our results have several policy implications. Climate policy makers can prioritize policies that support bioenergy in order to reduce the potentially negative effects of uncertainties on bioenergy investment. Investors aiming todiversify their portfolio should be aware that many uncertainties are common drivers of bioenergy and oil & gas returns, the connectedness between assets of these energy types could therefore increase when uncertainty increases.

Volatility Information Transfer along the Supply Chain
Huang, Wenli,Li, Gang,Zhang, Shaojun
We investigate whether and how information about one stock’s future volatility is transferred to other related stocks along the supply chain. The supply chain setting offers an ideal setting to study the effect of cross-firm volatility information transfer because customers and suppliers are closely related. Earnings announcements can have an impact on the announcing firm's short-term, long-term, and forward expected volatility. We find that, on average, the announcing firms’ short-term expected volatility decreases substantially after earnings announcements, while the change of their forward expected volatility is close to zero. Regression analysis shows that the change in the announcing firm’s short-term (forward) volatility has a significant effect on the change in its supply chain partner’s short-term (forward) volatility. The spillover effect is economically meaningful and becomes stronger if customers and suppliers are more closely related. Our results yield new insights on the transfer of volatility related information among firms.

What Triggers Stock Market Jumps?
R. Baker, Scott,Bloom, Nicholas,Davis, Steven J.,Sammon, Marco
We examine next-day newspaper accounts of large daily jumps in 16 national stock markets to assess their proximate cause, clarity as to cause, and the geographic source of the market-moving news. Our sample of 6,200 market jumps yields several findings. First, policy news â€" mainly associated with monetary policy and government spending â€" triggers a greater share of upward than downward jumps in all countries. Second, the policy share of upward jumps is inversely related to stock market performance in the preceding three months. This pattern strengthens in the postwar period. Third, market volatility is much lower after jumps triggered by monetary policy news than after other jumps, unconditionally and conditional on past volatility and other controls. Fourth, greater clarity as to jump reason also foreshadows lower volatility. Clarity in this sense has trended upwards over the past century. Finally, and excluding U.S. jumps, leading newspapers attribute one-third of jumps in their own national stock markets to developments that originate in or relate to the United States. The U.S. role in this regard dwarfs that of Europe and China.