Research articles for the 2021-04-20
'Twelve Judges in Scarlet' The Seventeenth-Century Contest over a Common Law of Slavery for England and its Empire
SSRN
Most scholars who have written about the law of slavery in England have focused on Somerset’s case of 1772, which had an intellectual impact not only in England itself but across the British Empire. While we recognize that Somerset represented some change in practice, historians have searched for consistency in earlier rulings, following a general tendency to see the Common Law as unchanging and the winning argument in the Somerset case itself. As a consequence, the current consensus is that the Common Law was somewhat confused, but that a kind of slavery was basically legal in England before 1772, and certainly in its empire, where English law on slavery did not reach. England was committed to a free society, but slavery was an anomaly that was tolerated because it was far away and across the ocean. Occasionally the historiography goes back as far as the seventeenth or even sixteenth century, to cite obscure cases, or even to the medieval period, when a kind of slavery was clearly legal. Seeing the slave law for the British empire from the perspective of the famous Somerset case of 1772 has obscured the vibrant debate within the English judicial system over the legality of slavery in England and its empire over more than a century. Not only was the Common Law on slavery changing profoundly during the seventeenth century; it was an instrument of policy. When Charles II failed to pass an imperial slave code via Parliament, he turned to the courts. His judgesâ€"really his in that they held their seats “during his pleasureâ€--presided over a series of rulings that made slavery legal in England itself --as well as its empire. These judges held that people could be property and that their status was hereditary, whether as chattels or villeins. These rulings brought the phalanx of English property law to bear upon slavery. Otherwise slavery law would followed feudal law, which had restrictions on ownership, master/servant law, which had a variety of protections for servants, or been nothing more than piracy, a situation enforced by the sword and brute force, but not law. These cases provided the structure of regulation of markets that made slavery--as it existed in eighteenth and nineteenth century Americaâ€"possible.
SSRN
Most scholars who have written about the law of slavery in England have focused on Somerset’s case of 1772, which had an intellectual impact not only in England itself but across the British Empire. While we recognize that Somerset represented some change in practice, historians have searched for consistency in earlier rulings, following a general tendency to see the Common Law as unchanging and the winning argument in the Somerset case itself. As a consequence, the current consensus is that the Common Law was somewhat confused, but that a kind of slavery was basically legal in England before 1772, and certainly in its empire, where English law on slavery did not reach. England was committed to a free society, but slavery was an anomaly that was tolerated because it was far away and across the ocean. Occasionally the historiography goes back as far as the seventeenth or even sixteenth century, to cite obscure cases, or even to the medieval period, when a kind of slavery was clearly legal. Seeing the slave law for the British empire from the perspective of the famous Somerset case of 1772 has obscured the vibrant debate within the English judicial system over the legality of slavery in England and its empire over more than a century. Not only was the Common Law on slavery changing profoundly during the seventeenth century; it was an instrument of policy. When Charles II failed to pass an imperial slave code via Parliament, he turned to the courts. His judgesâ€"really his in that they held their seats “during his pleasureâ€--presided over a series of rulings that made slavery legal in England itself --as well as its empire. These judges held that people could be property and that their status was hereditary, whether as chattels or villeins. These rulings brought the phalanx of English property law to bear upon slavery. Otherwise slavery law would followed feudal law, which had restrictions on ownership, master/servant law, which had a variety of protections for servants, or been nothing more than piracy, a situation enforced by the sword and brute force, but not law. These cases provided the structure of regulation of markets that made slavery--as it existed in eighteenth and nineteenth century Americaâ€"possible.
A Model of Long-Term Value Creation
SSRN
Companies need to rethink the way they create value and grow their business to thrive in tomorrow’s volatile and uncertain business environment. Companies in virtually every industry are being impacted by new disruptive and complex societal trends, such as climate change, energy transition and social inequality. At the same time, companies are increasingly evaluated on their non-financial performance and they ever more compete on speed and sustainability.Still, only a few companies have begun to invent new strategic directions, pioneering strategies focused on creating long-term value, not just for shareholders but for all stakeholders. A playbook on how to create long-term value is currently lacking, making it difficult for companies to capture the opportunities and mitigate the risks created by these societal trends.This paper develops a model of long-term value creation that supports companies in creating long-term value and setting their strategies accordingly. Financial institutions can draw on the model to assess how future proof their investment and/or lending portfolios are.
SSRN
Companies need to rethink the way they create value and grow their business to thrive in tomorrow’s volatile and uncertain business environment. Companies in virtually every industry are being impacted by new disruptive and complex societal trends, such as climate change, energy transition and social inequality. At the same time, companies are increasingly evaluated on their non-financial performance and they ever more compete on speed and sustainability.Still, only a few companies have begun to invent new strategic directions, pioneering strategies focused on creating long-term value, not just for shareholders but for all stakeholders. A playbook on how to create long-term value is currently lacking, making it difficult for companies to capture the opportunities and mitigate the risks created by these societal trends.This paper develops a model of long-term value creation that supports companies in creating long-term value and setting their strategies accordingly. Financial institutions can draw on the model to assess how future proof their investment and/or lending portfolios are.
Before Somerset: Debating Slavery and Absolutism in England and its Early Empire
SSRN
Seeing everything from the perspective of Somerset (1772) has obscured the vibrant debate within the English judicial system over the legality of slavery in England and its empire over more than a century. Not only was the Common Law on slavery changing profoundly during the seventeenth century; it was an instrument of policy. When Charles II failed to pass an imperial slave code via Parliament, he turned to the courts. This controversy over slavery in the Common Law was intimately connected to the broader arguments over the divine right of Kings. The Glorious Revolution, which dethroned a King who believed in his own divine right to rule and who overturned Parliamentary lawsâ€"also overturned the rulings that James II and his brother Charles II had laboriously overseen. These rulings had made slavery legal in England itself (as well as its empire) by holding that people could be property and that their status was hereditary, whether as chattels or villeins. These rulings brought the phalanx of English property law to bear upon slavery. Otherwise slavery would have allowed either a limited feudal ownership, or been nothing more than piracy, a situation enforced by the sword and brute force, but not law. These cases provided the structure of regulation of markets that made slavery--as it existed in eighteenth and nineteenth century Americaâ€"possible. While by the early nineteenth century the institution of chattel slavery had largely lost sight of its ideological connection to absolutism, that is where it was born in the seventeenth century.
SSRN
Seeing everything from the perspective of Somerset (1772) has obscured the vibrant debate within the English judicial system over the legality of slavery in England and its empire over more than a century. Not only was the Common Law on slavery changing profoundly during the seventeenth century; it was an instrument of policy. When Charles II failed to pass an imperial slave code via Parliament, he turned to the courts. This controversy over slavery in the Common Law was intimately connected to the broader arguments over the divine right of Kings. The Glorious Revolution, which dethroned a King who believed in his own divine right to rule and who overturned Parliamentary lawsâ€"also overturned the rulings that James II and his brother Charles II had laboriously overseen. These rulings had made slavery legal in England itself (as well as its empire) by holding that people could be property and that their status was hereditary, whether as chattels or villeins. These rulings brought the phalanx of English property law to bear upon slavery. Otherwise slavery would have allowed either a limited feudal ownership, or been nothing more than piracy, a situation enforced by the sword and brute force, but not law. These cases provided the structure of regulation of markets that made slavery--as it existed in eighteenth and nineteenth century Americaâ€"possible. While by the early nineteenth century the institution of chattel slavery had largely lost sight of its ideological connection to absolutism, that is where it was born in the seventeenth century.
CFOs’ Risk Preferences in Earnings Management: The Joint Effect of Risk-decreasing and Risk-increasing Incentives
SSRN
This study examines whether the equity incentives of the CFO are associated with earnings management. Prior research investigates delta and vega for the average of the top five executives on the firm’s financial misreporting. The top 5 executives variable most likely captures the culture of the firm as a whole rather than any one executive. We examine the CFO who is ultimately responsible for the quality of financial reporting. We find a negative effect of CFOs’ risk-decreasing incentives (delta) and a positive effect of CFOs’ risk-increasing incentives (vega) on our accrual-based earnings management proxies. Thus, we find the CFO responds to equity incentives differently from the average of the top five executives and that CFOs undertake or abstain from earnings management when it benefits their own wealth rather than shareholders’ interests.
SSRN
This study examines whether the equity incentives of the CFO are associated with earnings management. Prior research investigates delta and vega for the average of the top five executives on the firm’s financial misreporting. The top 5 executives variable most likely captures the culture of the firm as a whole rather than any one executive. We examine the CFO who is ultimately responsible for the quality of financial reporting. We find a negative effect of CFOs’ risk-decreasing incentives (delta) and a positive effect of CFOs’ risk-increasing incentives (vega) on our accrual-based earnings management proxies. Thus, we find the CFO responds to equity incentives differently from the average of the top five executives and that CFOs undertake or abstain from earnings management when it benefits their own wealth rather than shareholders’ interests.
COVID-19 and SME Failures
SSRN
We estimate the impact of the COVID-19 crisis on business failures among small and medium-size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. Accommodation and food services; arts, entertainment, and recreation; education; and other services are among the sectors most affected. The SME jobs at risk due to business failures related to COVID-19 represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of nonperforming loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets, and would result in a 0.75 percentage point decline in the common equity tier 1 capital ratio. We also evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at-risk firms can be modest (0.54 percent of gross domestic product). However, at a similar level of effectiveness, nontargeted subsidies can be substantially more expensive (1.82 percent of gross domestic product). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.
SSRN
We estimate the impact of the COVID-19 crisis on business failures among small and medium-size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. Accommodation and food services; arts, entertainment, and recreation; education; and other services are among the sectors most affected. The SME jobs at risk due to business failures related to COVID-19 represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of nonperforming loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets, and would result in a 0.75 percentage point decline in the common equity tier 1 capital ratio. We also evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at-risk firms can be modest (0.54 percent of gross domestic product). However, at a similar level of effectiveness, nontargeted subsidies can be substantially more expensive (1.82 percent of gross domestic product). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.
Calibrating an adaptive Farmer-Joshi agent-based model for financial markets
arXiv
arXiv
We replicate the contested calibration of the Farmer and Joshi agent based model of financial markets using a genetic algorithm and a Nelder-Mead with threshold accepting algorithm following Fabretti. The novelty of the Farmer-Joshi model is that the dynamics are driven by trade entry and exit thresholds alone. We recover the known claim that some important stylized facts observed in financial markets cannot be easily found under calibration -- in particular those relating to the auto-correlations in the absolute values of the price fluctuations, and sufficient kurtosis. However, rather than concerns relating to the calibration method, what is novel here is that we extended the Farmer-Joshi model to include agent adaptation using an Brock and Hommes approach to strategy fitness based on trading strategy profitability. We call this an adaptive Farmer-Joshi model: the model allows trading agents to switch between strategies by favouring strategies that have been more profitable over some period of time determined by a free-parameter fixing the profit monitoring time-horizon. In the adaptive model we are able to calibrate and recover additional stylized facts, despite apparent degeneracy's. This is achieved by combining the interactions of trade entry levels with trade strategy switching. We use this to argue that for low-frequency trading across days, as calibrated to daily sampled data, feed-backs can be accounted for by strategy die-out based on intermediate term profitability; we find that the average trade monitoring horizon is approximately two to three months (or 40 to 60 days) of trading.
Capital Requirements, Mortgage Rates and House Prices
SSRN
We study the effect of an increase in capital requirements for residential mortgages on mortgage rates and house prices. We exploit a unique quasi-experiment in which affected banks faced an increase in risk weights of five percentage points. Using a difference-in-difference estimator we find that treated banks increase their mortgage rates by 18 basis points. Houses near affected banks have a 2.34% lower sale price after the increase in capital requirements. Our results imply a semi-elasticity of house prices to changes in mortgage rates of 13, in line with predictions from a user cost model.
SSRN
We study the effect of an increase in capital requirements for residential mortgages on mortgage rates and house prices. We exploit a unique quasi-experiment in which affected banks faced an increase in risk weights of five percentage points. Using a difference-in-difference estimator we find that treated banks increase their mortgage rates by 18 basis points. Houses near affected banks have a 2.34% lower sale price after the increase in capital requirements. Our results imply a semi-elasticity of house prices to changes in mortgage rates of 13, in line with predictions from a user cost model.
Cognitive Abilities in the Wild: Population-scale game-based cognitive assessment
arXiv
arXiv
Psychology and the social sciences are undergoing a revolution: It has become increasingly clear that traditional lab-based experiments are challenged in capturing the full range of individual differences in cognitive abilities and behaviors across the general population. Some progress has been made toward devising measures that can be applied at scale across individuals and populations. What has been missing is a broad battery of validated tasks that can be easily deployed, used across different age ranges and social backgrounds, and in practical, clinical, and research contexts. Here, we present Skill Lab, a game-based approach affording efficient assessment of a suite of cognitive abilities. Skill Lab has been validated outside the lab in a crowdsourced broad and diverse sample, recruited in collaboration with the Danish Broadcast Company (Danmarks Radio, DR). Our game-based measures are five times faster to complete than the equivalent traditional measures and replicate previous findings on the decline of cognitive abilities with age in a large cross-sectional population sample. Finally, we provide a large open-access dataset that enables continued improvements on our work.
Corporate Groups: Corporate Law, Private Contracting and Equal Ownership
SSRN
In this paper we provide a simple and general framework that explains the nature of groups, their corporate governance problems and their ownership structures as the result of the double nature of the controlling shareholder in the group as both shareholder and stakeholder of the subsidiary. We use this framework to conduct an economic and empirical analysis that explores the limitations of regulation and shareholders’ agreements to deal with this dual nature of the parent. Our analysis is able to explain the extreme ownership structures prevalent across groups as solution of last resort to unresolved corporate governance problems when regulation is inefficient and transaction costs limit the use of contracts to provide shared control. We go on to test these ideas conducting an empirical study that explains groups ownership structures and allows us to derive important policy implications. First, it exposes the structural limitations that corporate law encounters to contain the corporate governance problems of groups. Second, it calls for an acknowledgement of the crucial role of shareholders agreements in corporate governance. Shareholder agreements offer the best alternative to protect parent and subsidiary from mutual opportunism, while preserving the incentives to cooperate. Guarantying the enforceability of these contracts offers jurisdictions the most efficient way forward to reduce expropriation in corporate groups.
SSRN
In this paper we provide a simple and general framework that explains the nature of groups, their corporate governance problems and their ownership structures as the result of the double nature of the controlling shareholder in the group as both shareholder and stakeholder of the subsidiary. We use this framework to conduct an economic and empirical analysis that explores the limitations of regulation and shareholders’ agreements to deal with this dual nature of the parent. Our analysis is able to explain the extreme ownership structures prevalent across groups as solution of last resort to unresolved corporate governance problems when regulation is inefficient and transaction costs limit the use of contracts to provide shared control. We go on to test these ideas conducting an empirical study that explains groups ownership structures and allows us to derive important policy implications. First, it exposes the structural limitations that corporate law encounters to contain the corporate governance problems of groups. Second, it calls for an acknowledgement of the crucial role of shareholders agreements in corporate governance. Shareholder agreements offer the best alternative to protect parent and subsidiary from mutual opportunism, while preserving the incentives to cooperate. Guarantying the enforceability of these contracts offers jurisdictions the most efficient way forward to reduce expropriation in corporate groups.
Creating a Common Law of Slavery for England and its Empire
SSRN
Most scholars who have written about the law of slavery in England have focused on Somerset’s case of 1772, which had an intellectual impact and that challenged slavery not only in England itself but across the British Empire. While we recognize that Somerset represented some change in practice, historians have searched for consistency in earlier rulings, following a general tendency to see the Common Law as unchanging and the winning argument in the Somerset case itself. As a consequence, the current consensus is that the Common Law was somewhat confused, but that some coerced servitude was legal in England before 1772, and certainly in its empire, where English law on slavery did not reach. England was committed to a free society, but slavery was an anomaly that was tolerated because it was far away and across the ocean. Occasionally the historiography goes back as far as the seventeenth or even sixteenth century, to cite obscure cases, or even to the medieval period, when a kind of slavery was clearly legal. Seeing the slave law for the British Empire from the perspective of the famous Somerset case of 1772 has obscured the vibrant debate within the English judicial system over the legality of slavery in England and its empire over more than a century. Not only was the Common Law on slavery changing profoundly during the seventeenth century; it was an instrument of policy. When Charles II failed to pass an imperial slave code via Parliament, he turned to the courts. His judgesâ€"really his in that they held their seats “during his pleasureâ€--presided over a series of rulings that made slavery legal in England itself, as well as its empire.
SSRN
Most scholars who have written about the law of slavery in England have focused on Somerset’s case of 1772, which had an intellectual impact and that challenged slavery not only in England itself but across the British Empire. While we recognize that Somerset represented some change in practice, historians have searched for consistency in earlier rulings, following a general tendency to see the Common Law as unchanging and the winning argument in the Somerset case itself. As a consequence, the current consensus is that the Common Law was somewhat confused, but that some coerced servitude was legal in England before 1772, and certainly in its empire, where English law on slavery did not reach. England was committed to a free society, but slavery was an anomaly that was tolerated because it was far away and across the ocean. Occasionally the historiography goes back as far as the seventeenth or even sixteenth century, to cite obscure cases, or even to the medieval period, when a kind of slavery was clearly legal. Seeing the slave law for the British Empire from the perspective of the famous Somerset case of 1772 has obscured the vibrant debate within the English judicial system over the legality of slavery in England and its empire over more than a century. Not only was the Common Law on slavery changing profoundly during the seventeenth century; it was an instrument of policy. When Charles II failed to pass an imperial slave code via Parliament, he turned to the courts. His judgesâ€"really his in that they held their seats “during his pleasureâ€--presided over a series of rulings that made slavery legal in England itself, as well as its empire.
Credit Supply Shocks and Household Defaults
SSRN
Are disruptions of the mortgage market a consequence of financial imbalances accumulated in the past? In this paper, we study the effects of positive and negative credit supply (CS) shocks on subsequent household defaults on debt over the last four decades in U.S. states. We apply sign restrictions within a VAR framework to isolate state-level CS shocks, and identify that 1984 and 2004 were the years of systemic, countrywide, positive CS shocks whereas 1989 and 2009 brought systemic negative shocks. Further, by employing a difference-in-differences framework, we find that both positive and negative CS shocks lead to greater household defaults in the future if they also increase mortgage-to-income ratios. We show that the CS shock-induced (i) shifts of employment between the tradable and non-tradable sectors, (ii) changes in household income and (iii) in house prices facilitate the accumulation of default risks. Our results indicate that positive CS shocks occurred in 1984 did not raise household defaults by more in more exposed states compared to less exposed states because the shocks increased both future income and mortgage debt, while not affecting mortgage-to-income ratios. In contrast, the 1989, 2004 and 2009 CS shocks increased mortgage-to-income ratios in subsequent years, thereby raising debt delinquencies and household defaults. These results provide further empirical evidence to theories of endogenous credit cycles.
SSRN
Are disruptions of the mortgage market a consequence of financial imbalances accumulated in the past? In this paper, we study the effects of positive and negative credit supply (CS) shocks on subsequent household defaults on debt over the last four decades in U.S. states. We apply sign restrictions within a VAR framework to isolate state-level CS shocks, and identify that 1984 and 2004 were the years of systemic, countrywide, positive CS shocks whereas 1989 and 2009 brought systemic negative shocks. Further, by employing a difference-in-differences framework, we find that both positive and negative CS shocks lead to greater household defaults in the future if they also increase mortgage-to-income ratios. We show that the CS shock-induced (i) shifts of employment between the tradable and non-tradable sectors, (ii) changes in household income and (iii) in house prices facilitate the accumulation of default risks. Our results indicate that positive CS shocks occurred in 1984 did not raise household defaults by more in more exposed states compared to less exposed states because the shocks increased both future income and mortgage debt, while not affecting mortgage-to-income ratios. In contrast, the 1989, 2004 and 2009 CS shocks increased mortgage-to-income ratios in subsequent years, thereby raising debt delinquencies and household defaults. These results provide further empirical evidence to theories of endogenous credit cycles.
Deposit Insurance and Credit Union Lending
SSRN
We exploit an exogenous change in the coverage of insured deposits following the passage of the Emergency Economic Stabilization Act (2008) to investigate the impact of deposit insurance on the volume, composition and quality of credit union lending. Using a difference-in-difference framework (where we compare the difference in the lending of affected credit unions before and after the change in deposit insurance coverage with the same difference in lending for credit unions classified as unaffected by the change), we find significant changes in the volume, composition and riskiness of credit union lending. Specifically, we find that affected credit unions increase total and unsecured lending. This increase in lending leads to a subsequent decline in loan quality, evidenced by an increase in non-performing loans. These results are robust to the inclusion of various fixed effects, alternative econometric specifications, as well as other influences, including possible confounding events. Overall, our results suggest that an increase in the maximum coverage of insured deposits induces credit unions to lend more, but at the expense of loan quality.
SSRN
We exploit an exogenous change in the coverage of insured deposits following the passage of the Emergency Economic Stabilization Act (2008) to investigate the impact of deposit insurance on the volume, composition and quality of credit union lending. Using a difference-in-difference framework (where we compare the difference in the lending of affected credit unions before and after the change in deposit insurance coverage with the same difference in lending for credit unions classified as unaffected by the change), we find significant changes in the volume, composition and riskiness of credit union lending. Specifically, we find that affected credit unions increase total and unsecured lending. This increase in lending leads to a subsequent decline in loan quality, evidenced by an increase in non-performing loans. These results are robust to the inclusion of various fixed effects, alternative econometric specifications, as well as other influences, including possible confounding events. Overall, our results suggest that an increase in the maximum coverage of insured deposits induces credit unions to lend more, but at the expense of loan quality.
Determinants and Shareholder Valuation of Indirect Tax Avoidance: Evidence from a Quasi-Natural Experiment
SSRN
We take advantage of recent indirect tax reforms in India to study the incentives to engage in indirect tax avoidance and shareholder valuation of such avoidance. Our results suggest that size of the product portfolio, geographical proximity of manufacturing facilities to headquarters, ownership concentration and membership in business groups are positively associated with the propensity to avoid indirect taxes and that the extent of international operations and a company’s financial health are negatively associated with the propensity. We also find evidence of a positive relation between direct tax avoidance and indirect tax avoidance. Firms that avoid indirect taxes suffer shareholder value loss when their privileged position comes under risk due to tax reforms, as suggested by the stock price reaction surrounding the tax legislation. However, greater product market power mitigates the negative reaction.
SSRN
We take advantage of recent indirect tax reforms in India to study the incentives to engage in indirect tax avoidance and shareholder valuation of such avoidance. Our results suggest that size of the product portfolio, geographical proximity of manufacturing facilities to headquarters, ownership concentration and membership in business groups are positively associated with the propensity to avoid indirect taxes and that the extent of international operations and a company’s financial health are negatively associated with the propensity. We also find evidence of a positive relation between direct tax avoidance and indirect tax avoidance. Firms that avoid indirect taxes suffer shareholder value loss when their privileged position comes under risk due to tax reforms, as suggested by the stock price reaction surrounding the tax legislation. However, greater product market power mitigates the negative reaction.
Does Religiosity Improve Analyst Forecast Accuracy?
SSRN
This paper studies the impact of local religiosity on analyst forecast accuracy. Using the level of religious adherence as a proxy for religiosity in firm headquarter states, we find that analyst forecasts are more accurate for firms located in areas with stronger religious social norms. Our finding is robust to the inclusion of analyst and regional characteristics, firm, industry, and state fixed effects, controlling for earnings quality and audit quality, 2SLS-instrumental variable estimation, propensity score matching analysis, and a difference-in-difference test using firm headquarter relocations as a quasi-natural experiment. We further document a novel finding that religiosity has an “accentuating effect†on analyst forecast accuracy: religion can make a good thing better. Specifically, we find that local religiosity has a more pronounced positive effect on firms issuing management guidance or having fewer agency problems. Finally, we find that analyst forecast revisions for firms in more religious areas have higher information content. Overall, our study shows that religiosity enhances the accuracy and information content of analyst forecasts.
SSRN
This paper studies the impact of local religiosity on analyst forecast accuracy. Using the level of religious adherence as a proxy for religiosity in firm headquarter states, we find that analyst forecasts are more accurate for firms located in areas with stronger religious social norms. Our finding is robust to the inclusion of analyst and regional characteristics, firm, industry, and state fixed effects, controlling for earnings quality and audit quality, 2SLS-instrumental variable estimation, propensity score matching analysis, and a difference-in-difference test using firm headquarter relocations as a quasi-natural experiment. We further document a novel finding that religiosity has an “accentuating effect†on analyst forecast accuracy: religion can make a good thing better. Specifically, we find that local religiosity has a more pronounced positive effect on firms issuing management guidance or having fewer agency problems. Finally, we find that analyst forecast revisions for firms in more religious areas have higher information content. Overall, our study shows that religiosity enhances the accuracy and information content of analyst forecasts.
Dynamically Controlled Kernel Estimation
SSRN
We introduce a data driven and model free approach for computing conditional expectations. The new method is based on classical techniques combined with machine learning methods. In particular, we consider kernel density estimation based on simulated risk factors combined with a control variate. This is used in a Gaussian process regression for finally approximating the conditional expectation. In this way we increase not only the stability of the estimator but we also need a significantly lower amount of simulations due to the variance reduction. Since we apply Gaussian process regression, we do not only get a point estimate, but also the full distribution. It turns out that the optimal coefficient for the control variate is the minimal variance delta. Thus, in this way we obtain model free and purely data driven hedges. Finally, we apply our method to several examples from option pricing including exotic option payoffs and payoffs with multiple underlyings for different models including the rough Bergomi model. A discussion on the challenges to extend the method to a large dimensional settings is provided and is partially solved by using Quasi random number sequences.
SSRN
We introduce a data driven and model free approach for computing conditional expectations. The new method is based on classical techniques combined with machine learning methods. In particular, we consider kernel density estimation based on simulated risk factors combined with a control variate. This is used in a Gaussian process regression for finally approximating the conditional expectation. In this way we increase not only the stability of the estimator but we also need a significantly lower amount of simulations due to the variance reduction. Since we apply Gaussian process regression, we do not only get a point estimate, but also the full distribution. It turns out that the optimal coefficient for the control variate is the minimal variance delta. Thus, in this way we obtain model free and purely data driven hedges. Finally, we apply our method to several examples from option pricing including exotic option payoffs and payoffs with multiple underlyings for different models including the rough Bergomi model. A discussion on the challenges to extend the method to a large dimensional settings is provided and is partially solved by using Quasi random number sequences.
Financial Flexibility and Corporate Employment
SSRN
We study the role of financial flexibility on COVID-19 employment actions. Using daily data from March through May 2020 for 354 of the largest U.S. employers, we find that firms facing a negative demand shock were 28.8 percentage points more likely to reduce their workforce and 17.3 percentage points less likely to provide pay increases to frontline workers, compared to other sample firms. Pre-pandemic financial flexibility attenuates these effects, reducing the likelihood of workforce reductions by almost half. The role of financial flexibility is greatest in firms with better governance, a more asymmetric cost structure, and better treatment of workers.
SSRN
We study the role of financial flexibility on COVID-19 employment actions. Using daily data from March through May 2020 for 354 of the largest U.S. employers, we find that firms facing a negative demand shock were 28.8 percentage points more likely to reduce their workforce and 17.3 percentage points less likely to provide pay increases to frontline workers, compared to other sample firms. Pre-pandemic financial flexibility attenuates these effects, reducing the likelihood of workforce reductions by almost half. The role of financial flexibility is greatest in firms with better governance, a more asymmetric cost structure, and better treatment of workers.
Financial education and savings and investment decisions; An analysis of the Survey of Financial Competences (ECF)
SSRN
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.
SSRN
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.
Fiscal Sustainability and Fiscal Risk in the EU: Forecasts and Challenges in Terms of COVID-19
SSRN
This study focuses on examining the relationship between fiscal and debt sustainability indicators in EU Member States, based on the multidimensional approach to estimating and forecasting different time horizons applied by the European Commission. The relationship between fiscal sustainability and the numerical fiscal rules applied at national and supranational level in the context of the Stability and Growth Pact has been established. The dynamics of medium-term risks in the Member States of the European Union for the period 2015 - 2019 is traced. The main challenges to fiscal sustainability in the European space in the context of the COVID-19 pandemic are outlined.
SSRN
This study focuses on examining the relationship between fiscal and debt sustainability indicators in EU Member States, based on the multidimensional approach to estimating and forecasting different time horizons applied by the European Commission. The relationship between fiscal sustainability and the numerical fiscal rules applied at national and supranational level in the context of the Stability and Growth Pact has been established. The dynamics of medium-term risks in the Member States of the European Union for the period 2015 - 2019 is traced. The main challenges to fiscal sustainability in the European space in the context of the COVID-19 pandemic are outlined.
Forecasting e-scooter substitution of direct and access trips by mode and distance
arXiv
arXiv
An e-scooter trip model is estimated from four U.S. cities: Portland, Austin, Chicago and New York City. A log-log regression model is estimated for e-scooter trips based on user age, population, land area, and the number of scooters. The model predicts 75K daily e-scooter trips in Manhattan for a deployment of 2000 scooters, which translates to 77 million USD in annual revenue. We propose a novel nonlinear, multifactor model to break down the number of daily trips by the alternative modes of transportation that they would likely substitute based on statistical similarity. The model parameters reveal a relationship with direct trips of bike, walk, carpool, automobile and taxi as well as access/egress trips with public transit in Manhattan. Our model estimates that e-scooters could replace 32% of carpool; 13% of bike; and 7.2% of taxi trips. The distance structure of revenue from access/egress trips is found to differ from that of other substituted trips.
GARCH-UGH: A bias-reduced approach for dynamic extreme Value-at-Risk estimation in financial time series
arXiv
arXiv
The Value-at-Risk (VaR) is a widely used instrument in financial risk management. The question of estimating the VaR of loss return distributions at extreme levels is an important question in financial applications, both from operational and regulatory perspectives; in particular, the dynamic estimation of extreme VaR given the recent past has received substantial attention. We propose here a two-step bias-reduced estimation methodology called GARCH-UGH (Unbiased Gomes-de Haan), whereby financial returns are first filtered using an AR-GARCH model, and then a bias-reduced estimator of extreme quantiles is applied to the standardized residuals to estimate one-step ahead dynamic extreme VaR. Our results indicate that the GARCH-UGH estimates are more accurate than those obtained by combining conventional AR-GARCH filtering and extreme value estimates from the perspective of in-sample and out-of-sample backtestings of historical daily returns on several financial time series.
Hedging of Financial Derivative Contracts via Monte Carlo Tree Search
arXiv
arXiv
The construction of approximate replication strategies for pricing and hedging of derivative contracts in incomplete markets is a key problem of financial engineering. Recently Reinforcement Learning algorithms for hedging under realistic market conditions have attracted significant interest. While research in the derivatives area mostly focused on variations of $Q$-learning, in artificial intelligence Monte Carlo Tree Search is the recognized state-of-the-art method for various planning problems, such as the games of Hex, Chess, Go,... This article introduces Monte Carlo Tree Search as a method to solve the stochastic optimal control problem behind the pricing and hedging tasks. As compared to $Q$-learning it combines Reinforcement Learning with tree search techniques. As a consequence Monte Carlo Tree Search has higher sample efficiency, is less prone to over-fitting to specific market models and generally learns stronger policies faster. In our experiments we find that Monte Carlo Tree Search, being the world-champion in games like Chess and Go, is easily capable of maximizing the utility of investor's terminal wealth without setting up an auxiliary mathematical framework.
Hiding Filthy Lucre in Plain Sight: Theory and Identification of Business-Based Money Laundering
SSRN
Proceeds from illicit activities percolate into the legal economy through several channels. We exploit international regulations targeting money laundering via the financial sector to identify the flows of “dirty money†into legitimate establishments: business-based money laundering (BBML). Our variant of the monopolistic competition model embeds a drug cartel that channels illicit proceeds into an offshore financial investment and into BBML. Tighter regulations in one channel increase the flow in the other. We use a research design that links U.S. county business activity to the evolution of anti-money-laundering regulations in Caribbean jurisdictions to provide the first empirical evidence of the phenomenon.
SSRN
Proceeds from illicit activities percolate into the legal economy through several channels. We exploit international regulations targeting money laundering via the financial sector to identify the flows of “dirty money†into legitimate establishments: business-based money laundering (BBML). Our variant of the monopolistic competition model embeds a drug cartel that channels illicit proceeds into an offshore financial investment and into BBML. Tighter regulations in one channel increase the flow in the other. We use a research design that links U.S. county business activity to the evolution of anti-money-laundering regulations in Caribbean jurisdictions to provide the first empirical evidence of the phenomenon.
How Competitive Are Income Annuity Providers Over Time?
SSRN
The 2019 SECURE Act provides safe harbor protections to employers who evaluate the costs of providing guaranteed income including gathering information on competing providers. Annuities can be more difficult to evaluate than mutual funds because expenses are opaque, financial strength matters, and insurer competitiveness can change over time. We find significant variation in the payout rates across providers over time. While the payout rankings of annuity companies (e.g., best to worst) are fairly sticky over the short-term, over the full period of the analysis the correlation declines effectively to zero (versus the initial rankings). This suggests individuals or institutions who choose an annuity provider based on income payout need to revisit the decision regularly because the best company today is unlikely to be the best in the future. We do find that companies for which immediate annuities are a higher fraction of total sales tend to rank higher and remain so more persistently over time.
SSRN
The 2019 SECURE Act provides safe harbor protections to employers who evaluate the costs of providing guaranteed income including gathering information on competing providers. Annuities can be more difficult to evaluate than mutual funds because expenses are opaque, financial strength matters, and insurer competitiveness can change over time. We find significant variation in the payout rates across providers over time. While the payout rankings of annuity companies (e.g., best to worst) are fairly sticky over the short-term, over the full period of the analysis the correlation declines effectively to zero (versus the initial rankings). This suggests individuals or institutions who choose an annuity provider based on income payout need to revisit the decision regularly because the best company today is unlikely to be the best in the future. We do find that companies for which immediate annuities are a higher fraction of total sales tend to rank higher and remain so more persistently over time.
How firms strategically disclose Information through selected channels
SSRN
This paper examines firms’ information disclosure through different channels (earnings conference call and earnings press release) and corresponding investor reactions. By drawing from a theory about e-communication, we predict that earnings conference calls induce less processing costs to investors than earnings press releases. Hence, disclosing through it increases the stock price impact and decreases the communicational ambiguity of information. Consistently, when comparing these channels, we find that firms distribute positive information through earnings conference calls and negative information through earnings press releases to investors. Firms that use a positive tone in earnings conference calls increase the stock market reaction sixfold compared to earnings press releases. When firms distribute information, the tone and readability of their calls improve while these characteristics of earnings press releases deteriorate. Also, firms tend to distribute less information through conference calls when earnings exceed benchmarks but more when future performance is good. A portfolio â€" that holds the quintile of firms that distribute the most information through distinct channels â€" yields significant abnormal returns (equal to 5 % p.a.).
SSRN
This paper examines firms’ information disclosure through different channels (earnings conference call and earnings press release) and corresponding investor reactions. By drawing from a theory about e-communication, we predict that earnings conference calls induce less processing costs to investors than earnings press releases. Hence, disclosing through it increases the stock price impact and decreases the communicational ambiguity of information. Consistently, when comparing these channels, we find that firms distribute positive information through earnings conference calls and negative information through earnings press releases to investors. Firms that use a positive tone in earnings conference calls increase the stock market reaction sixfold compared to earnings press releases. When firms distribute information, the tone and readability of their calls improve while these characteristics of earnings press releases deteriorate. Also, firms tend to distribute less information through conference calls when earnings exceed benchmarks but more when future performance is good. A portfolio â€" that holds the quintile of firms that distribute the most information through distinct channels â€" yields significant abnormal returns (equal to 5 % p.a.).
Inferring Multi-Period Optimal Portfolios via Detrending Moving Average Cluster Entropy
arXiv
arXiv
Despite half a century of research, there is still no general agreement about the optimal approach to build a robust multi-period portfolio. We address this question by proposing the detrended cluster entropy approach to estimate the portfolio weights of high-frequency market indices. The information measure produces reliable estimates of the portfolio weights gathered from the real-world market data at varying temporal horizons. The portfolio exhibits a high level of diversity, robustness and stability as it is not affected by the drawbacks of traditional mean-variance approaches.
Information Ambiguity, Market Institutions and Asset Prices: Experimental Evidence
SSRN
This paper explores how information ambiguity and traders' attitudes toward ambiguity influence investment decisions and asset prices in three different types of experimental asset markets. Our experiment focuses on the prediction of Epstein and Schneider (2008) that information ambiguity will lead market prices to overreact to bad news and to underreact to good news. We find that such an asymmetric reaction to bad/good news is strongest in individual prediction markets. It occurs to a lesser extent in single price call markets, and is weakest of all in continuous double auction markets. While we find asymmetric reactions at the individual trader level in the double auction market, the lack of an overall asymmetric reaction to bad/good news is due to the fact that the asymmetric reaction on the buyers' side cancels the (opposite) asymmetric reaction on the sellers' side.
SSRN
This paper explores how information ambiguity and traders' attitudes toward ambiguity influence investment decisions and asset prices in three different types of experimental asset markets. Our experiment focuses on the prediction of Epstein and Schneider (2008) that information ambiguity will lead market prices to overreact to bad news and to underreact to good news. We find that such an asymmetric reaction to bad/good news is strongest in individual prediction markets. It occurs to a lesser extent in single price call markets, and is weakest of all in continuous double auction markets. While we find asymmetric reactions at the individual trader level in the double auction market, the lack of an overall asymmetric reaction to bad/good news is due to the fact that the asymmetric reaction on the buyers' side cancels the (opposite) asymmetric reaction on the sellers' side.
Informed trading in dark pools: Fair-access dark venue vs. restricted-access dark venues
SSRN
Prior empirical studies find that dark pools are, on average, associated with uninformed order flow. The “exemption from fair-access requirement†has been conjectured as a necessary condition for dark venues to segment uninformed order flow. This study presents direct evidence contrasting a dark venue that offers equal access to all market participants to other dark pools which have the ability to subjectively exclude order flow. Using the period leading up to surprise corporate earnings news, I document robust evidence of informed trading taking place in the fair access dark venue. I do not find such evidence in other dark venues.
SSRN
Prior empirical studies find that dark pools are, on average, associated with uninformed order flow. The “exemption from fair-access requirement†has been conjectured as a necessary condition for dark venues to segment uninformed order flow. This study presents direct evidence contrasting a dark venue that offers equal access to all market participants to other dark pools which have the ability to subjectively exclude order flow. Using the period leading up to surprise corporate earnings news, I document robust evidence of informed trading taking place in the fair access dark venue. I do not find such evidence in other dark venues.
Institutional Trading around FOMC Meetings: Evidence of Fed Leaks
SSRN
Using detailed institutional transaction records from Ancerno, I find evidence consistent with informed trading on the days before the Federal Open Market Committee (FOMC) scheduled announcements. The institutional trading imbalances on highly exposed stocks are in the direction of the subsequent monetary policy surprises. On the three days before a 1% surprise rate increase, the institutional trading imbalance is 27.7% higher for high-MPE stocks as compared to low-MPE stocks. This result is particularly strong before easing monetary policy shocks - when the aggregate market reaction is positive -, for the most-active traders and the hedge fund management companies, and for the US institutions that are headquartered close to one of the regional reserve banks. It holds throughout the Ancerno's sample, from 1999 to 2014. Overall, these findings are consistent with a hypothesis of a systematic informal communication of Fed officials with the financial sector, provide an additional channel through which institutions make abnormal profits from their intra-quarter trades, and contribute to an information-based explanation of the pre-FOMC drift.
SSRN
Using detailed institutional transaction records from Ancerno, I find evidence consistent with informed trading on the days before the Federal Open Market Committee (FOMC) scheduled announcements. The institutional trading imbalances on highly exposed stocks are in the direction of the subsequent monetary policy surprises. On the three days before a 1% surprise rate increase, the institutional trading imbalance is 27.7% higher for high-MPE stocks as compared to low-MPE stocks. This result is particularly strong before easing monetary policy shocks - when the aggregate market reaction is positive -, for the most-active traders and the hedge fund management companies, and for the US institutions that are headquartered close to one of the regional reserve banks. It holds throughout the Ancerno's sample, from 1999 to 2014. Overall, these findings are consistent with a hypothesis of a systematic informal communication of Fed officials with the financial sector, provide an additional channel through which institutions make abnormal profits from their intra-quarter trades, and contribute to an information-based explanation of the pre-FOMC drift.
Interpretability in deep learning for finance: a case study for the Heston model
SSRN
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.
SSRN
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.
Investment Efficiency and Welfare with Feedback Effects
SSRN
Financial markets enable risk sharing and efficient allocation of capital, but these roles can be at odds. We illustrate this tension in a “feedback effects†model with diversely informed, risk-averse investors and a manager who learns from prices before deciding whether to adopt a new project. While managerial learning from prices always improves investment efficiency, it can reduce welfare when the ex-ante net present value of the project is positive. This is because investment decisions change the stock’s exposure to underlying shocks and consequently, investors’ ability to hedge risk. We show that this tension applies broadly to investment decisions beyond the simple project adoption setting, and outline implications for regulatory policy and incentive provision for managers.
SSRN
Financial markets enable risk sharing and efficient allocation of capital, but these roles can be at odds. We illustrate this tension in a “feedback effects†model with diversely informed, risk-averse investors and a manager who learns from prices before deciding whether to adopt a new project. While managerial learning from prices always improves investment efficiency, it can reduce welfare when the ex-ante net present value of the project is positive. This is because investment decisions change the stock’s exposure to underlying shocks and consequently, investors’ ability to hedge risk. We show that this tension applies broadly to investment decisions beyond the simple project adoption setting, and outline implications for regulatory policy and incentive provision for managers.
Let's get physical: Comparing metrics of physical climate risk
SSRN
Investors and regulators require reliable estimates of physical climate risks for decision-making. While assessing these risks is challenging, several commercial data providers and academics have started to develop physical risk scores at the firm level. This paper compares six physical risk scores, which rely on either model-based or language-based methodologies. We find a substantial divergence between these scores, also among those based on similar methodologies. Risk scores also lead to different rankings within and across sectors. We show how this divergence causes problems when testing whether financial markets are pricing in physical risks. Our results imply that financial markets may currently not be able to adequately account for the physical risk exposure of corporations using available risk scores. We identify six primary sources of uncertainty that drive the divergence of scores and offer recommendations for improving firm-level physical risk scores.
SSRN
Investors and regulators require reliable estimates of physical climate risks for decision-making. While assessing these risks is challenging, several commercial data providers and academics have started to develop physical risk scores at the firm level. This paper compares six physical risk scores, which rely on either model-based or language-based methodologies. We find a substantial divergence between these scores, also among those based on similar methodologies. Risk scores also lead to different rankings within and across sectors. We show how this divergence causes problems when testing whether financial markets are pricing in physical risks. Our results imply that financial markets may currently not be able to adequately account for the physical risk exposure of corporations using available risk scores. We identify six primary sources of uncertainty that drive the divergence of scores and offer recommendations for improving firm-level physical risk scores.
Limited Household Risk Sharing: General Equilibrium Implications for the Term Structure of Interest Rates
SSRN
We present a theory in which limited risk sharing of idiosyncratic labor income risk plays a key role in determining the dynamics of interest rates. Our production-based model relates the cross-sectional distribution of labor income risk to observable aggregate labor market variables. Our model makes two key predictions. First, it predicts positive risk premia for long-term bonds while simultaneously matching key macroeconomic moments. Second, it predicts a negative correlation between current labor market conditions (as measured by labor market tightness or the job-finding rate) and future bond excess returns. We provide evidence for these predictions.
SSRN
We present a theory in which limited risk sharing of idiosyncratic labor income risk plays a key role in determining the dynamics of interest rates. Our production-based model relates the cross-sectional distribution of labor income risk to observable aggregate labor market variables. Our model makes two key predictions. First, it predicts positive risk premia for long-term bonds while simultaneously matching key macroeconomic moments. Second, it predicts a negative correlation between current labor market conditions (as measured by labor market tightness or the job-finding rate) and future bond excess returns. We provide evidence for these predictions.
Mapping a Sector’s Scope Transformation and the Value of Following the Evolving Core
SSRN
A surprisingly neglected facet of sector evolution is the evolutionary analysis of firms’, and thus a sector’s, scope. Defining a sector as a group of firms that can change their scope over time, we study the transformation of U.S. banking firms. We undertake a sectoral, population-wide study of business-scope transformation, with particular focus on which segments banks expand into. As financial intermediation evolved, a continuously shifting set of activities became associated with “core banking,†with scope changing and relatedness itself (measured through coincidence) evolving over the banking sector’s history. Banks that expand scope while staying close to this evolving core attain net performance benefits. Identification tests show that the benefits of following the evolving core are robust to endogeneity.
SSRN
A surprisingly neglected facet of sector evolution is the evolutionary analysis of firms’, and thus a sector’s, scope. Defining a sector as a group of firms that can change their scope over time, we study the transformation of U.S. banking firms. We undertake a sectoral, population-wide study of business-scope transformation, with particular focus on which segments banks expand into. As financial intermediation evolved, a continuously shifting set of activities became associated with “core banking,†with scope changing and relatedness itself (measured through coincidence) evolving over the banking sector’s history. Banks that expand scope while staying close to this evolving core attain net performance benefits. Identification tests show that the benefits of following the evolving core are robust to endogeneity.
Market Value of Differentially-Private Smart Meter Data
arXiv
arXiv
This paper proposes a framework to investigate the value of sharing privacy-protected smart meter data between domestic consumers and load serving entities. The framework consists of a discounted differential privacy model to ensure individuals cannot be identified from aggregated data, a ANN-based short-term load forecasting to quantify the impact of data availability and privacy protection on the forecasting error and an optimal procurement problem in day-ahead and balancing markets to assess the market value of the privacy-utility trade-off. The framework demonstrates that when the load profile of a consumer group differs from the system average, which is quantified using the Kullback-Leibler divergence, there is significant value in sharing smart meter data while retaining individual consumer privacy.
Mortgage Prepayment, Race, and Monetary Policy
SSRN
During the period 2005 to 2020, Black borrowers with mortgages insured by Fannie Mae or Freddie Mac paid interest rates that were almost 50 basis points higher than those paid by non-Hispanic white borrowers. We show that the main reason is that non-Hispanic white borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic white borrowers face challenges refinancing because, on average, they have lower credit scores, equity, and income. But even holding those factors constant, Black and Hispanic white borrowers refinance less, suggesting that other social factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs that more directly pass through interest rate declines to borrowers can reduce racial mortgage pricing inequality.
SSRN
During the period 2005 to 2020, Black borrowers with mortgages insured by Fannie Mae or Freddie Mac paid interest rates that were almost 50 basis points higher than those paid by non-Hispanic white borrowers. We show that the main reason is that non-Hispanic white borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic white borrowers face challenges refinancing because, on average, they have lower credit scores, equity, and income. But even holding those factors constant, Black and Hispanic white borrowers refinance less, suggesting that other social factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs that more directly pass through interest rate declines to borrowers can reduce racial mortgage pricing inequality.
On Policy Evaluation with Aggregate Time-Series Shocks
arXiv
arXiv
We propose a new algorithm for estimating treatment effects in contexts where the exogenous variation comes from aggregate time-series shocks. Our estimator combines data-driven unit-level weights with a time-series model. We use the unit weights to control for unobserved aggregate confounders and use the time-series model to extract the quasi-random variation from the observed shock. We examine our algorithm's performance in a simulation based on Nakamura and Steinsson [2014]. We provide statistical guarantees for our estimator in a practically relevant regime, where both cross-sectional and time-series dimensions are large, and we show how to use our method to conduct inference.
Optimal Shadow Banking
SSRN
In contrast to most of countries, China’s shadow banking system has experienced stark growth since the 2008 Subprime Crisis. We present a model to explain why the shadow banking activities have been allowed to expand with the full awareness of regulators in China. In the presence of local government intervention, which tends to distort the banks’ portfolio choices towards inefficient low-quality projects, the policy combination of formal banking sector credit tightening and shadow banking sector loosening can improve credit quality. This is because shadow banking assets are less diversified than commercial bank assets, thereby subject to higher bank run risk, which forces banks to improve the quality of shadow banking assets. The banks may not be able to generate optimal size of shadow banking to maximize social welfare. A policy combination of allowing the bank to self-bailout their shadow banking products and imposing a punishment can further improve social welfare.
SSRN
In contrast to most of countries, China’s shadow banking system has experienced stark growth since the 2008 Subprime Crisis. We present a model to explain why the shadow banking activities have been allowed to expand with the full awareness of regulators in China. In the presence of local government intervention, which tends to distort the banks’ portfolio choices towards inefficient low-quality projects, the policy combination of formal banking sector credit tightening and shadow banking sector loosening can improve credit quality. This is because shadow banking assets are less diversified than commercial bank assets, thereby subject to higher bank run risk, which forces banks to improve the quality of shadow banking assets. The banks may not be able to generate optimal size of shadow banking to maximize social welfare. A policy combination of allowing the bank to self-bailout their shadow banking products and imposing a punishment can further improve social welfare.
Overshooting of Sovereign Emerging Eurobond Yields in the Context of COVID-19
SSRN
This paper illustrates the phenomenon of overshooting yields on eurobonds issued by emerging and developing countries in the context of COVID-19. Using panel data from 48 emerging and developing countries, the results show that daily reports of confirmed cases have led to increases in yields and announcements of international creditor assistance to developing and emerging countries, which have calmed investor concerns.
SSRN
This paper illustrates the phenomenon of overshooting yields on eurobonds issued by emerging and developing countries in the context of COVID-19. Using panel data from 48 emerging and developing countries, the results show that daily reports of confirmed cases have led to increases in yields and announcements of international creditor assistance to developing and emerging countries, which have calmed investor concerns.
Piercing through Opacity: Relationships and Credit Card Lending to Consumers and Small Businesses during Normal Times and the COVID-19 Crisis
SSRN
We investigate bank relationships in a rarely-considered context â€" consumer and small business credit cards. Using over one million accounts, we find during normal times, consumer relationship customers enjoy relatively favorable credit terms, consistent with the bright side of relationships, while the dark side dominates for small businesses. During COVID-19, both groups benefit, reflecting intertemporal smoothing, with more benefits flowing to safer relationship customers. Conventional banking relationships benefit consumers more than credit card relationships, with mixed findings for small businesses. Important identification issues are addressed. CARES Act consumer-delinquency reporting impediments reduce the informational value of consumer credit scores, penalizing safer borrowers.
SSRN
We investigate bank relationships in a rarely-considered context â€" consumer and small business credit cards. Using over one million accounts, we find during normal times, consumer relationship customers enjoy relatively favorable credit terms, consistent with the bright side of relationships, while the dark side dominates for small businesses. During COVID-19, both groups benefit, reflecting intertemporal smoothing, with more benefits flowing to safer relationship customers. Conventional banking relationships benefit consumers more than credit card relationships, with mixed findings for small businesses. Important identification issues are addressed. CARES Act consumer-delinquency reporting impediments reduce the informational value of consumer credit scores, penalizing safer borrowers.
Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis
SSRN
We investigate the role of private equity (PE) in the resolution of failed banks after the 2008 financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with data on PE investors, we find that PE investors made substantial investments in underperforming and riskier failed banks. Further, these acquisitions tended to be in geographies where the other local banks were also distressed. Our results suggest that PE investors helped channel capital to underperforming failed banks when the “natural†potential bank acquirers were themselves constrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use a quasi-random empirical design based on proprietary bidding data to examine ex post performance and real effects. We find that PE-acquired banks performed better ex post, with positive real effects for the local economy. Our results suggest that private equity investors had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution.
SSRN
We investigate the role of private equity (PE) in the resolution of failed banks after the 2008 financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with data on PE investors, we find that PE investors made substantial investments in underperforming and riskier failed banks. Further, these acquisitions tended to be in geographies where the other local banks were also distressed. Our results suggest that PE investors helped channel capital to underperforming failed banks when the “natural†potential bank acquirers were themselves constrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use a quasi-random empirical design based on proprietary bidding data to examine ex post performance and real effects. We find that PE-acquired banks performed better ex post, with positive real effects for the local economy. Our results suggest that private equity investors had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution.
Property in People & the Complexities of Capitalism
SSRN
My years of research on the emergence of slavery in the British Empire not only supports the argument that all markets are regulated, but shows that the character of that regulation can lead to an extraordinary form of capitalism, a form that strikes at the heart of the idea of free markets. This paper explores the dilemma of slavery in the seventeenth century British Empire focusing on questions of its legality and the implications of that legality for finance. Without the ability to maintain that a person could be property, attempted claims at ownership or sale were often legally dubious, difficult to maintain and impossible to finance. England’s Royal African Companyâ€"run by the king’s own brother, James, Duke of York, went bankrupt as a consequence in 1667. The paper shows how England’s high court stepped in to legitimate the legal process of treating people as property, and explains its impact on finance and trade in enslaved people across the empire. It then connects those court decisions to the military force necessary to uphold them, and argues that there is no such thing as a “free market†in forced labor, and that all markets have to be regulated and the rules of exchange enforced. While slavery is perhaps the most crucial example of how such regulation works, this case study from the era of its emergence illuminates how modern assumptions about free markets seriously underestimate the ways in which different regulation combined with the instruments of political power can create radically different kinds of society. The infusion of legal stabilityâ€"recognizing people as simple propertyâ€"enabled financial empires to be built on such “property.†By paying attention to the importance of such rules, however, we also need to acknowledge the centrality of basic regulation to all markets. Someone needs to enforce contracts, to prevent theft and limit fraud, a role usually performed by the state. Without such regulation, markets collapse; we have Hobbes’ state of nature. It was for that reason that so much thinking about the nature of contracts â€" both political and economic â€" helped to define modernity.
SSRN
My years of research on the emergence of slavery in the British Empire not only supports the argument that all markets are regulated, but shows that the character of that regulation can lead to an extraordinary form of capitalism, a form that strikes at the heart of the idea of free markets. This paper explores the dilemma of slavery in the seventeenth century British Empire focusing on questions of its legality and the implications of that legality for finance. Without the ability to maintain that a person could be property, attempted claims at ownership or sale were often legally dubious, difficult to maintain and impossible to finance. England’s Royal African Companyâ€"run by the king’s own brother, James, Duke of York, went bankrupt as a consequence in 1667. The paper shows how England’s high court stepped in to legitimate the legal process of treating people as property, and explains its impact on finance and trade in enslaved people across the empire. It then connects those court decisions to the military force necessary to uphold them, and argues that there is no such thing as a “free market†in forced labor, and that all markets have to be regulated and the rules of exchange enforced. While slavery is perhaps the most crucial example of how such regulation works, this case study from the era of its emergence illuminates how modern assumptions about free markets seriously underestimate the ways in which different regulation combined with the instruments of political power can create radically different kinds of society. The infusion of legal stabilityâ€"recognizing people as simple propertyâ€"enabled financial empires to be built on such “property.†By paying attention to the importance of such rules, however, we also need to acknowledge the centrality of basic regulation to all markets. Someone needs to enforce contracts, to prevent theft and limit fraud, a role usually performed by the state. Without such regulation, markets collapse; we have Hobbes’ state of nature. It was for that reason that so much thinking about the nature of contracts â€" both political and economic â€" helped to define modernity.
Shareholder litigation and the risk incentive effect of executive compensation: A re-examination
SSRN
Previous literature shows that securities litigation is positively impacted by management compensation with a focus on the delta, but not the vega, component of compensation. We argue that the vega, rather than the delta, component of management compensation should be associated with litigation propensity. Using a sample from 1996 to 2018, we document that securities litigation is related to option vega but not to delta. Our results are robust to alternate specifications of delta and vega, and to endogeneity concerns from reverse causality.
SSRN
Previous literature shows that securities litigation is positively impacted by management compensation with a focus on the delta, but not the vega, component of compensation. We argue that the vega, rather than the delta, component of management compensation should be associated with litigation propensity. Using a sample from 1996 to 2018, we document that securities litigation is related to option vega but not to delta. Our results are robust to alternate specifications of delta and vega, and to endogeneity concerns from reverse causality.
State-Owned Enterprises as Actors: An Institutional Work Framework
SSRN
Although state-owned enterprises (SOEs) are recognized as important economic actors, the literature to date has assumed close state control over SOEs and therefore their passive stance towards institutions. Drawing on the institutional work and historical institutionalism literatures, we challenge this view. We develop a multilevel framework of SOEs top management teams’ (TMTs’) embedded agency, spanning the national macro-institutional level, the meso-level of regimes of state-SOE relations, and sector-specific institutions. We then derive propositions regarding the factors across these multiple levels that shape SOE TMTs’ motivation, resources, and scope for institutional work. This framework allows us to explain the leeway for and likelihood of SOE TMTs’ engagement in institutional work across institutional contexts.
SSRN
Although state-owned enterprises (SOEs) are recognized as important economic actors, the literature to date has assumed close state control over SOEs and therefore their passive stance towards institutions. Drawing on the institutional work and historical institutionalism literatures, we challenge this view. We develop a multilevel framework of SOEs top management teams’ (TMTs’) embedded agency, spanning the national macro-institutional level, the meso-level of regimes of state-SOE relations, and sector-specific institutions. We then derive propositions regarding the factors across these multiple levels that shape SOE TMTs’ motivation, resources, and scope for institutional work. This framework allows us to explain the leeway for and likelihood of SOE TMTs’ engagement in institutional work across institutional contexts.
Stock Market Trend Analysis Using Hidden Markov Model and Long Short Term Memory
arXiv
arXiv
This paper intends to apply the Hidden Markov Model into stock market and and make predictions. Moreover, four different methods of improvement, which are GMM-HMM, XGB-HMM, GMM-HMM+LSTM and XGB-HMM+LSTM, will be discussed later with the results of experiment respectively. After that we will analyze the pros and cons of different models. And finally, one of the best will be used into stock market for timing strategy.
Stock-Bond Return Correlation, Bond Risk Premium Fundamentals, and Fiscal-Monetary Policy Regime
SSRN
We incorporate regime switching between monetary and fiscal policies in a general equilibrium model to explain three stylized facts: (1) the positive stock-bond return correlation from 1971 to 2000 and the negative one after 2000, (2) the negative correlation between consumption and inflation from 1971 to 2000 and the positive one after 2000, and (3) the coexistence of positive bond risk premiums and the negative stock-bond return correlation. We show that two distinctive shocksâ€"the technology and investment shocksâ€"drive positive and negative stock-bond return correlations under two policy regimes, but positive bond risk premiums are driven by the same technology shock.
SSRN
We incorporate regime switching between monetary and fiscal policies in a general equilibrium model to explain three stylized facts: (1) the positive stock-bond return correlation from 1971 to 2000 and the negative one after 2000, (2) the negative correlation between consumption and inflation from 1971 to 2000 and the positive one after 2000, and (3) the coexistence of positive bond risk premiums and the negative stock-bond return correlation. We show that two distinctive shocksâ€"the technology and investment shocksâ€"drive positive and negative stock-bond return correlations under two policy regimes, but positive bond risk premiums are driven by the same technology shock.
The Cyclical Growth of Public Firms and the COVID Crisis
SSRN
We document a significant but declining size effect and cyclicality in sales growth within U.S. public firms, including the COVID crisis. The patterns differ significantly from those documented in prior studies which focus on samples dominated by private firms. Small public firms grow faster than large public firms since the start of our sample period in 1974, especially during expansions, but the gap declines significantly starting in early 2000s and closes entirely during the 2020 recession. Contrary to the prevailing view in the literature, financing constraints do not explain the size effect, and the effect is stronger in 2020 than in the Great Recession during which constraints were, arguably, more severe. We examine alternative explanations for the size effect, including diversification, fallen angels, demand effects, and overinvestment. Preliminary analysis shows evidence inconsistent with the first two hypotheses. The size effect increases market shares of large firms in recession, but this is counteracted by new entry, thus, mitigating the effects on industry structures across business cycles.
SSRN
We document a significant but declining size effect and cyclicality in sales growth within U.S. public firms, including the COVID crisis. The patterns differ significantly from those documented in prior studies which focus on samples dominated by private firms. Small public firms grow faster than large public firms since the start of our sample period in 1974, especially during expansions, but the gap declines significantly starting in early 2000s and closes entirely during the 2020 recession. Contrary to the prevailing view in the literature, financing constraints do not explain the size effect, and the effect is stronger in 2020 than in the Great Recession during which constraints were, arguably, more severe. We examine alternative explanations for the size effect, including diversification, fallen angels, demand effects, and overinvestment. Preliminary analysis shows evidence inconsistent with the first two hypotheses. The size effect increases market shares of large firms in recession, but this is counteracted by new entry, thus, mitigating the effects on industry structures across business cycles.
The Effectiveness of Prudential Regulations for Banks: Global Perspective and Indian Context
SSRN
Banking regulations intend to protect the interest of depositors, reduce the risk of bank failures, minimize the moral hazard, and strengthen the financial stability by controlling the behavior of financial system participants and by building financial buffers. In countries like India, where banks dominate the financial sector, banking regulations assume added significance. This paper provides a global perspective on the prudential regulations and examines the extent to which the regulations could mitigate the risk of financial crises. It also analyses the role of macro-prudential regulations in achieving financial stability and its interaction with micro-prudential regulations. It further delves into the role of regulations in catalyzing financial innovations and hence, indirectly contributing to irrational exuberance and excessive risk-taking in the financial system. Certain other issues deliberated upon in this paper include a need to closely look at the nature and design of prudential regulations with a view to reducing complexities in regulatory and supervisory processes, and evaluation of the role of regulations in growth, governance, and performance of banks in India. The paper looks at the movement of credit to GDP ratio, the GDP growth trajectory, and a periodic emergence of credit gap in the Indian context, and discusses the utility of credit gap as an indicator for macroprudential policy in India. This paper also analyses the pattern and movement of gross and net NPAs of the Indian banks and its relations with regulatory forbearance and supervisory processes. It suggests a continual need for strengthening institutional credibility for improving the effectiveness of regulatory and supervisory processes so as to achieve stability, transparency, and robustness in financial institutions and financial markets.
SSRN
Banking regulations intend to protect the interest of depositors, reduce the risk of bank failures, minimize the moral hazard, and strengthen the financial stability by controlling the behavior of financial system participants and by building financial buffers. In countries like India, where banks dominate the financial sector, banking regulations assume added significance. This paper provides a global perspective on the prudential regulations and examines the extent to which the regulations could mitigate the risk of financial crises. It also analyses the role of macro-prudential regulations in achieving financial stability and its interaction with micro-prudential regulations. It further delves into the role of regulations in catalyzing financial innovations and hence, indirectly contributing to irrational exuberance and excessive risk-taking in the financial system. Certain other issues deliberated upon in this paper include a need to closely look at the nature and design of prudential regulations with a view to reducing complexities in regulatory and supervisory processes, and evaluation of the role of regulations in growth, governance, and performance of banks in India. The paper looks at the movement of credit to GDP ratio, the GDP growth trajectory, and a periodic emergence of credit gap in the Indian context, and discusses the utility of credit gap as an indicator for macroprudential policy in India. This paper also analyses the pattern and movement of gross and net NPAs of the Indian banks and its relations with regulatory forbearance and supervisory processes. It suggests a continual need for strengthening institutional credibility for improving the effectiveness of regulatory and supervisory processes so as to achieve stability, transparency, and robustness in financial institutions and financial markets.
The Fed Takes On Corporate Credit Risk: An Analysis of the Efficacy of the SMCCF
SSRN
We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the corporate bond market in the wake of the COVID-19 shock. The Fed announced the SMCCF on March 23 and expanded the program on April 9. Regression discontinuity estimates imply that these announcements reduced credit spreads on bonds eligible for purchase 70 basis points (bp). We refine this analysis by constructing a sample of bondsâ€"issued by the same set of companiesâ€"that differ in their SMCCF eligibility. A diff-in-diff analysis shows that both announcements had large effects on credit spreads, narrowing spreads by 20 bp on eligible bonds relative to their ineligible counterparts within the same set of issuers across the two announcement periods. The March 23 announcement also reduced bid-ask spreads 10 bp within 10 days of the announcement. By lowering credit spreads and improving liquidity, the April 9 announcement had an especially pronounced effect on “fallen angels.†The actual purchases lowered credit spreads by an additional 5 bp and bid-ask spreads by 2 bp. These results confirm that the SMCCF made it easier for companies to borrow in the corporate bond market.
SSRN
We evaluate the efficacy of the Secondary Market Corporate Credit Facility (SMCCF), a program designed to stabilize the corporate bond market in the wake of the COVID-19 shock. The Fed announced the SMCCF on March 23 and expanded the program on April 9. Regression discontinuity estimates imply that these announcements reduced credit spreads on bonds eligible for purchase 70 basis points (bp). We refine this analysis by constructing a sample of bondsâ€"issued by the same set of companiesâ€"that differ in their SMCCF eligibility. A diff-in-diff analysis shows that both announcements had large effects on credit spreads, narrowing spreads by 20 bp on eligible bonds relative to their ineligible counterparts within the same set of issuers across the two announcement periods. The March 23 announcement also reduced bid-ask spreads 10 bp within 10 days of the announcement. By lowering credit spreads and improving liquidity, the April 9 announcement had an especially pronounced effect on “fallen angels.†The actual purchases lowered credit spreads by an additional 5 bp and bid-ask spreads by 2 bp. These results confirm that the SMCCF made it easier for companies to borrow in the corporate bond market.
The Influence of US Dollar Funding Conditions on Asian Financial Markets
SSRN
More than 20 years after the Asian financial crisis, the region’s continued high reliance on United States (US) dollar-denominated funding has significant implications for the transmission of global financial conditions to domestic financial and macroeconomic circumstances. Given limited domestic capital market-based financing solutions, a high reliance on funding denominated in US dollars renders countries vulnerable to changing global financial and liquidity conditions. Using a dynamic panel and a vector autoregression model to assess the exchange rate as a possible transmission channel, we find that changes in bilateral US dollar exchange rates can have a significant impact on sovereign credit risk. In particular, a depreciation of the domestic currency against the US dollar leads to a widening of the sovereign bond spread. This finding suggests a significant relationship between US dollar funding exposure, US dollar liquidity conditions, and domestic financial conditions in some emerging Asian economies, and thus highlights one source of structural vulnerability. Given that the magnitude of the effects varies across countries, policy makers need to monitor closely the interplay between the exchange rates and local financial market conditions with tailored prescriptions for domestic financial resilience.
SSRN
More than 20 years after the Asian financial crisis, the region’s continued high reliance on United States (US) dollar-denominated funding has significant implications for the transmission of global financial conditions to domestic financial and macroeconomic circumstances. Given limited domestic capital market-based financing solutions, a high reliance on funding denominated in US dollars renders countries vulnerable to changing global financial and liquidity conditions. Using a dynamic panel and a vector autoregression model to assess the exchange rate as a possible transmission channel, we find that changes in bilateral US dollar exchange rates can have a significant impact on sovereign credit risk. In particular, a depreciation of the domestic currency against the US dollar leads to a widening of the sovereign bond spread. This finding suggests a significant relationship between US dollar funding exposure, US dollar liquidity conditions, and domestic financial conditions in some emerging Asian economies, and thus highlights one source of structural vulnerability. Given that the magnitude of the effects varies across countries, policy makers need to monitor closely the interplay between the exchange rates and local financial market conditions with tailored prescriptions for domestic financial resilience.
The Life Cycle of a Bank Enforcement Action and Its Impact on Minority Lending
SSRN
This paper studies the role banking supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect bank borrower base. We document significant changes in the underlying demographic mix of residential mortgage borrowers. After an EDO's termination, banks significantly increase residential mortgage lending to minorities and increase their market share of lending to this group within the counties where they operate. EDO banks are also less likely to deny loans to minority borrowers, and their reasons for loan denial change. Our results are consistent with banks catering to regulators after EDO termination.
SSRN
This paper studies the role banking supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect bank borrower base. We document significant changes in the underlying demographic mix of residential mortgage borrowers. After an EDO's termination, banks significantly increase residential mortgage lending to minorities and increase their market share of lending to this group within the counties where they operate. EDO banks are also less likely to deny loans to minority borrowers, and their reasons for loan denial change. Our results are consistent with banks catering to regulators after EDO termination.
The Mysterious Disappearance of Morgan Godwyn: Rethinking Press Censorship and the Debates over Slavery in the Early British Empire
SSRN
In the spring of 1685, Morgan Godwyn, a minister who had served in Virginia and Barbados for more than 15 years, disappeared after publishing a book condemning the slave trade, and in 1687, he died. This paper is an attempt both to explain the mystery surrounding his death by providing a context for it, and to explore the limits of our vision as historians by examining how censorship worked in late seventeenth century England and its empire and how those very restraints limit what we can see and hear as historians. I will argue that Godwyn probably died for criticizing slavery in a world where the name of the King of England, James II, was synonymous with the slave trade. James II was personally responsible, as director of the Royal African Company which had a legal monopoly on the slave trade, for the importation of literally 100,000 souls (that we can count via the slave trade database) from Africa to the new world in the decade of the 1680s alone. That same King believed he was God’s anointed servant, responsible to no-one, ruling by divine right. Godwyn’s public condemnation of the slave trade (at Westminster Abbey, in London in 1685), a sermon he then had published-- essentially accused James II of making a Faustian bargain with the Devil. This paper is a meditation on how power shaped what could be published, rendering many people "dumb" or mute, at least to our ears, which are attuned to the published past, from whence we tell our histories. Consequently we have failed to see how extensively slavery was debated before 1775, partly because we have not been looking in the right places, but mostly because we have not been reading underneath and behind censorship's veil.
SSRN
In the spring of 1685, Morgan Godwyn, a minister who had served in Virginia and Barbados for more than 15 years, disappeared after publishing a book condemning the slave trade, and in 1687, he died. This paper is an attempt both to explain the mystery surrounding his death by providing a context for it, and to explore the limits of our vision as historians by examining how censorship worked in late seventeenth century England and its empire and how those very restraints limit what we can see and hear as historians. I will argue that Godwyn probably died for criticizing slavery in a world where the name of the King of England, James II, was synonymous with the slave trade. James II was personally responsible, as director of the Royal African Company which had a legal monopoly on the slave trade, for the importation of literally 100,000 souls (that we can count via the slave trade database) from Africa to the new world in the decade of the 1680s alone. That same King believed he was God’s anointed servant, responsible to no-one, ruling by divine right. Godwyn’s public condemnation of the slave trade (at Westminster Abbey, in London in 1685), a sermon he then had published-- essentially accused James II of making a Faustian bargain with the Devil. This paper is a meditation on how power shaped what could be published, rendering many people "dumb" or mute, at least to our ears, which are attuned to the published past, from whence we tell our histories. Consequently we have failed to see how extensively slavery was debated before 1775, partly because we have not been looking in the right places, but mostly because we have not been reading underneath and behind censorship's veil.
The Netting Efficiencies of Marketwide Central Clearing
SSRN
Market disruptions in response to the COVID pandemic spurred calls for the consideration of marketwide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. We assess the netting efficiencies of increased central clearing using nonpublic Treasury TRACE transactions data. We find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly $330 billion (60 percent) in the weeks preceding and following the market disruptions of March 2020, but nearly $800 billion (70 percent) when trading was at its highest. We also find that expanded central clearing would have substantially lowered settlement fails. The estimated benefits would likely be greater if dealers’ auction purchases were included in the analysis or if the increased central clearing included repo transactions.
SSRN
Market disruptions in response to the COVID pandemic spurred calls for the consideration of marketwide central clearing of Treasury securities, which might better enable dealers to intermediate large customer trading flows. We assess the netting efficiencies of increased central clearing using nonpublic Treasury TRACE transactions data. We find that central clearing of all outright trades would have lowered dealers’ daily gross settlement obligations by roughly $330 billion (60 percent) in the weeks preceding and following the market disruptions of March 2020, but nearly $800 billion (70 percent) when trading was at its highest. We also find that expanded central clearing would have substantially lowered settlement fails. The estimated benefits would likely be greater if dealers’ auction purchases were included in the analysis or if the increased central clearing included repo transactions.
The Race to Digitize: An Asian Perspective
SSRN
We consider the challenges regarding regulation, risk management and digitisation. Some of the topics discussed are: 1) Sergey Bubka and The Regulators2) Risk Management: A Slow Walk On A Tight Rope3) Alice in Business-Land4) Sleeping Like A Koala
SSRN
We consider the challenges regarding regulation, risk management and digitisation. Some of the topics discussed are: 1) Sergey Bubka and The Regulators2) Risk Management: A Slow Walk On A Tight Rope3) Alice in Business-Land4) Sleeping Like A Koala
The option pricing model based on time values: an application of the universal approximation theory on unbounded domains
arXiv
arXiv
We propose a time value related decision function to treat a classical option pricing problem raised by Hutchinson-Lo-Poggio. In numerical experiments, the new decision function significantly improves the original model of Hutchinson-Lo-Poggio with faster convergence and better generalization performance. By proving a novel universal approximation theorem, we show that our decision function rather than Hutchinson-Lo-Poggio's can be approximated on the entire domain of definition by neural networks. Thus the experimental results are partially explained by the representation properties of networks.
The role of negative emissions in meeting China's 2060 carbon neutrality goal
arXiv
arXiv
China's pledge to reach carbon neutrality before 2060 is an ambitious goal and could provide the world with much-needed leadership on how to limit warming to +1.5C warming above pre-industrial levels by the end of the century. But the pathways that would achieve net zero by 2060 are still unclear, including the role of negative emissions technologies. We use the Global Change Analysis Model to simulate how negative emissions technologies, in general, and direct air capture (DAC) in particular, could contribute to China's meeting this target. Our results show that negative emissions could play a large role, offsetting on the order of 3 GtCO2 per year from difficult-to-mitigate sectors such as freight transportation and heavy industry. This includes up to a 1.6 GtCO2 per year contribution from DAC, constituting up to 60% of total projected negative emissions in China. But DAC, like bioenergy with carbon capture and storage and afforestation, has not yet been demonstrated at anywhere approaching the scales required to meaningfully contribute to climate mitigation. Deploying NETs at these scales will have widespread impacts on financial systems and natural resources such as water, land, and energy in China.
Trust, Social Capital, and the Bond Market Benefits of ESG Performance
SSRN
We investigate whether a firm’s social capital, and the trust that it engenders, are viewed favorably by bondholders. Using firms’ environmental and social (E&S) performance to proxy for social capital, we find no relation between social capital and bond spreads over the period 2006-2019. However, during the 2008-2009 financial crisis, which represents a shock to trust and default risk, high-social-capital firms benefited from lower bond spreads. These effects are stronger for firms with higher expected agency costs of debt and firms whose E&S efforts are more salient. During the crisis, high-social-capital firms were also able to raise more debt, at lower spreads, and for longer maturities. We find no evidence that the governance element of ESG is related to bond spreads.
SSRN
We investigate whether a firm’s social capital, and the trust that it engenders, are viewed favorably by bondholders. Using firms’ environmental and social (E&S) performance to proxy for social capital, we find no relation between social capital and bond spreads over the period 2006-2019. However, during the 2008-2009 financial crisis, which represents a shock to trust and default risk, high-social-capital firms benefited from lower bond spreads. These effects are stronger for firms with higher expected agency costs of debt and firms whose E&S efforts are more salient. During the crisis, high-social-capital firms were also able to raise more debt, at lower spreads, and for longer maturities. We find no evidence that the governance element of ESG is related to bond spreads.
Uncertainty Network Risk and Currency Returns
SSRN
We examine the pricing of a horizon specific uncertainty network risk, extracted from option implied variances on exchange rates, in the cross-section of currency returns. Buying currencies that are receivers and selling currencies that are transmitters of short-term shocks exhibits a high Sharpe ratio and yields a significant alpha when controlling for standard dollar, carry trade, volatility, variance risk premium and momentum strategies. This profitability stems primarily from the causal nature of shock propagation and not from contemporaneous dynamics. Shock propagation at longer horizons is priced less, indicating a downward-sloping term structure of uncertainty network risk in currency markets.
SSRN
We examine the pricing of a horizon specific uncertainty network risk, extracted from option implied variances on exchange rates, in the cross-section of currency returns. Buying currencies that are receivers and selling currencies that are transmitters of short-term shocks exhibits a high Sharpe ratio and yields a significant alpha when controlling for standard dollar, carry trade, volatility, variance risk premium and momentum strategies. This profitability stems primarily from the causal nature of shock propagation and not from contemporaneous dynamics. Shock propagation at longer horizons is priced less, indicating a downward-sloping term structure of uncertainty network risk in currency markets.
When Love and Hate Collide: A Network Analysis of emotional contagion in Financial Markets
SSRN
Emotional finance introduces the notion that financial markets may be driven by the co-existence of fully-rational and emotional investors, driven by phantasy. The analysis of emotional finance is informed with reference to a Freudian psychoanalytical framework. In this paper, we add to the existing information cascade and herding research by developing an emotional finance model that examines the effects of phantasy investors on the decisions of rational investors under dynamic pricing. We consider a ï¬nancial market for a risky asset in which traders’ emotions develop over time based on how they perform. We hypothesize that emotions affect traders’ behavior in a number of ways, through love and hate, where love results in investors buying and holding their stock regardless of the realized profit or loss.The assumptions of the model include a constant population size of investors, and that all individuals are identical in their susceptibility to various emotional states. We also assume that the probability of becoming in love with stock is independent of an individual's history of emotional episodes and mood. We introduced an elementary agent-based asset pricing model consisting of three trader types: fundamental traders, emotional traders, and semi-emotional traders. The model comprises two features: 1) an emotional herding mechanism based on the susceptible-infected susceptible (SIS) model, and 2) wealth price herding based on wealth preferential attachment. We did this by creating sets of investors with given attributes and behaviors. Then we considered a set of investor relationships and methods of interaction: an underlying topology of connectedness defining how and with whom agents interact. Then we considered the market network where investors interact with their environment, and with other investors.Combining analytical and simulation methods, the interaction between these elements is studied in a four-phase plane of the price movement: 1) prices resembling a bull market; 2) prices resembling a bear market; 3) U-shaped pricing trends; and 4) n shaped pricing trends. Finally, we compare our approach with a traditional information cascade/herding model incorporating phantasy investors. We have formally demonstrated that emotions can be thought of as infectious diseases spreading across social networks. We have introduced a novel form of mathematical infectious disease model for describing the spread of emotions. We have validated this model by studying emotional propagation between different group of investors across a social network.
SSRN
Emotional finance introduces the notion that financial markets may be driven by the co-existence of fully-rational and emotional investors, driven by phantasy. The analysis of emotional finance is informed with reference to a Freudian psychoanalytical framework. In this paper, we add to the existing information cascade and herding research by developing an emotional finance model that examines the effects of phantasy investors on the decisions of rational investors under dynamic pricing. We consider a ï¬nancial market for a risky asset in which traders’ emotions develop over time based on how they perform. We hypothesize that emotions affect traders’ behavior in a number of ways, through love and hate, where love results in investors buying and holding their stock regardless of the realized profit or loss.The assumptions of the model include a constant population size of investors, and that all individuals are identical in their susceptibility to various emotional states. We also assume that the probability of becoming in love with stock is independent of an individual's history of emotional episodes and mood. We introduced an elementary agent-based asset pricing model consisting of three trader types: fundamental traders, emotional traders, and semi-emotional traders. The model comprises two features: 1) an emotional herding mechanism based on the susceptible-infected susceptible (SIS) model, and 2) wealth price herding based on wealth preferential attachment. We did this by creating sets of investors with given attributes and behaviors. Then we considered a set of investor relationships and methods of interaction: an underlying topology of connectedness defining how and with whom agents interact. Then we considered the market network where investors interact with their environment, and with other investors.Combining analytical and simulation methods, the interaction between these elements is studied in a four-phase plane of the price movement: 1) prices resembling a bull market; 2) prices resembling a bear market; 3) U-shaped pricing trends; and 4) n shaped pricing trends. Finally, we compare our approach with a traditional information cascade/herding model incorporating phantasy investors. We have formally demonstrated that emotions can be thought of as infectious diseases spreading across social networks. We have introduced a novel form of mathematical infectious disease model for describing the spread of emotions. We have validated this model by studying emotional propagation between different group of investors across a social network.
Yes, Vaccinations Bring Safety: COVID-19 and the Volatility of Travel and Leisure Companies
SSRN
This paper examines the impact of vaccination programs on the stock market volatility of the travel and leisure sector. Using daily data from 56 countries over the period from January 2020 to March 2021, we find that vaccination leads to a decrease in the investment risk of travel and leisure companies. The drop in volatility is robust to many alternative estimation techniques and variable specifications and does not depend on the pandemic or government policy responses. Furthermore, the impact of mass vaccinations on the risk of tourism companies is more substantial in emerging markets.
SSRN
This paper examines the impact of vaccination programs on the stock market volatility of the travel and leisure sector. Using daily data from 56 countries over the period from January 2020 to March 2021, we find that vaccination leads to a decrease in the investment risk of travel and leisure companies. The drop in volatility is robust to many alternative estimation techniques and variable specifications and does not depend on the pandemic or government policy responses. Furthermore, the impact of mass vaccinations on the risk of tourism companies is more substantial in emerging markets.
é‡'èžæœºæž„的投资者适å½"性义务：实è¯ç "究与完善建议 (Investor Suitability Obligations of Financial Institutions: Empirical Research and Suggestions for Improvement)
SSRN
Chinese abstract: é‡'èžæœºæž„的投资者适å½"性义务è¦æ±‚é‡'èžæœºæž„å'投资者é"€å"®é€‚å½"çš„é‡'èžäº§å"，ä½"现“买者自负ã€å–者尽责â€çš„ç†å¿µï¼Œæˆ'国é€æ¥å»ºç«‹èµ·äº†æŠ•èµ„者适å½"性义务制度，但ä»æœ‰è¯¸å¤šä¸è¶³ï¼Œè¿'æ¥ä¹Ÿå‡ºçŽ°ä¸è¡ŒåŽŸæ²¹å®ç‰é—®é¢˜ã€‚实è¯ç "究å'现，æˆ'国相关案例ä¸å¤šï¼Œä½†å¢žé•¿è¶‹åŠ¿æ˜Žæ˜¾ï¼Œæ€»ä½"èµ"å¿çŽ‡ä½ŽäºŽæµ·å¤–ï¼›é"¶è¡Œéžä¿æœ¬ç†è´¢äº§å"å'ŒæŠ•èµ„顾问业务的案件å æ¯"很高；原å'ŠæŠ•èµ„è€…å‡ ä¹Žå…¨éƒ¨æ˜¯ä¸ªäººï¼Œä¸"多为è€å¹´äººã€‚适å½"性义务的履行åº"é¿å…å½¢å¼åŒ–ï¼›åº"一并关注其“质â€å'Œâ€œé‡â€ä¸¤ä¸ªç»´åº¦ï¼›åº"区分适å½"性义务与åˆæ ¼æŠ•èµ„者制度；以åˆåŒä¸ºä¸»ç•Œå®šæ°'事责任，但å'行人承担连带责任有其æ£å½"性；åº"完善责任å‡å…事ç"±ï¼Œä½†ä¸èƒ½ä»¥åˆåŒæŽ'除适å½"性义务；åº"以功能ç›'管为方å'统一适å½"æ€§ä¹‰åŠ¡æ ‡å‡†ã€‚English abstract: Investor suitability duty of financial institutions requires financial institutions to sell suitable products to investors, which is based on the balance of the two principles of Caveat Emptor and Seller Due Diligence. China has gradually established the system of investor suitability duty, but still suffers from many problems, as evidenced by the recent case of Bank of China’s Crude Oil Treasure. There are several important empirical findings: although there are not many cases, a clear increase in the number of cases can be discerned in recent years; the overall compensation rate is lower than overseas jurisdictions; asset management products offered by the banks have a high incidence of violations; almost all plaintiff investors are individual investors, and are mostly aged persons. A formality approach should be avoided in performing the suitability duty; attention should be paid to the two dimensions of quality and quantity; the suitability duty needs to be distinguished from the institution of qualified investors; civil lability for breaching the suitability duty should mainly be contractual, and it is reasonable for the issuer to bear joint and several liability; liability-mitigating circumstances should be clearly set out, but the duty cannot be contractually precluded altogether; a functional regulatory principle should be adopted to unify the various standards for the suitability duty as applied in different financial sectors.
SSRN
Chinese abstract: é‡'èžæœºæž„的投资者适å½"性义务è¦æ±‚é‡'èžæœºæž„å'投资者é"€å"®é€‚å½"çš„é‡'èžäº§å"，ä½"现“买者自负ã€å–者尽责â€çš„ç†å¿µï¼Œæˆ'国é€æ¥å»ºç«‹èµ·äº†æŠ•èµ„者适å½"性义务制度，但ä»æœ‰è¯¸å¤šä¸è¶³ï¼Œè¿'æ¥ä¹Ÿå‡ºçŽ°ä¸è¡ŒåŽŸæ²¹å®ç‰é—®é¢˜ã€‚实è¯ç "究å'现，æˆ'国相关案例ä¸å¤šï¼Œä½†å¢žé•¿è¶‹åŠ¿æ˜Žæ˜¾ï¼Œæ€»ä½"èµ"å¿çŽ‡ä½ŽäºŽæµ·å¤–ï¼›é"¶è¡Œéžä¿æœ¬ç†è´¢äº§å"å'ŒæŠ•èµ„顾问业务的案件å æ¯"很高；原å'ŠæŠ•èµ„è€…å‡ ä¹Žå…¨éƒ¨æ˜¯ä¸ªäººï¼Œä¸"多为è€å¹´äººã€‚适å½"性义务的履行åº"é¿å…å½¢å¼åŒ–ï¼›åº"一并关注其“质â€å'Œâ€œé‡â€ä¸¤ä¸ªç»´åº¦ï¼›åº"区分适å½"性义务与åˆæ ¼æŠ•èµ„者制度；以åˆåŒä¸ºä¸»ç•Œå®šæ°'事责任，但å'行人承担连带责任有其æ£å½"性；åº"完善责任å‡å…事ç"±ï¼Œä½†ä¸èƒ½ä»¥åˆåŒæŽ'除适å½"性义务；åº"以功能ç›'管为方å'统一适å½"æ€§ä¹‰åŠ¡æ ‡å‡†ã€‚English abstract: Investor suitability duty of financial institutions requires financial institutions to sell suitable products to investors, which is based on the balance of the two principles of Caveat Emptor and Seller Due Diligence. China has gradually established the system of investor suitability duty, but still suffers from many problems, as evidenced by the recent case of Bank of China’s Crude Oil Treasure. There are several important empirical findings: although there are not many cases, a clear increase in the number of cases can be discerned in recent years; the overall compensation rate is lower than overseas jurisdictions; asset management products offered by the banks have a high incidence of violations; almost all plaintiff investors are individual investors, and are mostly aged persons. A formality approach should be avoided in performing the suitability duty; attention should be paid to the two dimensions of quality and quantity; the suitability duty needs to be distinguished from the institution of qualified investors; civil lability for breaching the suitability duty should mainly be contractual, and it is reasonable for the issuer to bear joint and several liability; liability-mitigating circumstances should be clearly set out, but the duty cannot be contractually precluded altogether; a functional regulatory principle should be adopted to unify the various standards for the suitability duty as applied in different financial sectors.
