Research articles for the 2021-04-19

A Black-Scholes user's guide to the Bachelier model
Jaehyuk Choi,Minsuk Kwak,Chyng Wen Tee,Yumeng Wang

To cope with the negative oil futures price caused by the COVID-19 recession, global commodity futures exchanges switched the option model from Black-Scholes to Bachelier in April 2020. This study reviews the literature on Bachelier's pioneering option pricing model and summarizes the practical results on volatility conversion, risk management, stochastic volatility, and barrier options pricing to facilitate the model transition. In particular, using the displaced Black-Scholes model as a model family with the Black-Scholes and Bachelier models as special cases, we not only connect the two models but also present a continuous spectrum of model choices.

A Ruffled Mind Makes a Restless Forecast: The Effect of Rest on Analyst Forecast Accuracy
Jannati, Sima,Khalaf, Sarah
This paper tests whether increased rest during holidays improves judgment tasks. We find that earnings forecasts that are issued after holidays are, on average, 55 basis points more accurate than those issued before holidays. This impact is comparable to other determinants of analyst accuracy and is robust to alternative measures and explanations. Supporting the rest channel, we find that exogenous changes that enhance sleep time and quality lead to more accurate forecasts. Overall, we contribute to the literature by linking rest to financial decision-making.

A public micro pension programme in Brazil: Heterogeneity among states and setting up of benefit age adjustment
Renata Gomes Alcoforado,Alfredo D. Egídio dos Reis

Brazil is the 5th largest country in the world, despite of having a ``High Human Development'' it is the 9th most unequal country. The existing Brazilian micro pension programme is one of the safety nets for poor people. To become eligible for this benefit, each person must have an income that is less than a quarter of the Brazilian minimum monthly wage and be either over 65 or considered disabled. That minimum income corresponds to approximately $2$ dollars per day. This paper analyses quantitatively some aspects of this programme in the Public Pension System of Brazil. We look for the impact of some particular economic variables on the number of people receiving the benefit, and seek if that impact significantly differs among the 27 Brazilian Federal Units. We search for heterogeneity. We perform regression and spatial cluster analysis for detection of geographical grouping. We use a database that includes the entire population that receives the benefit. Afterwards, we calculate the amount that the system spends with the beneficiaries, estimate values \textit{per capita} and the weight of each UF, searching for heterogeneity reflected on the amount spent \textit{per capita}. In this latter calculation we use a more comprehensive database, by individual, that includes all people that started receiving a benefit under the programme in the period from 2nd of January 2018 to 6th of April 2018. We compute the expected discounted benefit and confirm a high heterogeneity among UF's as well as gender. We propose achieving a more equitable system by introducing `age adjusting factors' to change the benefit age.

Aiding Long-Term Investment Decisions with XGBoost Machine Learning Model
Ekaterina Zolotareva

The ability to identify stock market trends has obvious advantages for investors. Buying stock on an upward trend (as well as selling it in case of downward movement) results in profit. Accordingly, the start and end-points of the trend are the optimal points for entering and leaving the market. The research concentrates on recognizing stock market long-term upward and downward trends. The key results are obtained with the use of gradient boosting algorithms, XGBoost in particular. The raw data is represented by time series with basic stock market quotes with periods labelled by experts as Trend or Flat. The features are then obtained via various data transformations, aiming to catch implicit factors resulting in a change of stock direction. Modelling is done in two stages: stage one aims to detect endpoints of tendencies (i.e. sliding windows), stage two recognizes the tendency itself inside the window. The research addresses such issues as imbalanced datasets and contradicting labels, as well as the need for specific quality metrics to keep up with practical applicability. The model can be used to design an investment strategy though further research in feature engineering and fine calibration is required.This paper is the full text of the research, presented at the 20th International Conference on Artificial Intelligence and Soft Computing Web System (ICAISC 2021)

Board committee overlap and the use of earnings in CEO compensation contracts
Carter, Mary Ellen,Lynch, Luann J.,Martin, Melissa
Using proxy statement data describing the terms of compensation contracts, we examine how overlapping membership between compensation and audit committees influences the use of earnings metrics in compensation. While research predicts that such overlap could either increase or decrease the reliance on earnings, we find that firms with overlapping directors rely less on earnings-based performance measures in incentive contracts without altering the overall level of performance-contingent cash bonuses. In addition, we provide evidence that firms substitute earnings measures with measures less subject to earnings management. Our findings are robust to potential alternative explanations, extend to an implicit relation between earnings and compensation for a larger sample, and are not driven by the tendency towards an overlapping committee structure more broadly.

Cash Collateral, Creditor Rights, and the Provision of Trade Credit
Billett, Matthew T.,Freeman, Kayla,Gao, Janet
U.S. bankruptcy code classifies receivables as cash collateral and provides strong creditor protection over such collateral. We show that strong creditor rights over cash collateral incentivize firms to extend trade credit to customers. We use the staggered adoption of anti-recharacterization laws as shocks enhancing the creditor rights of non-cash collateral, rendering receivables a less attractive collateral choice. Firms incorporated in treated states reduce trade credit provision and borrow less through receivable-backed loans. This effect is not explained by selling receivables to SPVs and is robust to customer-supplier-pair fixed effects. Reduced trade credit leads to reductions in investment and increased borrowing by customers.

Co-Creation of Innovative Gamification Based Learning: A Case of Synchronous Partnership
Nicholas Dacre,Vasilis Gkogkidis,Peter Jenkins

In higher education, gamification offers the prospect of providing a pivotal shift from traditional asynchronous forms of engagement, to developing methods to foster greater levels of synchronous interactivity and partnership between and amongst teaching and learning stakeholders. The small vein of research that focuses on gamification in teaching and learning contexts, has mainly focused on the implementation of pre-determined game elements. This approach reflects a largely asynchronous approach to the development of learning practices in educational settings, thereby limiting stakeholder engagement in their design and adoption. Therefore, we draw on the theory of co-creation to examine the development process of gamification-based learning as a synchronous partnership between and amongst teaching and learning stakeholders. Empirical insights suggest that students gain a greater sense of partnership and inclusivity as part of a synchronous co-creation gamification-based learning development and implementation process.

Contagious Zombies
Bittner, Christian,Fecht, Falko,Georg, Co-Pierre
Does banks’ zombie lending induced by unconventional monetary policy also allow zombie firms to leverage their trade credit borrowing? We first provide evidence suggesting thatâ€"even in Germanyâ€"particularly weak banks used the European Central Bank’s very long-term refinancing operations (VLTROs) to evergreen exposures to zombie firms, which in turn elevated credit risk. Second, we show that zombie firms, which obtained additional funding from banks relying to a larger extent on VLTRO funding, also increased their accounts payable and advance payments received from downstream and upstream firms. And third, zombie firms that obtained further bank funding and such trade credit after the VLTROs had an elevated expected default probability even compared to average zombie firms. This suggests that suppliers relying on banks’ lending decisions as a signal about borrowers’ credit quality might be misled by banks’ zombie lending to extend more trade credit to zombie firms exposing suppliers to elevated contagion risk.

Corporate credit booms, financial constraints, and the investment nexus
Albuquerque, Bruno
Does corporate debt overhang affect investment over the medium term? To better uncover thisassociation, I argue that we need: (i) firm-level data, (ii) a long-time series, (iii) to measure debtoverhang with a concept of credit accumulation or credit boom; and (iv) to combine leveragewith liquid assets to capture financial constraints. Using firm-level data for a large panel of USnon-financial firms over 1985Q1-2019Q1, I find that debt overhang leads financially vulnerablefirms â€" high debt and low liquid asset holdings â€" to cut back on investment: a 10 p.p. increasein the three-year change in the leverage ratio is associated with 5% lower investment after fiveyears compared to the most resilient firms. My results indicate that financial constraints amplifythe negative effects of persistent corporate credit booms on the real economy.

Credit Allocation and Real Effects of Negative Interest Rates: New Micro-Evidence from Japan
Nakashima, Kiyotaka,Takahashi, Koji
In this paper, we investigate the effects of the negative interest rate policy (NIRP) on bank credit offering and the borrowing behavior of firms by using tens of thousands of bank-firm matched data for Japanese listed firms. By utilizing the difference-in-difference method, we find that the implementation of the NIRP in February 2016 by the Bank of Japan has a significantly negative impact on loans from banks with larger reserves. Furthermore, the negative interest rate led to heterogeneous credit allocation effects, that is, banks with lower capitalization increased loans to risky firms or firms with lower distance-to-default. In addition, non-financial firms that borrow from banks with high exposure to the negative interest rate decreased their fixed investments. Further, we also provide insight into the unintended effects of the NIRP in terms of profitability channel by demonstrating that a bank's high reliance on deposit funding does not necessarily lead to the existence of a reversal rate, unlike previous studies using European data.

Cross-Autocorrelation, Risk Transmission and Contagion in the Global CDS Markets
Cai, Charlie X.,Hu, May,Ye, Xiaoxia
We show that the cross-autocorrelation also exists in the global CDS markets and develop an econometric model to capture the global correlation structure. We study implications on the credit risk transmission and contagion risk. We find four main results: (i) credit risk transmission is through the cross-correlation at regional rather than sectoral level; (ii) time-variation in financial sector's importance is caused by asymmetric responses to the positive and negative macro news; (iii) autocorrelation reduces the contagion risk in Asia while has little impact on other regions; (iv) contagion risks in the US and EU originate from sectors with international influence.

Booth, Richard A.
In a typical securities fraud class action (SFCA) against a publicly traded company under SEC Rule 10b-5, the claim arises from an alleged cover-up of bad news by company agents. When the truth comes out, stock price drops, and fraud-period buyers sue to recover their losses. In most such cases, the merits of the claim turn on whether the plaintiff can plead (and ultimately prove) scienter â€" a wrongful state of mind â€" on the part of those who spoke falsely for the corporation. Moreover, the scienter of the speaker must be imputed to the corporation if the corporation is to be held liable. But the definition of scienter is nebulous at best â€" and especially so because securities fraud of the sort just described typically does not involve any gain for the corporation-defendant. If nothing is to be gained by the corporation-defendant, the alleged deception may be merely accidental or careless. So how do we separate the meritorious wheat from the dismissible chaff? What does it take to plead scienter in a situation in which the speaker is not obviously motivated by the prospect of gain?The definition of scienter has evolved significantly since 1976 when it was first held by SCOTUS to be a required element of any claim under Rule 10b-5. At first, the Court defined scienter simply as a mental state embracing intent to deceive, manipulate, or defraud. The Court also acknowledged at the time that recklessness might suffice to show scienter. But so to define scienter is merely to kick the can down the road. What exactly does it mean to say that recklessness will suffice to prove scienter? The Court has repeatedly declined to require that any motive be pleaded, while itself freely discussing motive when it seems relevant. Thus, lower courts (and plaintiffs) are left to explain why a defendant corporation (or its agents acting on its behalf) would want to mislead the market when the truth is bound to come out anyway. The idea that a corporate agent might lie to the market for no reason at all would seem to suggest that negligence will suffice â€" which is contrary to the rationale for the scienter requirement â€" or that the defendant bears the burden of proof that the statement in question was made without scienter â€" which is contrary to the heightened pleading standard applicable to scienter.Cleverly, SCOTUS has alluded to a possible alternative standard in a series of securities cases not involving Rule 10b-5. The genuine belief test asks whether the corporate spokesperson could or should reasonably believe their own words given known or knowable facts. This is essentially the same standard as the reasonable basis test, which has been applied in the context of actions against broker-dealers and investment advisers since the 1940s. In contrast to the traditional approach to scienter, the genuine-belief reasonable-basis (GBRB) test is an objective one that does not require any reference to motive. It does not rely on any explanation of why a corporate agent might want to deceive the market. The question remains whether the scienter of a corporate agent in connection with a voluntary statement can be imputed to the corporation. As the few courts that have considered it have ruled, the answer to this question is a matter of agency law. But most courts have stopped short of providing a complete answer by relying on the doctrines of vicarious liability or apparent authority. Both answers are problematic. The former imposes strict or absolute liability and is thus inconsistent with the scienter requirement. The latter leaves open the possibility that the corporate agent who speaks to the market may have gone rogue in which case the principal corporation would have a claim against its own agent for any harm it suffers. But the imputation issue does not arise in cases in which the speaker acts with actual authority â€" rather than merely apparent authority â€" or where the corporation ratifies deception by failing promptly to correct.This article traces the evolution of scienter as applied under Rule 10b-5 primarily by analysis of SCOTUS decisions addressing the concept. It contributes to the law and literature by demonstrating the relevance of agency law doctrine, which has been almost entirely ignored by other scholarship on the subject of scienter.

David vs Goliath (You against the Markets), A Dynamic Programming Approach to Separate the Impact and Timing of Trading Costs
Ravi Kashyap

We develop a fundamentally different stochastic dynamic programming model of trading costs. Built on a strong theoretical foundation, our model provides insights to market participants by splitting the overall move of the security price during the duration of an order into the Market Impact (price move caused by their actions) and Market Timing (price move caused by everyone else) components. We derive formulations of this model under different laws of motion of the security prices, starting with a simple benchmark scenario and extending this to include multiple sources of uncertainty, liquidity constraints due to volume curve shifts and relating trading costs to the spread. We develop a numerical framework that can be used to obtain optimal executions under any law of motion of prices and demonstrate the tremendous practical applicability of our theoretical methodology including the powerful numerical techniques to implement them. Our decomposition of trading costs into Market Impact and Market Timing allows us to deduce the zero sum game nature of trading costs. It holds numerous lessons for dealing with complex systems, wherein reducing the complexity by splitting the many sources of uncertainty can lead to better insights in the decision process.

Decomposition scheme matters more than you may think
Anna Naszodi

This paper promotes the application of a path-independent decomposition scheme. Besides presenting some theoretical arguments supporting this decomposition scheme, this study also illustrates the difference between the path-independent decomposition scheme and a popular sequential decomposition with an empirical application of the two schemes. The empirical application is about identifying a directly unobservable phenomenon, i.e. the changing social gap between people from different educational strata, through its effect on marriages and cohabitations. It exploits census data from four waves between 1977 and 2011 about the American, French, Hungarian, Portuguese, and Romanian societies. For some societies and periods, the outcome of the decomposition is found to be highly sensitive to the choice of the decomposition scheme. These examples illustrate the point that a careful selection of the decomposition scheme is crucial for adequately documenting the dynamics of unobservable factors.

Deep Reinforcement Learning in a Monetary Model
Mingli Chen,Andreas Joseph,Michael Kumhof,Xinlei Pan,Rui Shi,Xuan Zhou

We propose using deep reinforcement learning to solve dynamic stochastic general equilibrium models. Agents are represented by deep artificial neural networks and learn to solve their dynamic optimisation problem by interacting with the model environment, of which they have no a priori knowledge. Deep reinforcement learning offers a flexible yet principled way to model bounded rationality within this general class of models. We apply our proposed approach to a classical model from the adaptive learning literature in macroeconomics which looks at the interaction of monetary and fiscal policy. We find that, contrary to adaptive learning, the artificially intelligent household can solve the model in all policy regimes.

Deep reinforcement learning for portfolio management based on the empirical study of chinese stock market
Gang Huang,Xiaohua Zhou,Qingyang Song

According to documents, there has not been a completely artificial intelligence framework with shorting mechanism in continuous action space for portfolio optimization. The objective of this paper is to verify that current cutting-edge technology, deep reinforcement learning, can be applied to portfolio management, and help us get artificial intelligence. We improve on the existing Deep Reinforcement Learning Portfolio model and make many innovations. Unlike many previous studies on discrete trading signals, we make the agent to short in a continuous action space for portfolio optimization. In addition, we design an arbitrage mechanism based on Arbitrage Pricing Theory, and redesign the activation function for acquiring action vectors. Furthermore, we redesign neural networks for reinforcement learning with reference to deep neural networks that process image data. In experiments, we use our model in several randomly selected portfolios which include CSI300 that represents the market's rate of return and the randomly selected constituents of CSI500. The experimental results show that no matter what stocks we select in our portfolios, we can always get a higher return than the market itself, namely we can get artificial intelligence through deep reinforcement learning to defeat market.

Dissension or consensus? Management and Business Research in Latin America and the Caribbean
Julian D. Cortes

This study presents longitudinal evidence on the dissension of Management and Business Research (MBR) in Latin America and the Caribbean (LAC). It looks after intellectual bridges linking clusters among such dissension. It was implemented a coword network analysis to a sample of 12,000+ articles published by authors from LAC during 1998-2017. Structural network scores showed an increasing number of keywords and mean degree but decreasing modularity and density. The intellectual bridges were those of the cluster formed by disciplines/fields that tend toward consensus (e.g., mathematical models) and not by core MBR subjects (e.g., strategic planning).

Do credit rating agencies value less volatile leverage?
Jung, Boochun,Kim, Tae Wook,Li, Miaochan,Stice, Derrald
Prior studies investigating financial statement volatility focus primarily on the volatility of income statement items, earnings volatility in particular, while our knowledge of the effects of the volatility of balance sheet items remains limited. We focus on leverage, arguably the most important balance sheet item ratio, and we investigate how credit rating agencies assess firms with smoother leverage ratios. We document that after controlling for a variety of firm characteristics, including the level of leverage and free cash flow, credit ratings are negatively related to leverage volatility. These results suggest that one benefit for firms with lower leverage volatility is a more favorable credit rating. We also examine the characteristics of firms with a greater ability to smooth leverage ratios. We find a negative relation between financial reporting quality and leverage volatility, consistent with the idea that higher financial reporting quality provides firms with better access to both equity and debt financing, providing greater flexibility to smooth leverage than firms with lower financial reporting quality.

Does Longer Duration of Executive Compensation Foster Investment Efficiency?
Regier, Matthias
In this paper, I examine whether longer duration of executive compensation influences investment decisions. I exploit a regulation designed to foster long-term orientation in executive compensation as an exogenous trigger to lengthen executives' incentive duration. I find that treated firms reduce their abnormal investment relative to control firms, implying an increase in investment efficiency. These results are robust to different measures of investment, several models of expected investment, and different plausible control groups. The treatment effect is economically significant, as the reduction in abnormal investment amounts to about 10% of mean investment. It appears that a mandated longer duration has the greatest effect on investment efficiency in firms that had a low degree of compensation committee independence before the shock. Further, it seems that the lower abnormal investment stems to a greater extent from reductions in over-investment.

ESG, Green Growth and Employee Capitalism: G7 Roadmap for the Fifth Industrial Revolution
Firzli, M. Nicolas J.,Weeks, David,Sherry, Nick
This paper co-authored & edited jointly by M. Nicolas J. Firzli, David Weeks and the Hon. Nicholas Sherry looks at the twin notions of asset ownership and EESG-driven investment in relation to the emerging financial policy agenda of the 47th G7 Summit (Carbis Bay Summit) from the perspective of G7 and Australian pension investors and board members (trustees), which were discussed notably at two recent global conferences organised by the Singapore Economic Forum (SEF) and the G7 Pensions Summit (G7 P7).Here, the authors use the term ‘EESG’ coined by former Delaware Supreme Court Justice Leo E. Strine Jr. to emphasize employees and workers’ rights dynamics â€" also a section of the present article based on recent interviews with Dr. David H. Webber, Boston University School of Law.Dr. Webber also co-chaired the Roundtable on The Framework for Inclusive Capitalism with, inter alia, Renaye Manley, fmr. member, Advisory Board, Federal Reserve Bank of Chicago (FRBC), Daniel Pedrotty, Director, North America's Building Trades Unions (NABTU) and Deborah Goldberg, Treasurer & Receiver General, State of Massachusetts, Chair, Mass. Pension Reserves Investment Management (PRIM), the $ 90 bn. public employees and teachers’ pension fund.Weeks, Sherry and Firzli explain that the ‘greenium’ phenomenon observed recently in most financial markets means most green bonds now trade with a lower yield than comparable conventional bonds, a natural reflection of changing risk/return perceptions, “most notably from the part of employee-nominated pension board members in G7 nations [plus Singapore and Australia], who represent broad cross-sections of society at large.” They argue that this recent trend represents yet another sign of the progressive transition towards asset owners-led financial markets or “fiduciary capitalism.”The authors also look at recent developments in Green Bonds, Social Bonds, Real Assets & Financial Innovation, the title of the keynote address delivered by Bertrand de Mazières, DG Finance, European Investment Bank (EIB), the Luxembourg-based European Union development finance institution and the world’s leading supranational issuer of fixed income instruments. Mr. de Mazières insists on the dual role played by sustainability-driven fixed income investments: not only do they fund additional infrastructure projects, but they also induce issuers, institutional investors, and governments alike to adopt (E)ESG-informed approaches more systematically, across the board. David Zahn, Head of Sustainable Fixed Income, Franklin Templeton, shares the findings of his ongoing research work on ESG in bond markets, focusing on the United Kingdom and the EU. In that context, variations by country always have some (degree of) relevance. So, too, have considerations relating to the drivers of expected excess return (or ‘alpha’ themes) as an investment criterion. These two taken together, geography (“countries and governments”) and alpha dynamics, help to form a broader picture. The authors observe that the notion of reindustrialization is now “moving center stage in the United States, Britain and Australia: a powerful investment trend that can only gain more momentum in the coming quarters” […] insisting that “reindustrialization will also benefit from the UN Sustainable Development Goals (SDGs), intensifying Sino-American competition and the employee-led fiduciary awakening”, making it one of the central features of the Fifth Industrial Revolution (FIR). The nascent “Biden Doctrine” is also analysed from the perspective of pension investors, notably as put forward by U.S. Commerce Secretary Gina Raimondo, a venture capital and private equity veteran, and keen proponent of the notion of industrial renaissance. In many ways, Ms. Raimondo’s bold approach to trade and economic strategy echoes the prevailing view amongst China’s leading policy thinkers: more developmentalist than neoliberal, thus, perhaps, marking the end of four decades of laissez-faire? Finally, the authors shed light on the unprecedented presence of APAC powers Australia, India and South Korea at the 47th G7, to be held in Carbis Bay, Cornwall, 11â€"13 June 2021. This constitutes “a significant strategic decision acknowledging the need to strengthen financial ties to the Eurasia-Pacific nations whose economies now constitute the engines of global growth”The upcoming G7 Pensions dialogue held in London and via video-link 11 June 2021, on the sidelines of the 47th G7, is also discussed succinctly in the last section, including the session on ‘Long Term Investment, Climate Finance & The Firm of the Future’.

Educación financiera y decisiones de ahorro e inversión. un análisis de la Encuesta de Competencias Financieras (ECF) (Financial Education and Savings and Investment Decisions: An Analysis of the Survey of Financial Competences (ECF))
Ispierto, Anna,Martínez-García, Irma,Ruiz Suárez, Gloria Ruiz
Spanish Abstract: Este trabajo parte de los resultados de la Encuesta de Competencias Financieras (ECF), en un intento de contribuir a la mejora de los diseños de políticas de educación financiera, y persigue varios objetivos: (i) cuantificar los conocimientos financieros de los individuos, (ii) relacionarlos con sus características socioeconómicas y (iii) analizar el efecto de la educación financiera en la toma decisiones de ahorro e inversión para un conjunto amplio de activos financiero. Los resultados de este estudio ponen de manifiesto que la educación financiera juega un papel especialmente relevante en la decisión de adquirir activos financieros como títulos de renta fija y variable y de participar en fondos de inversión. Esto es, la educación financiera determina las decisiones de inversión en las que predomina la valoración de la rentabilidad, el riesgo y el plazo de inversión y no las decisiones de ahorro ni de adquisición de productos con marcadas connotaciones de cobertura.English Abstract: This paper is based on the results deriving from the Survey of Financial Competences (ECF) in an attempt to contribute to the improvement of financial education policy designs, and it pursues several objectives: (i) to quantify the financial knowledge of individuals, (ii) to relate this knowledge to available socio-economic characteristics, and (iii) to analyse the effect of financial education on savings and investment decision-making for a broad set of financial assets. The results reveal that financial education plays a particularly important role in the decision to acquire financial assets such as fixed income and equity securities and investment funds. Financial education determines investment decisions in which the valuation of return, risk and investment term predominate and not the decisions of saving or acquisition of assets strongly perceived as hedging products.

Evolution in the Tax Code: (Almost) the End of Homeowner Tax Savings?
Ambrose, Brent W.,Hendershott, Patric,Ling, David C.,McGill, Gary A.
The federal government has long promoted homeownership through various provisions in the U.S. income tax code. The Tax Cuts and Jobs Act of 2017 (TCJA) renewed interest and debate about the treatment of housing via the tax code, particularly with respect to the mortgage interest deduction and the limitation on deductions for state and local taxes. We document the extent that the TCJA magnifies the long-standing anti-mortgage debt bias in the tax code. Our analysis reveals that ongoing discussions about the effects of eliminating the mortgage interest deduction are largely irrelevant because most households no longer benefit from this deduction. We also demonstrate how the limitations on the deduction of state and local taxes alters the costs associated with homeownership across geographic areas, and we provide detailed calculations of the average and marginal tax rates at which housing related expenses are deducted. Finally, we calculate how the major tax benefit of owner-occupied housing â€" the nontaxation of net implicit rental income varies across income groups and locations.

Fair-Value Cost Estimation and Government Cash Flows: Working Paper 2021-05
Falkenheim, Michael
Under current law, federal agencies estimate the budgetary costs of loans and loan guarantees using the projected yields on Treasury securities to discount future cash flows to the present. That approach recognizes costs when loans originate instead of when cash flows occur, the approach agencies use to account for most other items in the federal budget. Agencies project the future cash flows of loans and loan guarantees as the average of their possible values, weighting different outcomes by their probability. Fair-value budgetingâ€"an alternative to the approach used under

Financial Conditions, Local Competition, and Local Market Leaders: The Case of Real Estate Developers
Fan, Ying,Leung, Charles K.,Yang, Zan
This paper studies whether (and how) corporate decisions are affected by internal factors (such as the financial conditions of own company) and external factors (such as the actions of local competitors) in an imperfectly competitive environment. We study the listed real estate developers in Beijing as a case study. Our hand-collected dataset includes transaction-level information booked indicators (such as profitability, liability, and liquidity) and un-booked financial indicators (political connections). Our multi-step empirical model shows that both the firm's financial conditions and her competitors' counterparts are essential but play different roles in the output design, pricing, and the time-on-the-market (TOM). Internal versus external factors' relative importance relates to the degrees of market concentration in a nonlinear manner. Local market leaders' existence alters the small firms' strategy and leads to higher selling prices and slower selling pace in the local market. Our findings survive various robust checks.

Foreign exchange markets: price response and spread impact
Juan Camilo Henao Londono,Thomas Guhr

In spite of the considerable interest, a thorough statistical analysis of foreign exchange markets was hampered by limited access to data. This changed, and nowadays such data analyses are possible down to the level of ticks and over long time scales. We analyze price response functions in the foreign exchange market for different years and different time scales. Such response functions provide quantitative information on the deviation from Markovian behavior. The price response functions show an increase to a maximum followed by a slow decrease as the time lag grows, in trade time scale and in physical time scale, for all analyzed years. Furthermore, we use a price increment point (pip) spread definition to group different foreign exchange pairs and analyze the impact of the spread in the price response functions. We found that large pip spreads have stronger impact on the response. This is similar to what has been found in stock markets.

Governance Fiscale E Sostenibilità Del Debito Pubblico (The Sustainability of Public Debt in the European Union)
Giannini, Bianca,Oldani, Chiara
Italian Abstract: L’indebitamento e la sua sostenibilità sono elementi cruciali per determinare la solidità delle finanze pubbliche, ma la risposta alla domanda “quanto debito dovrebbe emettere il settore dell’amministrazione pubblica” non è univoca. La sostenibilità del debito è un obiettivo primario nel processo di integrazione europea e Sylos Labini nel “Manifesto” evidenziava le conseguenze di un debito pubblico elevato. Il forte legame tra il problema della sostenibilità del debito e la necessità di stimolare la domanda, oltre che l’offerta, per evitare il diffondersi di disoccupazione e disuguaglianze rimane di estrema attualità. Un aspetto rilevante delle azioni correttive intraprese dai governi è il livellamento dei costi finanziari del debito e lo spostamento di parte del debito in avanti, attraverso l’utilizzo di strumenti finanziari derivati, come gli swap. Con il presente contributo, colmiamo la lacuna nel dibattito di policy, muovendo dal contributo al tema della sostenibilità del debito di Sylos Labini per attualizzarlo alle sfide poste dalla finanziarizzazione.English Abstract: Debt capacity and debt sustainability are crucial elements in determining the soundness of public finances, but the answer to the question "how much debt should the government sector issue" is not unique. Sylos Labini (1948) is one of the first contributions to the development of an analytical reference framework to assess the "ability to repay" the debt of governments over time. Furthermore, debt sustainability represented a primary objective in the process of European integration and adoption of the euro, and already in the "Manifesto" the consequences of a high public debt on the economy were highlighted where it was emphasized as "the contraction of public investments it is particularly strongly felt because of the huge public debt existing in many European countries and because of the consequent limitations on the public deficit imposed by the Maastricht parameters ”(Modigliani et al., 1998). The strong link between the problem of debt sustainability and the need to stimulate demand, as well as supply, to avoid the spread of unemployment and economic and social inequalities in Europe - present in Sylos Labini's "Manifesto" - is still present today. An important aspect of the corrective actions undertaken by European Governemnts was the leveling of the financial costs of the debt and the shifting of part of the debt forward, through the use of financial derivative instruments, such as interest rate swaps (IRS). With this contribution, we aim to fill this gap in the policy debate by moving from Sylos Labini's contribution to the theme of debt sustainability to actualize it to the challenges posed by the financialization of European states.

Governor Ciampi and the “Ambrosiano Case”: International Banking Supervision and Monetary Policy
Masera, Rainer
Following bank failures in 1974, notably in Germany (Bankhaus Herstatt of Cologne on June 16) and the US (Franklin National Bank of New York on October 8), the Central Bank Governors of the G10 countries decided to set up a Committee at the BIS in Basel to improve quality and enhance the effectiveness of banking supervision. The Eurodollar market and the rise of offshore financial centers had concurred to create an increasingly interlinked web of international banking transactions. The system of national supervision of domestic banking system had to be completed by incisive and coordinated action at international level, also to cope with the vulnerability to frauds and interactions with organized crime. The Basel Committee issued in December 1975 the Concordat, which provided a framework for international banking supervision and made a distinction between solvency and liquidity. It was within this emerging frame of reference that the Bank of Italy and the G10 Governors dealt with the crisis of the Banco Ambrosiano Group: the crisis had started in 1977 and was concluded with the formal liquidation on August 6 1982. The measures taken by Governor Ciampi and Treasury Minister Andreatta, the dialectical interactions with the Basel Committee, the G10 Governors (banking supervision and monetary policy) and the IOR in the Vatican City are analized and discussed in this article. In preparing the paper the author could benefit from the extremely competent support of the Historical Archives of the Bank of Italy and the access to documents only recently accessible for public consultation. As is shown, the action undertaken by Governor Ciampi and by the Bank of Italy in the Ambrosiano case contributed to the evolution of banking supervision as regards both the revision of the Concordat and, thereafter, the development of a system of mandatory risk-weighted capital ratios. A parallel lasting lesson is that capital adequacy requirements must be complemented by targeted effective supervisory guidance and oversight of corporate governance for banking firms to prevent, insofar as possible, inappropriate and illegal practices, while ensuring accountability of shareholders and top managers for their wrongdoings.

Household Income, Asset Location and Real Estate Value: Evidence from REITs
Feng, Zifeng
This article investigates the extent to which the market valuation of properties is related to the income growth of their asset locations. Based on the income tax data from the Internal Revenue Service (IRS) and the individual property information of US equity real estate investment trusts (REITs) from 1995-2018, I construct an aggregated measure of income growth for each REIT based on its asset locations in different metropolitan areas. The results show that REITs’ market value and stock return are positively correlated with their previous-year household income growth. Further analysis provides evidence that income growth enhances shareholder value mainly through wages & salaries growth, not investment income growth. Moreover, firm-level operational efficiency is also found to be positively related to household income growth and wages & salaries growth. Additional tests such as splitting REITs into demand services and supply jobs subsample, controlling GDP growth and population growth, and analyzing real estate value growth at the MSA level are conducted. The results are largely consistent. Overall, these findings suggest that household income growth has a significant impact on real estate value and that the asset allocation strategy of a portfolio can play an important role in its long-term prospects.

How Many Online Workers are there in the World? A Data-Driven Assessment
Otto Kässi,Vili Lehdonvirta,Fabian Stephany

An unknown number of people around the world are earning income by working through online labour platforms such as Upwork and Amazon Mechanical Turk. We combine data collected from various sources to build a data-driven assessment of the number of such online workers (also known as online freelancers) globally. Our headline estimate is that there are 163 million freelancer profiles registered on online labour platforms globally. Approximately 19 million of them have obtained work through the platform at least once, and 5 million have completed at least 10 projects or earned at least $1000. These numbers suggest a substantial growth from 2015 in registered worker accounts, but much less growth in amount of work completed by workers. Our results indicate that online freelancing represents a non-trivial segment of labour today, but one that is spread thinly across countries and sectors.

How to Motivate and Engage Generation Clash of Clans at Work? Emergent Properties of Business Gamification Elements in the Digital Economy
Nicholas Dacre,Panos Constantinides,Joe Nandhakumar

Organisations are currently lacking in developing and implementing business systems in meaningful ways to motivate and engage their staff. This is particularly salient as the average employee spends eleven cumulative years of their life at work, however less than one third of the workforce are actually engaged in their duties throughout their career. Such low levels of engagement are particularly prominent with younger employees, referred to as Generation Y (GenY), who are the least engaged of all groups at work. However, they will dedicate around five cumulative years of their life immersed playing video games such as Clash of Clans, whether for social, competitive, extrinsic, or intrinsic motivational factors. Using behavioural concepts derived from video games, and applying game design elements in business systems to motivate employees in the digital economy, is a concept which has come to be recognised as Business Gamification. Thus, the purpose of this research paper is to further our understanding of game design elements for business, and investigate their properties from design to implementation in gamified systems. Following a two-year ethnographic style study with both a system development, and a communication agency largely staffed with GenY employees, findings suggest properties in game design elements are emergent and temporal in their instantiations.

Information Content of Stocks in Call Auction of Shorter Duration in Emerging Market
Bag, Dinabandhu
Pre-open auctions have been widely implemented across trading exchanges. Pre-open auctions tend to reduce information asymmetry and trading risks. Call auctions have been encouraged to enhance price discovery. This paper explores the shifts in information content of the pre-market auction session over time. We derive that the information content of the pre opening auction did improve little after a gap of two months. We conclude that the intraday 15 minutes realized volatility was influenced by information content in the pre-market. We demonstrate that volatility is the cause of order imbalance or a cause of poor information content. The investigation of the related volatility in the futures segment provides interesting insights on the unusual pre-market imbalances visualized on days close to expiry of futures.

Informed Trading and Co-Illiquidity
Massa, Massimo,Rzeźnik, Aleksandra,Hvidkjaer, Soeren
We study the link between informed trading and co-movement in illiquidity. We argue that investors concerned with liquidity and fire-sale shocks respond to an increase in informed trading by shifting their portfolios away from stocks with high information asymmetry. This rebalancing causes a substitution in ownership away from the investors who induce financial fragility and co-movement in illiquidity, reducing the co-illiquidity of affected stocks. We exploit two experiments â€" the SHO experiment and the short selling bans â€" that impact the incentives/ability of informed traders to trade. The results suggest that informed traders ameliorate co-movement in illiquidity, a major problem that emerged during the global financial crisis.

Interactions of capital and liquidity requirements: A review of the literature
Vo, Quynh-Anh
One prominent feature of the regulatory framework put in place after the global financial crisis of 2008 is its reliance on multiple regulatory metrics, which has prompted new research on the interactions between them. This paper reviews the growing literature on the interactions between capital and liquidity requirements â€" the two primary requirements of the Basel III framework â€" with the focus on what the literature conveys on the extent to which capital and liquidity requirements are substitutes or complements. The paper also identifies gaps for further research.

Interpretability in deep learning for finance: a case study for the Heston model
Damiano Brigo,Xiaoshan Huang,Andrea Pallavicini,Haitz Saez de Ocariz Borde

Deep learning is a powerful tool whose applications in quantitative finance are growing every day. Yet, artificial neural networks behave as black boxes and this hinders validation and accountability processes. Being able to interpret the inner functioning and the input-output relationship of these networks has become key for the acceptance of such tools. In this paper we focus on the calibration process of a stochastic volatility model, a subject recently tackled by deep learning algorithms. We analyze the Heston model in particular, as this model's properties are well known, resulting in an ideal benchmark case. We investigate the capability of local strategies and global strategies coming from cooperative game theory to explain the trained neural networks, and we find that global strategies such as Shapley values can be effectively used in practice. Our analysis also highlights that Shapley values may help choose the network architecture, as we find that fully-connected neural networks perform better than convolutional neural networks in predicting and interpreting the Heston model prices to parameters relationship.

Investor Experience and Portfolio Choice
Scherer, Bernd,Lehner, Sebastian
MiFID II forces banks and wealth managers to ask clients for their investment knowledge and experience. The implied regulatory view is that less experience should result in less risk taking. While this is neither shared in theoretical nor in empirical finance, it becomes a source of legal risk for asset managers and banks. How do banks react? So far this question was impossible to answer. The relevant data have not been available as they are not shared by banks. We circumvene this problem by using publicly available portfolio recommendations from robo-advisory firms. These firms fall under the same regulations as banks and wealth managers with respect to MiFID II investor profiling and are often owned by traditional banks. It is therefore reasonable to assume that their treatment of investor experience is similar to traditional banks' approaches.

Labour market conditions and the corporate financing decision: A European analysis
Vega-Gutierrez, Pedro Luis,López-Iturriaga, Félix J.,Rodríguez-Sanz, Juan Antonio
This study examines the influence of labour market conditions on corporate capital structure in a sample of 2,892 firms from France, Germany, Italy, Spain, and the UK. After considering the effect of unemployment and inflation, we analyse the impact of two market imperfections: employees’ rights and downward wage rigidity. Results indicate that financial leverage responds to changes in unemployment and inflation. We also find that the influence of employees’ rights is non-linear, whereas the negative effect of downward wage rigidity is moderated by firms’ market power. Taken together, our results show that corporate financial decisions are conditioned not only by firm-level issues but also by a country’s labour market.

Management of Retail Assets in Banking: Comparison of Internal Model Over Basel
Bag, Dinabandhu,Manjappa, D.H.
Retail Assets in Banks has grown due to the trend among banks to grow at a much faster space. Unlike the commercial exposures banks manage retail assets on pooled basis. In this paper, we discuss the methodology of creating pools of revolving retail assets. We compare the capital charges generated by the Basel’s formula with the capital charges generated by two possible earnings at-risk internal capital allocation models. We find that in general, Basel’s capital ratios are closer to those generated by our models for the groups with lower credit risk. We explain the discrepancies to the different ways Basel and our models account for future margin income, to Basel’s’ assumptions about asset correlations

Merchants of Death: The Effect of Credit Supply Shocks on Hospital Outcomes
Aghamolla, Cyrus,Karaca-Mandic, Pinar,Li, Xuelin,Thakor, Richard T.
This study examines the link between credit supply and hospital health outcomes. Using detailed data on hospitals and the banks that they borrow from, we use bank stress tests as exogenous shocks to credit access for hospitals that have lending relationships with tested banks. We find that affected hospitals shift their operations to enhance their profit margins in response to a negative credit shock, but reduce the quality of their care to patients across a variety of measures. In particular, affected hospitals exhibit significantly lower attentiveness in providing timely and effective treatment and procedures, and are rated substantially lower in patient satisfaction. This decline in care quality is reflected in health outcomes: affected hospitals experience a significant increase in risk-adjusted, unplanned 30-day readmission rates of recently discharged patients and in risk-adjusted 30-day patient mortality rates. Overall, the results indicate that access to credit can affect the quality of healthcare hospitals deliver, pointing to important spillover effects of credit market frictions on health outcomes.

Mid-term Climate Change Risk in Catastrophe Bond Market
Li, Yutian
The catastrophe bond market is a good place to reveal how investors think about the climate risk in a mid-term foreseeable future. By studying catastrophe bond market transaction data, I find out that investors treat climate related bonds and non-climate related bonds differently. The yield difference between short-term climate related bonds and mid-term climate related bonds is significantly higher than the yield difference between short-term non-climate related bonds and mid-term non-related bonds. This yield difference is not caused by annual climate seasonality, different local property value growths, and different term structures. Tests on implied hazard rate of catastrophe bonds show similar results. I also find that the difference in yield difference between climate related bonds and non-climate related bonds gets larger after some major climate related disaster events happened between the year 2017 and the year 2018, which indicates that this difference could be connected to the investors' perception of the uncertainty of future climate situations.

National Culture and Bank Liquidity Creation
Boubakri, Narjess,, Zhongyu (Edward) Cao,El Ghoul, Sadok,Guedhami, Omrane,Li, Xinming
This paper investigates the relationship between national culture and cross-country variations in bank liquidity creation. We hypothesize that banks in individualistic societies create more liquidity because of risk-taking and overconfidence bias. On the other hand, a better access to soft information likely facilitates liquidity creation by banks in collectivistic societies as well. Using a sample covering 66 countries over the 2001â€"2014 period, we find that individualism is associated with greater bank liquidity creation. This finding is robust to several sensitivity checks. The effect of individualism is stronger for larger banks, pointing to the importance of soft information on bank lending. Additional analysis suggests that uncertainty avoidance and power distance are related to lower bank liquidity creation.

News-Implied Linkages and Local Dependency in the Equity Market
Ge, Shuyi,Linton, Oliver B.
This paper studies a heterogeneous coefficient spatial factor model that separately addresses both common factor risks (strong cross-sectional dependence) and local dependency (weak cross-sectional dependence) in the equity market. For a high-dimensional panel of equity returns, it is challenging to measure firm-to-firm connectivity. We use extensive business news to construct firms’ links via which local shocks transmit, and we use those news-implied linkages as a proxy for the connectivity among firms. We document a considerable degree of local dependency among S&P 500 stocks. Adding spatial interactions to factor models significantly reduces mispricing and estimation errors. We show that our news-implied linkages provide a comprehensive and integrated proxy for firm-to-firm connectivity, and it out-performs other existing networks in the literature.

On The Investment Strategies in Occupational Pension Plans
Bosserhoff, Frank,Chen, An,Sørensen, Nils,Stadje, Mitja
Demographic changes increase the necessity to base the pension system more and more on the second and the third pillar, namely the occupational and private pension plans; this paper deals with Target Date Funds (TDFs), which are a typical investment opportunity for occupational pension planners. TDFs are usually identified with a decreasing fraction of wealth invested in equity (a so-called glide path) as retirement comes closer, i.e., wealth is invested more risky the younger the saver is. We investigate whether this is actually optimal in the presence of non-tradable income risk in a stochastic volatility environment. The retirement planning procedure is formulated as a stochastic optimization problem. We find it is the (random) contributions that induce the optimal path exhibiting a glide path structure, both in the constant and stochastic volatility environment. Moreover, the initial wealth and the initial contribution made to a retirement account strongly influence the fractional amount of wealth to be invested in risky assets. The risk aversion of an individual mainly determines the steepness of the glide path.

On the Investment Strategies in Occupational Pension Plans
Frank Bosserhoff,An Chen,Nils Sorensen,Mitja Stadje

Demographic changes increase the necessity to base the pension system more and more on the second and the third pillar, namely the occupational and private pension plans; this paper deals with Target Date Funds (TDFs), which are a typical investment opportunity for occupational pension planners. TDFs are usually identified with a decreasing fraction of wealth invested in equity (a so-called glide path) as retirement comes closer, i.e., wealth is invested more risky the younger the saver is. We investigate whether this is actually optimal in the presence of non-tradable income risk in a stochastic volatility environment. The retirement planning procedure is formulated as a stochastic optimization problem. We find it is the (random) contributions that induce the optimal path exhibiting a glide path structure, both in the constant and stochastic volatility environment. Moreover, the initial wealth and the initial contribution made to a retirement account strongly influence the fractional amount of wealth to be invested in risky assets. The risk aversion of an individual mainly determines the steepness of the glide path.

On the Portfolio Choice of Crypto Asset Class: Meet the Gentlemen Investors
Bonaparte, Yosef
We utilize a unique data from the recent wave of Survey of Consumer Finance 2019 to analyze the portfolio choice of a new and raising asset class: cryptocurrency. Specifically, we study who owns crypto and why? We first analyze how key households’ demographic (age, gender, race, etc.) and household’s traits/preferences (time horizon, financial literacy, optimism, etc.) influence crypto ownership. We find that crypto owners are more of college white male; with generational gap as mostly millennials. Moreover, they are financially literate; social; pessimistic; with longer time horizon and employ high research when investing. We then turn to study the relationship between crypto asset class with other asset classes (stock equity, bonds, home and business), and find that only direct holding of stocks increase the propensity to own crypto, while other asset classes negatively influence the likelihood to own crypto. We then zoomed in this subgroup of direct stockholders to draw inference on their portfolio properties that impact crypto ownership, and find that these investors consider crypto asset class to be a part of portfolio diversity. We then turn to analyze what are the key motives for investing in crypto and find that consumption smoothing and hedging against rainy days and emergencies are the key motives to invest crypto, while retirement motive has no impact. Collectively, we are able to profile crypto owners, who exhibit a unique personality and call them as gentleman investors: social, intensively search, less overconfident, less claiming financial knowledge and financially literate.

On the Portfolio Choice of Cryptoholders: Meet the Gentleman Investors
Bonaparte, Yosef
We utilize a unique data set from the recent Survey of Consumer Finance (SCF) 2019 wave to analyze the portfolio choice of cryptoholders. We first identify the key demographics and personality treats that influence crypto ownership. We find that that college white male are one of the main determinants to invest in crypto. Furthermore, crypto owners are social but pessimistic, and have longer time horizon and not knowledgeable about personal finances, as such they research more for investment. We then examine whether key equity stock portfolio properties influence crypto ownership, such as portfolio diversification and home bias and find that their portfolio exhibit less diversity and less home bias. We then turn to analyze what are the key motive for investing in crypto and find that consumption smoothing and hedging against rainy days and emergencies are the key motives to invest, while retirement motive has no impact. Collectively, we are able to profile crypto owners, who exhibit a unique personality treats.

On the regularity of human mobility patterns at times of a pandemic
Fabio Vanni,David Lambert

The study of human mobility patterns is a crucially important research field for its impact on several socio-economic aspects and, in particular, the measure of regularity patters of human mobility can provide a across-the-board view of many social distancing variables in epidemics such as: human movement trends, physical interpersonal distances and population density. We will show that the notion of information entropy is also strongly related to demographic and economic trends by the use and analysis of real-time data. In the present research paper we address three different problems. First, we provide an evidence-based analytical approach which relates the human mobility patterns, social distancing attitudes and population density, with entropic measures which depict for erraticity of human contact behaviors. Second, we investigate the correlations between the aggregated mobility and entropic measures versus five external economic indicators. Finally,we show how entropic measures represents a useful tool for testing the limitations of typical assumptions in epidemiological and mobility models.

Ordering Arbitrage Portfolios and Finding Arbitrage Opportunities
Arvanitis, Stelios,Post, Thierry
Concepts are introduced for analyzing arbitrage portfolios in the face of ambiguity about investor risk preferences and initial portfolio holdings. A Stochastic Arbitrage Opportunity is a self-financing overlay portfolio which enhances every feasible host portfolio for all relevant utility functions. The logical alternative to the existence of such opportunities is the solvability of a system of asset pricing restrictions for the base assets. An asymptotic statistical theory is developed to analyze the behavior of the empirical optimal arbitrage portfolio if the latent parameters of the joint payoff distribution are estimated using time-series data. An empirical application to one-month S&P500 index options uncovers significant arbitrage opportunities in the form of short strip strangle spreads, for investors with reasonable levels of relative risk aversion. The optimal option combinations enhance not only passive index portfolios but also portfolios with existing volatility risk exposure.

Ordering results between the largest claims arising from two general heterogeneous portfolios
Sangita Das,Suchandan Kayal

This work is entirely devoted to compare the largest claims from two heterogeneous portfolios. It is assumed that the claim amounts in an insurance portfolio are nonnegative absolutely continuous random variables and belong to a general family of distributions. The largest claims have been compared based on various stochastic orderings. The established sufficient conditions are associated with the matrices and vectors of model parameters. Applications of the results are provided for the purpose of illustration.

Paris Agreement requires substantial, broad, and sustained engagements beyond COVID-19 recovery packages
Katsumasa Tanaka,Christian Azar,Olivier Boucher,Philippe Ciais,Yann Gaucher,John Hassler,Daniel J. A. Johansson

Andrijevic et al. (Policy Forum, 16 October 2020, p.298) claim that "low-carbon investments to put the world on an ambitious track toward net zero carbon dioxide emissions by mid-century are dwarfed by currently announced COVID-19 stimulus funds." We argue that this short-sighted and public investment-led view misrepresents the grand challenges that climate change entails.

Political connection and firm performance: Allowable theories and a review of literature
Hossain, Dewan Azmal
Purpose: The purpose of this literature review is to accumulate the theories applicable in political connection research and also to analyze previous literature to identify the relationship between political connection and firm performance. This study also shows how political connection can affect an emerging economy like Bangladesh.Methodology: This is a desktop-based study. To achieve the purpose of this literature review 32 papers have been rigorously analyzed. Two terms “Political connection” and “Firm performance” have been used to search the relevant papers.Novelty: This literature review will help to understand the various impact of political connection on firm performance and also to understand the applicable theories associated with political connection research.

Portfolio Optimization with Sparse Multivariate Modelling
Procacci, Pier Francesco,Aste, Tomaso
Portfolio optimization approaches inevitably rely on multivariate modeling of markets and the economy. In this paper, we address three sources of error related to the modeling of these complex systems: 1.oversimplifying hypothesis; 2. uncertainties resulting from parameters' sampling error; 3. intrinsic non-stationarity of these systems. For what concerns point 1. we propose a L0-norm sparse elliptical modeling and show that sparsification is effective. The effects of points 2. and 3. are quantified by studying the models' likelihood in- and out-of-sample for parameters estimated over train sets of different lengths. We show that models with larger out-sample likelihoods lead to better performing portfolios up to when two to three years of daily observations are included in the train set. For larger train sets, we found that portfolio performances deteriorate and detaches from the models' likelihood, highlighting the role of non-stationarity. We further investigate this phenomenon by studying the out-of-sample likelihood of individual observations showing that the system changes significantly through time. Larger estimation windows lead to stable likelihood in the long run, but at the cost of lower likelihood in the short-term: the `optimal' fit in finance needs to be defined in terms of the holding period. Lastly, we show that sparse models outperform full-models in that they deliver higher out of sample likelihood, lower realized portfolio volatility and improved portfolios' stability, avoiding typical pitfalls of the Mean-Variance optimization.

Reversing the Decline of Canadian Public Markets
Tingle, QC, Bryce,Pandes, J. Ari
The public markets in Canada and the United States are booming right now, so why do so few companies want to join them? Public companies grow faster, innovate more, provide better jobs and access cheaper capital. If they don’t go public, companies must eventually sell themselves to larger competitors, resulting in economic concentration and, maybe, the loss of entire sectors to foreign buyers.Since the 1990s, fewer companies in Canada, the U.S. and U.K. have chosen to go public. This has occurred even as the economic rewards of going public have increased. The simultaneous declines in very similar economies with different regulatory and institutional characteristics, suggest the causes are not being addressed in what has mostly been an American debate.This paper argues that reforms to corporate governance and disclosure over the past forty years are primarily responsible for the growing unattractiveness of public markets. It takes agency cost theory seriously and examines the incentives operating on corporate managers around the going public decision. It finds many areas in the current public market system where significant costs are imposed on managers with, according to a well-established empirical literature, very few benefits to the firms themselves or their shareholders. The paper concludes with recommendations for reform.

Short Memories? The Impact of SEC Enforcement on Insider Leakage
Ghoshal, Sid,Bengtzen, Martin,Roberts, Stephen
We study the impact of SEC enforcement on information leakage by corporate insiders. We find, for the first time, that SEC enforcement has a significant and immediate deterrent effect on insider leakage. Furthermore, enforcement actions undertaken after a long period of SEC enforcement inactivity display a more significant effect on leakage, consistent with predictions that insiders adapt their behavior depending on how active they perceive the regulator to be. We also study SEC escalations in sanctioning and find that they have a particularly notable deterrent effect, changing insider leakage behavior for approximately 24 months. Our results suggest that capital markets regulators need to intervene on a regular basis in order to maintain deterrence of undesirable behavior.Published in Journal of Law, Finance, and Accounting: Vol. 5: No. 2, pp 273-305. citation: S. Ghoshal, M. Bengtzen and S. Roberts (2020), "Short Memories? The Impact of SEC Enforcement on Insider Leakage", Journal of Law, Finance, and Accounting: Vol. 5: No. 2, pp 273-305.

SoK: Decentralized Exchanges (DEX) with Automated Market Maker (AMM) protocols
Jiahua Xu,Nazariy Vavryk,Krzysztof Paruch,Simon Cousaert

As an integral part of the Decentralized Finance (DeFi) ecosystem, Automated Market Maker (AMM) based Decentralized Exchanges (DEXs) have gained massive traction with the revived interest in blockchain and distributed ledger technology in general. Most prominently, the top six AMMs -- Uniswap, Balancer, Curve, DODO, Bancor and Sushiswap -- hold in aggregate 15 billion USD worth of crypto-assets as of March 2021. Instead of matching the buy and sell sides, AMMs employ a peer-to-pool method and determine asset price algorithmically through a so-called conservation function. Compared to centralized exchanges, AMMs exhibit the apparent advantage of decentralization, automation and continuous liquidity. Nonetheless, AMMs typically feature drawbacks such as high slippage for traders and divergence loss for liquidity providers. This work establishes a general AMM framework describing the economics and formalizing the system's state-space representation. We employ our framework to systematically compare the top AMM protocols' mechanics, deriving their slippage and divergence loss functions. We further discuss security and privacy concerns associated with AMM DEXs, and conduct a comprehensive literature review on related work covering both DeFi and conventional market microstructure.

Sarmiento, Camilo
This paper incorporates uncertainties of model risk in a stress scenario for house prices. Our approach consists of mapping the Gaussian (or other alternative) distribution quantiles to the quantiles of the empirical distribution using a statistical criterion. The mapping corrects for the presence of fatter tails (relative to the Gaussian distribution) into the re-parameterized distribution. The focus of the analysis is at the tail of the distribution, which is associated with uncertain adverse events. The application of the model to house prices indicates the relevance of our mapping in terms of capturing the home price declines observed in the Great Recession. The derivation of confidence intervals, furthermore, provides buffers for model risk. For example, while regulatory capital may use the point estimate of the quantile of the distribution, risk management organizations may use this confidence intervals to bolster resilience of financial institutions to home price declines.

The American put with finite-time maturity and stochastic interest rate
Cheng Cai,Tiziano De Angelis,Jan Palczewski

In this paper we study pricing of American put options on the Black and Scholes market with a stochastic interest rate and finite-time maturity. We prove that the option value is a $C^1$ function of the initial time, interest rate and stock price. By means of Ito calculus we rigorously derive the option value's early exercise premium formula and the associated hedging portfolio. We prove the existence of an optimal exercise boundary splitting the state space into continuation and stopping region. The boundary has a parametrisation as a jointly continuous function of time and stock price, and it is the unique solution to an integral equation which we compute numerically. Our results hold for a large class of interest rate models including CIR and Vasicek models. We show a numerical study of the option price and the optimal exercise boundary for Vasicek model.

The Characteristics of Family Firms: Exploiting Information on Ownership, Kinship, and Governance Using Total Population Data
Andersson, Fredrik,Johansson, Dan,Karlsson, Johan,Lodefalk, Magnus,Poldahl, Andreas
Family firms are often considered characteristically different from non-family firms. However, our understanding of family firms suffers from an inability to identify them in total population data; information is rarely available regarding owners, their kinship and their involvement in firm governance. We present a method for identifying domiciled family firms using register data; this method offers greater accuracy than previous methods. We apply this method to Swedish data concerning firm ownership, governance and kinship from 2004 to 2010. We find that the family firm is a significant organizational form, contributing over one-third of all employment and gross domestic product (GDP). Family firms are common in most industries and range in size. Furthermore, we find that, compared to private non-family firms, family firms have fewer total assets, employment and sales and carry higher solidity, although family firms are more profitable. These differences diminish with firm size. We conclude that the term “family firm” includes a large variety of firms, and we call for increased attention to their heterogeneity.

The Conglomerate Network
Ahern, Kenneth R.,Kong, Lei,Yan, Xinyan
This paper proposes a network model of the economy in which conglomerate firms transmit idiosyncratic shocks from one industry to another. The strength of inter-industry connections is determined by the conglomerate's share of total industry sales and by the industry's share of the conglomerate's total sales. The empirical results show that industry growth rates comove more strongly within industry pairs that are more closely connected in the conglomerate network. These results hold after controlling for industry-pair and year fixed effects, input-output connections, reverse causality, and in tests that exploit exogenous cross-sectional industry shocks from import tariff changes. Finally, our model also provides a new cross-industry extension for the widely-used Herfindahl index of concentration.

The Dynamism of Partially State-Owned Enterprises in East Asia
Carney, Richard W.,Child, Travers,Liu, Wai-Man,Ngo, Phong T. H.
We examine the nature of state blockholding across publicly listed firms in East Asia by assembling a unique dataset spanning 16 years and 9 economies. Our newly compiled data identifies ultimate owners for each firm annually between 1997 and 2012, totaling 2,984 firm-year observations. Three findings stand out. First, large changes (>5%) to state blockholdings â€" both investments and divestments â€" are quite prevalent. Second, the identity of the largest shareholder frequently changes over time between state, family, and widely-held entities. Third, sovereign wealth funds are far more likely to acquire rather than sell large stakes in publicly traded firms.

The Effects and Value of Financial Information Under a Power Utility CAPM
Johnstone, David
Using a distribution-free "payoffs" CAPM derived under power utility, we examine the parameters of the payoff distribution that have greatest effect on the market equilibrium price, cost of capital and investor welfare. Results are necessarily all numerical, and are obtained by simulating from lognormal and normal payoff distributions. Those distributions are calibrated to approximate the empirical probability distribution of returns and payoffs on the S&P500. The overriding result is that the benefits to investors of better information arise most strongly via better estimates of the mean payoff. Estimation risk surrounding the payoff risk or variance prove surprisingly much less important. That result under our CRRA CAPM replicates similar results in finance under the conventional CARA mean-variance CAPM. We also confirm the inherent disconnection under equilibrium between the market cost of capital and investor welfare.

The Hidden Role of Contract Terms: Evidence from Credit Card Minimum Payments in Mexico
Medina, Paolina C.,Negrin, Jose L.
This paper argues that thresholds in financial contracts act as implicit nudges in consumers’decisions. Exploiting a regulatory change to credit card minimum payments in Mexico, wefind that a one percentage point change in minimum payments, leads to a 0.87 pp change inactual payments, both expressed as a percentage of total balances. We decompose the totaleffect of minimum payments into a constraining effect and a reference effect. The formercaptures the effect of minimum payments as a binding constraint and accounts for 59% of itstotal effect. The later captures any remaining impact of changes in minimum payments beyondtheir constraining effect and represents 41% of the total. In turn, 67% of the referenceeffect is explained by the multiple heuristic: the tendency of consumers to pay whole-numbermultiples of the minimum payment.

The Prospects of Introducing the Corporate Governance 2.0 Model in Uzbekistan
Ashurov, Dr. Zufar
The Corporate Governance 2.0 model is a highly debated topic in foreign countries, among both academia and business community. Taking account of current priority areas of corporate governance development, new concepts and best practices of corporate governance should be introduced in Uzbekistan, and therefore, in the future, it is required to transform the national corporate governance system into a more advanced model. The aim of this paper is to examine the concept of Corporate Governance 2.0 model and specify the future prospects of introducing and implementing this model in Uzbekistan.

The Rewards of a Long-Term Investment Strategy: Case of REITs
Feng, Zifeng,Hardin, William G.,Wang, Chongyu
The initial structure of real estate investment trusts was predicated on real estate as a long hold asset that benefits from ownership in a portfolio context. Using a sample of U.S. publicly traded equity real estate investment trusts (REITs) from 1995 to 2018, we find that REIT performance is positively correlated with the previous-year property holding periods. The results suggest that adopting long-term investing perspectives is profitable for REITs and their shareholders and highlight that the benefits related to portfolio construction and management are complementary to studies related to property location. Our findings are attributed to enhanced operational efficiency, property-level cash flows, and managerial efforts.

The Silver Lining of Crises â€" A Loss Aversion Based Model of Reform
Roel, Marcus,Chen, Zhuoqiong
We explore how and when crises can help firms, organizations, and societies undertake beneficial reforms. In our model, a loss averse decision maker decides whether she should undertake a new project (a reform), characterized by a sequence of cash-flows, or stick with the status quo. In normal times, the decision maker may not pursue a beneficial project, a project with a positive net-present-value, for she places a greater emphasis on losses than on (equal sized) gains. We show that a sufficiently bad crisis guarantees that she undertakes the most beneficial project and characterize when a crisis begets change. When choosing between a single project and the status quo, a crisis can only shape preferences for the better. When choosing among multiple projects, it may distort choices. However, the crisis will always push the decision maker towards implementing a project that is better than the status quo. Implications for economic reforms and policy changesare discussed.

The Time-varying Relationship between Liquidity and Stock Returns: Evidence from Germany
Paul, Thomas,Aryoubi, Abdullah,Walther, Thomas
This study investigates the structural relationship between illiquidity and ex-ante returns in the German stock market over time. In line with other authors, we show that illiquidity is still a significant factor, but has had a weakened impact in more recent times. When considering structural breaks, illiquidity is not priced during times of financial turmoil, which explains the weakened relationship between illiquidity and returns in the recent past. Incorporating structural breaks in portfolio decisions results in significantly better portfolio returns explained by increasing illiquidity premia. The results are robust to different variations of Amihud’s illiquidity measures and when controlled for Fama-French factors.

The Value of Being Responsible in a Crisis: An Analysis of the European Market
Ghanma, Dina,Oikonomou, Ioannis,Schopohl, Lisa,Varotto, Simone
In the Subprime Crisis of 2008/9, European firms with high Corporate Social Responsibility (CSR) scores had stock returns 1.8 to 2.6 percentage points higher than those with lower scores. This is believed to be the effect of social capital â€" an asset which becomes incrementally valuable during crises of trust. However, during the subsequent Sovereign Debt Crisis in 2011, we find the opposite to hold true. European firms with high CSR scores had stock returns which were roughly 1.6 percentage points lower than the returns of low CSR firms. We observe that the drastic change in the market response to CSR scores may be the result of the scores becoming a proxy for ESG “controversies” which could lead to legal disputes and fines. We find that using a new measure of social responsibility based on firms’ efforts to avoid controversies surrounding sustainability and conduct issues eliminates the return penalty previously observed with raw CSR scores. We conclude that European market participants have not ceased to value social capital in their investment decision making following the Subprime Crisis. Rather, in considering ESG measures beyond raw CSR scores, they have become shrewder in assessing true firm commitment to investment in social capital and are managing their portfolios accordingly.

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