Research articles for the 2021-04-26

A Basket Half Full: Sparse Portfolios
Ekaterina Seregina

The existing approaches to sparse wealth allocations (1) are limited to low-dimensional setup when the number of assets is less than the sample size; (2) lack theoretical analysis of sparse wealth allocations and their impact on portfolio exposure; (3) are suboptimal due to the bias induced by an $\ell_1$-penalty. We address these shortcomings and develop an approach to construct sparse portfolios in high dimensions. Our contribution is twofold: from the theoretical perspective, we establish the oracle bounds of sparse weight estimators and provide guidance regarding their distribution. From the empirical perspective, we examine the merit of sparse portfolios during different market scenarios. We find that in contrast to non-sparse counterparts, our strategy is robust to recessions and can be used as a hedging vehicle during such times.

A New Investment Strategy with Economic Cycle Alternations Based on Residual Income Valuation Model: Empirical Results from Taiwan Stock Markets
Hwang, Tang-Lin
The purpose of this research is an attempt to present a mixed model based on the residual income valuation model, where two new factors, business cycles and financial items, are added. We offer a practical investment opinion by which investors and fundamental analysts can either establish or adjust their portfolios if there is an effort made to reverse the present economic atmosphere due to the ongoing COVID-19 pandemic.We find that the items in financial reports don’t have the same impacts for different business cycles. However, tax has a significantly positive sign when economies are expanding or contracting.

A Text Convolution Network Based Policy Uncertainty Index: An Application For China
Fu, Yuqi,Yang, Zan,Ding, Liqun
Accurate measurements of economic policy uncertainty (EPU) are essential for understanding and predicting economic dynamics. In this study, we use text convolution network, an advanced natural language processing method, to develop an innovative monthly index of EPU. It is explored that this method can better analyze complex semantics and subtle language in textual data and accurately measure policy uncertainty. We apply this method to the Chinese real estate market based on the texts of 60 Chinese newspapers from 2005 to 2019. It is proved that the index effectively captures the characteristics of policy uncertainty in China’s real estate market. This new approach is not limited to the study of policy uncertainty but can be widely applied to other concept-based text analysis.

A note on the option price and 'Mass at zero in the uncorrelated SABR model and implied volatility asymptotics'
Jaehyuk Choi,Lixin Wu

Gulisashvili et al. [Quant. Finance, 2018, 18(10), 1753-1765] provide a small-time asymptotics for the mass at zero under the uncorrelated stochastic-alpha-beta-rho (SABR) model by approximating the integrated variance with a moment-matched lognormal distribution. We improve the accuracy of the numerical integration by using the Gauss--Hermite quadrature. We further obtain the option price by integrating the constant elasticity of variance (CEV) option prices in the same manner without resorting to the small-strike volatility smile asymptotics of De Marco et al. [SIAM J. Financ. Math., 2017, 8(1), 709-737]. For the uncorrelated SABR model, the new option pricing method is accurate and arbitrage-free across all strike prices.

A self-organized criticality participative pricing mechanism for selling zero-marginal cost products
Daniel Fraiman

In today's economy, selling a new zero-marginal cost product is a real challenge, as it is difficult to determine a product's "correct" sales price based on its profit and dissemination. As an example, think of the price of a new app or video game. New sales mechanisms for selling this type of product need to be designed, in particular ones that consider consumer preferences and reality. Current auction mechanisms establish a time deadline for the auction to take place. This deadline is set to increase the number of bidders and thus the final offering price. Consumers want to obtain the product as quickly as possible from the moment they become interested in it, and this time does not always coincide with the seller's deadline. Naturally, consumers also want to pay a price they consider "fair". Here we introduce an auction model where buyers continuously place bids and the challenge is to decide quickly whether or not to accept them. The model does not include a deadline for placing bids, and exhibits self-organized criticality; it presents a critical price from which a bid is accepted with probability one, and avalanches of sales above this value are observed. This model is of particular interest for startup companies interested in profit as well as making the product known on the market.

An Incentives-Based Mechanism for Corporate Cyber Governance Enforcement and Regulation
Corbet, Shaen,Gurdgiev, Constantin
A growing literature in finance examines the impact of cybercrime on equity markets and publicly traded corporations, with an emerging strand of this literature investigating the contagion channel from cybersecurity breaches against the publicly traded companies, to broader market volatility. The dominant responses by the corporations to these threats can be described as ‘test internally for internal vulnerabilities’, and the ‘insure and forget’ approach, both of which imply a lack of significant preventative actions by companies under the risk of an external cybersecurity attack. The evidence of growing adverse impact and risk of hacking events on firms’ market valuations is highlighted by (i) the rising cumulative abnormal returns impact of such events, (ii) the rising systemic contagion effects of hacks, and (iii) the lack of robust regulatory mechanisms for systematic prevention, mitigation, and enforcement of data security breaches. This supports our proposal that when acting under regulatory authority’s supervision from within a ring-fenced incentives system, ‘white knight’ hackers may provide the appropriate mechanism for discovery and deterrence of weak corporate cybersecurity practices and systems. This mechanism can helpalleviate the systemic weaknesses in the existent mechanisms for cybersecurity oversight and enforcement in financial markets.

Assessing and Mitigating Fire Sales Risk Under Partial Information
Pang, Raymond Ka-Kay,Veraart, Luitgard Anna Maria
We consider the problem of assessing and mitigating fire sales risk for banks under partial information. Using data from the European Banking Authority's stress tests, we consider the matrix of asset holdings of different banks. We first analyse fire sales risk under both full and partial information using different matrix reconstruction methods. We then investigate how well some policy interventions aimed at mitigating fire sales risk perform if they are applied based on only partial information. We compare the performance of policy interventions under full and partial information. We find that even under partial information, using suitable network reconstruction methods to decide on policy interventions can significantly mitigate risk from fire sales. Furthermore, we show that some interventions based on reconstructed networks significantly outperform ad hoc methods that decide on interventions only based on the size of an institution and do not account for overlapping portfolios.

Bank Deposit Flows and Textual Sentiment When an ECB President's speech is not just a speech
Anastasiou, Dimitrios,Katsafados, Apostolos G.
We investigate whether the textual sentiment affects European depositors’ behavior to withdrawtheir deposits. Following Loughran and McDonald (2011) methodology, we construct twotextual sentiments able to capture the perceived uncertainty. Our findings suggest that a highfrequency of uncertainty and weak modal words in the ECB president’s monthly speeches leadsboth households and non-financial corporations to withdraw their bank deposits. We also findthat non-financial corporations’ deposits are more sensitive than households’ deposits to thesetextual sentiments. These findings suggest that regulators and policymakers could expand thealready existing early-warning systems for the banking sector by considering the frequency ofuncertainty and weak modal words in the ECB president’s speeches.

Banking Audit Function Transformed â€" A Strong Foundation for Resilience
Kumar, Jm,Sundar, K Shyam
Banking industry has traditionally visualized audit as a profession driven by extensive interaction between accounting stakeholders, documented evidence based verification and validation and a lot of office desk driven activities.With the advent of the COVID 19 pandemic, the profession now encounters a titanic challenge in the way businesses is to be done and would be done going forward.Apropos to note, the timing of the pandemic closures happened at a time when banking organisations (specially in geographies who follow Jan to Dec or Apr to Mar accounting cycle or accounting cycle overlapping to the pandemic window) are at the cusp of finalizing their accounting books and hence peak season for work.In this back-drop, authors (joint authors from Tata Consultancy Services) on this paper this paper enlists to highlight some of the points for consideration by auditors in conducting their audit in this unique accounting season, as also lay down a set of perspectives for consideration for the profession to be better prepared to address similar insurmountable scenario(s) in the future.

Bubbles in discrete time models
Martin Herdegen,Dörte Kreher

We introduce a new definition of speculative bubbles in discrete-time models based on the discounted stock price losing mass at some finite drop-down under an equivalent martingale measure. We provide equivalent probabilistic characterisations of this definition and give examples of discrete-time martingales that are speculative bubbles and those that are not. In the Markovian case, we provide sufficient analytic conditions for the presence of speculative bubbles. We also show that the existence of speculative bubbles is directly linked to the existence of a non-trivial solution to a linear Volterra integral equation of the second kind involving the Markov kernel. Finally, we show that our definition of speculative bubbles in discrete time is consistent with the strict local martingale definition of speculative bubbles in continuous time in the sense that a properly discretised strict local martingale in continuous time is a speculative bubble in discrete time.

COVID-19 Pandemic Effects in Global Stock Markets : Application of PMFG & Threshold Network
Kamal, Md. Mostafa,Chen, Lin,Zhao, Longfeng,Zhilin, Qiao
Recent outbreak of COVID-19 has already taken away thousands of precious souls, sealed many businesses, and forced millions to be unemployed â€"which eventually thwarting financial systems collapsed. In this study, we use cross-correlation based threshold networks and PMFG method to analyze the effects of the global epidemic on major global stock indices. Our results explore the strongly significant correlations among the indices during the infected time and majority indices cluster together based on their geographic proximity â€"not based on geodesic distance. When compared the results of the effects based on threshold and PMFG, we found PMFG can detect the key influential stock index more accurately. The results of the paper can be used for making decision regarding cross-country portfolio management, and imposing regulations in stock markets.

COVID-19, Volatility Dynamics, and Sentiment Trading
John, Kose ,Li, Jingrui (Victoria)
In this paper, we study how different categories of crucial COVID-19 information influence price dynamics in stock and option markets during the period from 01/21/20 to 01/31/21. We present a theoretical model in which the behavioral traders make perceptual errors based on the intensity of sentiment arising from different types of news. In addition to the magnitude and direction of the news and its payoff relevance to security prices, other factors such as fear, emotion, and social media can influence the sentiment level. Using Google search data, we construct novel proxies for the sentiment levels induced by five categories of news, COVID, Market, Lockdown, Banking, and Government relief efforts. If the relative presence of behavioral traders in the stock market exceeds that in the option market, different predictions obtain for the effect of sentiment indices on jump volatility of the VIX index, the S&P 500 index, and the S&P 500 Banks index. We find that the jump component in the VIX index is increasing significantly with COVID index, Market index, Lockdown index, and Banking index. However, only COVID index and Market index increase the jump component of realized volatility of the stock indices (S&P 500 index and S&P 500 Banks index). The Government relief efforts index decreases this jump component. Banking and Lockdown index reduce jump volatility in the S&P 500 index and S&P 500 Banks index, but only with a delay of 5 days. These results are consistent with the predictions of our model.

Combining incentives for pollination with collective action to provide a bundle of ecosystem services in farmland
Jerome Faure,Lauriane Mouysset,Sabrina Gaba

A polycentric approach to ecosystem service (ES) governance that combines individual incentives for interdependent ES providers with collective action is a promising lever to overcome the decline in ES and generate win-win solutions in agricultural landscapes. In this study, we explored the effectiveness of such an approach by focusing on incentives for managed pollination targeting either beekeepers or farmers who were either in communication with each other or not. We used a stylized bioeconomic model to simulate (i) the mutual interdependency through pollination in intensive agricultural landscapes and (ii) the economic and ecological impacts of introducing two beekeeping subsidies and one pesticide tax. The findings showed that incentives generated a spillover effect, affecting not only targeted stakeholders but non-targeted stakeholders as well as the landscape, and that this effect was amplified by communication. However, none of the simulated types of polycentric ES governance proved sustainable overall: subsidies showed excellent economic but low environmental performance, while the tax led to economic losses but was beneficial for the landscape. Based on these results, we identified three conditions for sustainable ES governance based on communication between stakeholders and incentives: (i) strong mutual interdependency (i.e. few alternatives exist for stakeholders), (ii) the benefits of communication outweigh the costs, and (iii) the incentivized ES drivers are not detrimental to other ES. Further research is needed to systematize which combination of individual payments and collaboration are sustainable in which conditions.

Constructing long-short stock portfolio with a new listwise learn-to-rank algorithm
Xin Zhang,Lan Wu,Zhixue Chen

Factor strategies have gained growing popularity in industry with the fast development of machine learning. Usually, multi-factors are fed to an algorithm for some cross-sectional return predictions, which are further used to construct a long-short portfolio. Instead of predicting the value of the stock return, emerging studies predict a ranked stock list using the mature learn-to-rank technology. In this study, we propose a new listwise learn-to-rank loss function which aims to emphasize both the top and the bottom of a rank list. Our loss function, motivated by the long-short strategy, is endogenously shift-invariant and can be viewed as a direct generalization of ListMLE. Under different transformation functions, our loss can lead to consistency with binary classification loss or permutation level 0-1 loss. A probabilistic explanation for our model is also given as a generalized Plackett-Luce model. Based on a dataset of 68 factors in China A-share market from 2006 to 2019, our empirical study has demonstrated the strength of our method which achieves an out-of-sample annual return of 38% with the Sharpe ratio being 2.

Cost of Loans and Moral Hazard
Fernström, Clara,Qi, Yingjie
We document the effects of higher borrowing cost on private firms by exploiting a novel quasi-experiment and a unique and comprehensive dataset from Sweden. In June 2010, the central bank of Sweden increased the repo rate unexpectedly and exposed firms with long term loans maturing right before or after the hike to different cost of borrowing. Consistent with the debt overhang theory, we find that higher cost of borrowing has a significant negative effect on investment, and more for highly levered firms. Contrary to the risk shifting theory, we find no evidence that distressed firms engage in activities that are riskier ex-post.

Decomposition of Optimal Dynamic Portfolio Choice with Wealth-Dependent Utilities in Incomplete Markets
Chenxu Li,Olivier Scaillet,Yiwen Shen

This paper provides a novel five-component decomposition of optimal dynamic portfolio choice. It reveals the simultaneous impacts from market incompleteness and wealth-dependent utilities. The decomposition leads to implementation via either closed-form solutions or Monte Carlo simulations. With a nonrandom but time-varying interest rate, we can explicitly solve for the optimal policy under the wealth-dependent HARA utility. It is a combination of a bond holding scheme and the corresponding simpler CRRA strategy. Under incomplete markets with a stochastic volatility model estimated on US equity data, wealth-dependence introduces sophisticated cycle-dependence for optimal policy and hysteresis effect in Sharpe ratio.

Do Well-Behaved Firms Attract More Market Makers? Evidence from the CDS Market
Li, Yubin,Wang, Xinjie,Zhong, Zhaodong
This paper explores whether corporate social performance impacts CDS market liquidity. We first document that better corporate social performance attracts more CDS market makers and induces more frequent CDS price updates. Second, we explore the influence mechanism of CSR on CDS market liquidity. Cross-sectional analyses show that the effect of CSR on liquidity provision is stronger for firms with smaller sizes, fewer analysts following, higher stock return volatility, higher systematic risk or higher credit risk. These findings are consistent with the notion that strong social performance attracts CDS dealers by reducing information asymmetry or offsetting firm risk. Our findings are robust to controlling for more variables, remain qualitatively similar for three subperiods around the 2008 financial crisis period and are robust to the acquisition of CSR data vendors. To our knowledge, this is the first study to focus on the relation between corporate social responsibility and financial market microstructure.

Does corruption shape firm centralization? Evidence from state-owned enterprises in China
Kong, Dongmin,Zhu, Ling
This study investigates the causal effects of corruption on firm centralization. Based on a unique setting in China that both parent firms’ and the whole group’s financial statements are mandatorily disclosed, we construct a novel proxy of centralization exploiting the allocation decision rights within group firms. We then verify the reliability of our measure and introduce a quasi-natural experiment (i.e., China’s anti-corruption campaign) to present that the reduction of corruption significantly enhances state-owned enterprises’ (SOEs’) centralization. A plausible mechanism is that the anti-corruption campaign reshapes firms’ external business environment and internal governance. Our findings are particularly pronounced for SOEs located in areas with high economic development/openness, low government intervention, better financing conditions, intensive industry concentration, and low ownership concentration.

Economic Consequences of the COVID-19 Pandemic and the Economic Ability of a Government as a Factor of Production
Papava, Vladimer,Chkuaseli, Mikheil
The article examines the impact of the COVID-19 pandemic on the economy. The features of the economic crisis caused by the pandemic have been studied. The features of how this crisis differs from the economic crisis caused by the Spanish flu are presented. The main function of the economic ability of a government, as a factor of production, during the current pandemic economic crisis is analyzed.

Equity Markets Development and Economic Growth in Emerging Markets
Khawaja, Arslan
This study explores the relations between the development level of capital markets sub-components and economic growth over the past 50 years in Emerging Markets. There is a long-term cointegrating relationship between capital markets development and economic growth and a unidirectional causality running from capital markets development to economic growth. Although the focus of my paper is on capital markets but using a linear regression model, I find other factors are negatively and positively associated with economic growth. Capital markets play a critical role in economic development by pooling together domestic savings and mobilizing foreign capital for productive long-term investment. Emerging markets are projected to grow strongly over the next couple of years, and sophisticated capital markets will only enhance future growth and ensure the competitiveness of those economies globally.

Estimating Future VaR from Value Samples and Applications to Future Initial Margin
Narayan Ganesan,Bernhard Hientzsch

Predicting future values at risk (fVaR) is an important problem in finance. They arise in the modelling of future initial margin requirements for counterparty credit risk and future market risk VaR. One is also interested in derived quantities such as: i) Dynamic Initial Margin (DIM) and Margin Value Adjustment (MVA) in the counterparty risk context; and ii) risk weighted assets (RWA) and Capital Value Adjustment (KVA) for market risk. This paper describes several methods that can be used to predict fVaRs. We begin with the Nested MC-empirical quantile method as benchmark, but it is too computationally intensive for routine use. We review several known methods and discuss their novel applications to the problem at hand.

The techniques considered include computing percentiles from distributions (Normal and Johnson) that were matched to parametric moments or percentile estimates, quantile regressions methods, and others with more specific assumptions or requirements.

We also consider how limited inner simulations can be used to improve the performance of these techniques. The paper also provides illustrations, results, and visualizations of intermediate and final results for the various approaches and methods.

Estimating the Relation between Digitalization and the Market Value of Insurers
Fritzsch, Simon,Scharner, Philipp,Weiss, Gregor N. F.
We analyze the relation between digitalization and the market value of US insurance companies. To create a text-based measure that captures the extent to which insurers digitalize, we apply an unsupervised machine learning algorithm - Latent Dirichlet Allocation - to their annual reports. We show that an increase in digitalization is associated with an increase in market valuations in the insurance sector. In detail, capital market participants seem to reward digitalization efforts of an insurer in the form of higher absolute market capitalizations and market-to-book ratios. Additionally, we provide evidence that the positive relation between digitalization and market valuations is robust to sentiment in the annual reports and the choice of the reference document on digitalization, both being issues of particular importance in text-based analyses.

FDA approval announcements: Attention-grabbing or Event-day misspecification?
Hamill, Philip A.,Hutchinson, Mark C.,Nguyen, Quang Minh Nhi,Mulcahy, Mark B.
The attention-grabbing hypothesis has been offered as a behavioural explanation for post-event abnormal returns for FDA drug approval announcements for NYSE listed firms. We show that when event-day mis-specification is accounted for the market reaction is centred on the event-day and that the increase in firm value is driven by after-market-close approval announcements.

Financial Reporting Quality and International Trade
Zhou, Yuqing
This paper examines the effects of financial reporting quality on international trade. First, I conduct country-sector-level analyses and find that a one standard deviation increase in financial reporting quality in a country is associated with increases in manufacturing exports and imports of 4.2 and 3.5 percent, respectively. Second, I exploit a reporting regulation change in China and use administrative firm-level international trade data to conduct differences-in-differences analyses. The results show that treated firms export 15.1 percent more after the financial reporting reform. They also export to more countries and export more types of goods after the change. I provide evidence for two potential mechanisms for these effects: (i) that improved financial reporting decreases information asymmetry between trade partners and (ii) that it facilitates firms raising external capital. This paper extends understanding of the real economic effects of financial disclosure and provides a potential link between information transparency and global economic growth.

Financial development and economic growth in Brazil
Sanvicente, Antonio,Guglielmetti, Victor
[We examine the association between economic growth and financial development for the Brazilian economy from 1997 to 2018. Vector-autoregressive (VAR) models and Granger causality tests are employed, with financial development represented by two different variables, the first being the “banking channel” (total bank loans to the private sector as a percentage of GDP), and the second being the “stock market channel” (market value of the companies listed at B3 - Brazilian Stock Exchange - as a percentage of GDP). Economic growth is measured by the real growth of Gross Domestic Product. The empirical analysis adopts the procedures developed by Toda and Yamamoto (1995). The main conclusions are that there exists strong evidence of unidirectional Granger causality between economic growth and financial development (from the latter to the former), when measured by both the banking and stock market channels, contradicting several results available in the literature.

Form 10-Q Itemization
Yanci Zhang,Tianming Du,Yujie Sun,Lawrence Donohue,Rui Dai

Form 10-Q, the quarterly financial statement, is one of the most crucial filings for US public firms to disclose their financial and other relevant business operation information. Due to the gigantic number of 10-Q filings prevailing in the market for each quarter and diverse variations in the implementation of format given company-specific nature, it has long been a problem in the field to provide a generalized way to dissect and retrieve the itemized information. In this paper, we create a tool to itemize 10-Q filings using multi-stage processes, blending a rule-based algorithm with a CNN deep learning model. The implementation is an integrated pipeline which provides a solution to the item retrieval on a large scale. This would enable cross sectional and longitudinal textual analysis on massive number of companies.

Generative Adversarial Network: Some Analytical Perspectives
Haoyang Cao,Xin Guo

Ever since its debut, generative adversarial networks (GANs) have attracted tremendous amount of attention. Over the past years, different variations of GANs models have been developed and tailored to different applications in practice. Meanwhile, some issues regarding the performance and training of GANs have been noticed and investigated from various theoretical perspectives. This subchapter will start from an introduction of GANs from an analytical perspective, then move on the training of GANs via SDE approximations and finally discuss some applications of GANs in computing high dimensional MFGs as well as tackling mathematical finance problems.

Hermite Polynomial-based Valuation of American Options with General Jump-Diffusion Processes
Li Chen,Guang Zhang

We present a new approximation scheme for the price and exercise policy of American options. The scheme is based on Hermite polynomial expansions of the transition density of the underlying asset dynamics and the early exercise premium representation of the American option price. The advantages of the proposed approach are threefold. First, our approach does not require the transition density and characteristic functions of the underlying asset dynamics to be attainable in closed form. Second, our approach is fast and accurate, while the prices and exercise policy can be jointly produced. Third, our approach has a wide range of applications. We show that the proposed approximations of the price and optimal exercise boundary converge to the true ones. We also provide a numerical method based on a step function to implement our proposed approach. Applications to nonlinear mean-reverting models, double mean-reverting models, Merton's and Kou's jump-diffusion models are presented and discussed.

High Frequency Return and Risk Patterns in U.S. Sector ETFs during COVID-19
Gurrib, Ikhlaas,Kamalov, Firuz
This study investigates the presence of intraday patterns in the eleven sectors of the United States (U.S.) economy. Key contributions are in terms of assessing (i) risk and return patterns at specific time periods of the trading session on the New York Stock Exchange (NYSE), (ii) whether a specific day return model can predict the next 15-minute positive return, and (iii) the impact of the first vaccination rollout in the U.S. on intraday Exchange-Traded-Funds (ETF) returns. We use time dependent regressions to capture risk and returns relationships, decision trees in machine learning to compare return models, and impulse responses to capture the effect of the 2019 novel coronavirus (COVID-19) vaccine rollout in the U.S. 15-minute frequency Standard & Poor’s Depository Receipts (SPDR) Select Sector ETF data is used, from 12th March 2020 till 23rd February 2021. Findings suggest that sector ETF returns in both the first and last 15 minutes of the core session fluctuate more than for the rest of the day. Average returns in the first 15 minutes are the highest, converging to near zero as we progress through the day. Overnight returns are the most significant in contributing towards the volatility for any trading session. U-shaped patterns into both return and risk are observed, with Mondays exhibiting a more pronounced U-shaped pattern. Mondays and Fridays have the most significant positive returns 15 minutes after the open. Prediction scores using an all-return model were superior to any specific day return model. The first vaccination rollout has a positive effect only in energy, technology, and financial sector ETFs, however with a short-lasting effect on the ETFs return.

High-Dimensional Estimation, Basis Assets, and the Adaptive Multi-Factor Model
Liao Zhu,Sumanta Basu,Robert A. Jarrow,Martin T. Wells

The paper proposes a new algorithm for the high-dimensional financial data -- the Groupwise Interpretable Basis Selection (GIBS) algorithm, to estimate a new Adaptive Multi-Factor (AMF) asset pricing model, implied by the recently developed Generalized Arbitrage Pricing Theory, which relaxes the convention that the number of risk-factors is small. We first obtain an adaptive collection of basis assets and then simultaneously test which basis assets correspond to which securities, using high-dimensional methods. The AMF model, along with the GIBS algorithm, is shown to have a significantly better fitting and prediction power than the Fama-French 5-factor model.

How Does Information Asymmetry Affect Corporate Risk Management? Evidence from a Natural Experiment
Kumar, Praveen,Wong, Kit Pong,Yang, Shijie,Zhu, Margaret Rui,Zou, Hong
We revisit the unsettled question of the effects of information asymmetry on corporate hedging by testing three prominent information-asymmetry based theories of hedging. Exploiting mergers or closures of brokerage firms as plausibly exogenous information asymmetry events, we find that treatment firms significantly reduce derivative-based hedging, compared with matched control firms. Lower hedging is concentrated in firms that are ex ante subject to (1) lower collateral, more financial constraints and simultaneously better growth opportunities or (2) lower collateral and a lower-quality CEO. Treatment firms that have a high-quality CEO and are not subject to collateral constraints increase hedging after the shock, consistent with the hypothesis that hedging signals superior managerial quality. Overall, our findings support the view that collateral constraints significantly dampen hedging.

How Regulation Best Interest Impacts Broker-Dealers' Practices
Wang, Blair
In June 2019, the Securities and Exchange Commission (“SEC”) adopted Regulation Best Interest (“Reg BI” or “Final Rule”) with a compliance date of June 30, 2020, aiming at improving protection for retail customers and enhancing the standard of conduct under the Securities Exchange Act of 1934 (“Exchange Act”) for broker-dealers and natural persons who are associated persons of a broker-dealer (“Broker-Dealers”) in the course of recommending any securities transaction or investment strategy to retail customers. The SEC also mandates a disclose form for investment advisers and broker-dealers (“Form CRS”). Additionally, the SEC excludes application to broker-dealer from the Investment Adviser Act of 1940 (“IAA”) if the “solely incidental” prong is satisfied. Reg BI imposes a general “best interest” standard which requires broker-dealers to act in the best interest of retail customers at the time the recommendation is made, without placing the interests of the firm ahead of the retail customer’ interest. The Reg BI Package will be carried out with following four prongs: 1). Disclosure Obligation, 2) Care Obligation, 3) Conflict of Interest Obligation, 4) Compliance Obligation. As the foregoing discusses, broker-dealers are bound by Reg BI that places their clients’ interests ahead of their own. Though the SEC intentionally attempts to augment the protection for retail customers by imposing obligations beyond existing suitability obligations , it declines to address the definition of “best interest” in the rule text, nor did the SEC label the new regulation as “Broker-Dealer Standard of Conduct” proposed by NASAA. In the Final Rule, the SEC adopted a “principles-based” approach to align with an investment adviser’s fiduciary duty and broker-dealers’ practice will be evaluated objectively on the ground of facts and circumstances of how the four component obligations of Regulation Best Interest are satisfied at the time the recommendation is made. This article will provide an analysis of the new Best Interest Standard and the potential impact of Conflict of Interest obligation on a broker-dealer’s practices. For example, how Reg BI differentiates among other regulation regimes, what limitations will be imposed on broker-dealers when rendering financial recommendation and advice, how broker-dealers mitigate or eliminate conflicts of interest arising from financial incentives in conjunction with their recommendations.

IPO Performance: A Cross-Country Comparison of the effect of Regulations
Krishnan, C. N. V.,He, Yu
We compare short-term and longer-term returns around IPOs, as well as post-issue performance, between US and China IPOs. Short-term abnormal returns are higher for China IPOs than US IPOs, both in univariate test (difference of means and medians tests), and in multivariate tests, controlling for other variables and fixed effects. We postulate that this is due to the different regulations between the two countries that could lead to more underpricing and constraints on reaching true value, in the short run, for China IPOs. However, the upward price pressure leading to superior stock returns does not last. In the longer-term, not only do China and US IPO firms have similar abnormal stock returns â€" on average negative as documented in the extant literature - but also the firms’ operating performance, on average, as well as their book-to-market ratios (a proxy for future growth options) are not significantly different, in both univariate and multivariate tests.

If it Looks like a Human and Speaks like a Human ... Dialogue and cooperation in human-robot interactions
Mario A. Maggioni,Domenico Rossignoli

The paper presents the results of a behavioral experiment conducted between February 2020 and March 2021 at Universit\`a Cattolica del Sacro Cuore, Milan Campus in which students were matched to either a human or a humanoid robotic partner to play an iterated Prisoner's Dilemma. The results of a Logit estimation procedure show that subjects are more likely to cooperate with human rather robotic partners; that are more likely to cooperate after receiving a dialogic verbal reaction following the realization of a sub-obtimal social outcome; that the effect of the verbal reaction is independent on the nature of the partner. Our findings provide new evidence on the effect of verbal communication in strategic frameworks. Results are robust to the exclusion of students of Economics related subjects, to the inclusion of a set of psychological and behavioral controls, to the way subjects perceive robots' behavior and to potential gender biases in human-human interactions.

Impact of Intelligent Financial Qualifications on Capital Developing for Iraqi Small and Medium Enterprise
Alrawazqee, Abdulzahra
This research aims to analyze the intelligent financial qualifications which can be gain by the financial managers, with its impact to generate new investment opportunities, at Iraqi small and medium enterprises, these enterprises have more risks than other especially under Iraqi economic condition, which improve store market finally. These skills are divided into two groups scientific and occupational, the researchers use an inductive approach for literature review to financial intelligent skills. Research data has been collected by primary data method in some of the academics, enterprise managers, financial managers, accountant, and auditors, at Al-Najaf city. after the hypotheses test, the research finds there is a positive impact for financial intelligent skills and capital growth opportunities, and positive relationship between these skills and developing of the securities market, the main recommendation is to open connection channels with international stocks market to integrate local market with them, In addition to the necessity of qualifying financial decision-makers with good financial skills through periodic training courses, facilitating mergers with foreign companies, encouraging managers of small and medium enterprises to enter the stock market and facilitating the procedures required for that.

Impediments to Active Stock Selection and the Growth in Passive Fund Management
Busse, Jeffrey A.,Chung, Kiseo,Kottimukkalur, Badrinath
During the last decade, assets of passive funds have swelled while active funds have lost market share. This growth in passive investments coincides with a substantially more challenging environment for active stock selection, as reflected in a lower fraction of stocks with positive alpha, lower idiosyncratic volatility, and higher aggregate liquidity. As the opportunities to discover alpha decrease, the relation between alpha and fund costs turns significantly negative. To compensate, active managers reduce expenses and fund turnover. Nonetheless, the inverse relation between fund costs and performance leads to greater predictability in fund performance, a stronger inverse relation between fund costs and investor flows, and greater sensitivity of investor flows to past performance.

Index-Linked Trading and Stock Returns
Davies, Shaun
I consider a model of index-linked trading in which a fraction of investors trade an index product that holds the market portfolio (e.g., an ETF). The remaining investors build portfolios by evaluating stocks individually. Investors are equally informed and choose portfolios to maximize their expected utility. In equilibrium, price impact from trading the index product is not equal across stocks. Index-linked trade generates cross sectional differences in returns and volatilities. Furthermore, uncertainty about indexing demand generates risk premiums in expected returns and their magnitudes depend on firm fundamentals. The findings lend theoretical support to existing studies and provide new predictions.

Jumps and Diffusive Variance: A Granular Analysis of Individual Stock Returns
Li, Gang,Li, Ruicong,Zhang, Chu
Jumps and diffusive changes in stock prices are different ways in which information is reflected in the prices. We use nonparametric methods to decompose returns on individual stocks into jumps and diffusive components. Contrary to the conventional assumption that jump intensity is positively related to diffusive variance, we find abundant evidence that realized jump intensity and diffusive variance are uncorrelated or negatively related for a majority of stocks. The jump-diffusion beta is found to positively contribute to the implied volatility smile of options on individual stocks. We also document a counter-cyclical pattern of realized jump sizes, which challenges the i.i.d. jump size assumption commonly seen in the literature. The findings provide useful guidance on modeling option prices.

Kelly Portfolio Optimization: a Disciplined Convex Programming Framework
Cajas, Dany
This work presents a disciplined convex programming framework for Kelly criterion in portfolio optimization based on exponential cone programming. This framework allows us to incorporate mean logarithmic return in problems like maximize mean logarithmic return subject to a risk constraint, maximize risk adjusted logarithmic return and constraints on mean logarithmic return. The advantage of this framework is that gives us an exact solution that considers all moments instead of approximate solution that only considers first and second moments. Finally, we run some numerical examples using Python, Riskfolio-Lib package and MOSEK solver, comparing asset allocations obtained using arithmetic return, approximate and exact logarithmic return.

Managerial Conservatism and Corporate Policies
Duong, Kiet Tuan,Banti, Chiara,Instefjord, Norvald
This paper investigates how conservative managers make corporate decisions. Motivated by psychology research, we use handwritten signatures (i.e., emotionally restraint disclosure styles) as a proxy for CEO conservatism. We find that firms with conservative CEOs engage more with safer investments (capital expenditures), engage less with risky policies (Research & Development expenses and debt financing), hold more cash, are less likely to pay cash dividends, and more likely to use stock repurchase schemes. We use the same proxy for CFO conservatism. We find that CFO conservatism is a better determinant than CEO conservatism for cash holding and financing policies, but the reverse is true for investment policies. Conservative CFOs prefer long-term debt to short-term debt.

Managing the Digital Transformation, Strategic Management, and Tactical Actions to Implement GFMIS: an Egyptian case study
Esawe, Ahmed
Purpose- This study was designed to show whether there is compatibility between the tactical actions to implement GFMIS and the strategic management objectives for digital transformation in Egypt Vision 2030. Specific aims: The aim of this study is to review and evaluate the tactical steps taken to implement GFMIS.Design/methodology/approach - The study uses an interpretive case study in which the government has imposed GFMIS. A search of the English literature addressing Digital transformation; GFMIS; TAS; E-payment and related topics were conducted using online resources and databases accessed through the Egyptian Knowledge Bank â€" EKB. Findings - The study recognizes that the implementation of GFMIS may have emerged primarily in order to raise transparency and institutional efficiency of governmental institutions to achieve the third dimension of the strategy, which is the economic dimension. Findings reveal implementing GFMIS requires modification of existing administrative doctrines. Based on a review of the theoretical and methodological rules and procedures and their re-enactment. As a result, some laws and regulations have generally been modified to comply with the automation process. Moreover, achieving integrative, emerging, and qualitatively new practices at the organizational level depends not only on technologies but also on modifying the existing societal context and existing relationships between employees.Originality/value - This study fills a gap in the literature, as it examined the tactical actions to implement the government financial management information system by the Ministry of Finance. As one of the programs to implement Egypt Vision 2030. Recognized weaknesses of GFMIS implementation in this paper can help to reshape plans for raising the quality of implementation.

On the joint volatility dynamics in dairy markets
Anthony N. Rezitis,Gregor Kastner

The present study investigates the price (co)volatility of four dairy commodities -- skim milk powder, whole milk powder, butter and cheddar cheese -- in three major dairy markets. It uses a multivariate factor stochastic volatility model for estimating the time-varying covariance and correlation matrices by imposing a low-dimensional latent dynamic factor structure. The empirical results support four factors representing the European Union and Oceania dairy sectors as well as the milk powder markets. Factor volatilities and marginal posterior volatilities of each dairy commodity increase after the 2006/07 global (food) crisis, which also coincides with the free trade agreements enacted from 2007 onwards and EU and US liberalization policy changes. The model-implied correlation matrices show increasing dependence during the second half of 2006, throughout the first half of 2007, as well as during 2008 and 2014, which can be attributed to various regional agricultural dairy policies. Furthermore, in-sample value at risk measures (VaRs and CoVaRs) are provided for each dairy commodity under consideration.

Proprietary Information and the Choice Between Public and Private Debt
Bae, Kee-Hong,Dai, Yunhao,Tan, Weiqiang,Wang, Wenming
The high costs of disclosing confidential information lead firms with proprietary information to prefer private debt (bank loan) to public debt (corporate bond). We provide empirical evidence supporting this proposition using the staggered adoption of the inevitable disclosure doctrine (IDD) by U.S. state courts that exogenously increased the value of proprietary information. The focal firms are significantly less likely to issue bonds after the IDD adoption. Financing through public debt decreases more for firms in which the protection of proprietary information is relatively more important.

Public Entrepreneurial Finance around the Globe
Bai, Jessica,Bernstein, Shai,Dev, Abhishek,Lerner, Josh
This paper examines how government funding programs geared towards early-stage companies interact with private capital markets. Using hand-collected data on 755 government programs worldwide, we find that governments’ allocations to such funding programs have been comparable to global venture capital disbursements in the past decade. Government programs were more frequent in periods with more private venture activity, a relationship that was stronger in nations with better public governance. The programs’ structures often relied on the local private sector. The private sector’s involvement was greater when government programs targeted earlier-stage companies and when rankings of government effectiveness were higher. We find that such government funding programs increased local innovation, particularly when the programs focused on early-stage ventures or collaborated with the private sector. These findings are most consistent with the explanation that the reliance on private capital markets enabled governments to mitigate investment frictions and improve capital allocation.

Re-investigating the oil-food price co-movement using wavelet analysis
Loretta Mastroeni,Greta Quaresima,Pierluigi Vellucci

In this article we analyse the oil-food price co-movement and its determinants in both time and frequency domains, using the wavelet analysis approach. Our results show that the significant local correlation between food and oil is only apparent. This is mainly due to the activity of commodity index investments and, to a lower extent, to the increasing demand from emerging economies. Furthermore, we employ the wavelet entropy to assess the predictability of the time series under consideration. We find that some variables share with both food and oil a similar predictability structure. These variables are those that mostly co-move with both oil and food. Some policy implications can be derived from our results, the most relevant being that the activity of commodity index investments is able to increase correlation between food and oil. This activity generates highly integrated markets and an increasing risk of joint price movements which is potentially dangerous in periods of economic downturn and financial stress. In our work we suggest that governments should also provide subsidy packages based on the commodity traded in commodity indices to protect producers and consumers from adverse price movements due to financial activity rather than lack of supply or demand.

Regshock: Interactive Visual Analytics of Systemic Risk in Financial Networks
Zhibin Niu,Junqi Wu,Dawei Cheng,Jiawan Zhang

Financial regulatory agencies are struggling to manage the systemic risks attributed to negative economic shocks. Preventive interventions are prominent to eliminate the risks and help to build a more resilient financial system. Although tremendous efforts have been made to measure multi-risk severity levels, understand the contagion behaviors and other risk management problems, there still lacks a theoretical framework revealing what and how regulatory intervention measurements can mitigate systemic risk. Here we demonstrate regshock, a practical visual analytical approach to support the exploration and evaluation of financial regulation measurements. We propose risk-island, an unprecedented risk-centered visualization algorithm to help uncover the risk patterns while preserving the topology of financial networks. We further propose regshock, a novel visual exploration and assessment approach based on the simulation-intervention-evaluation analysis loop, to provide a heuristic surgical intervention capability for systemic risk mitigation. We evaluate our approach through extensive case studies and expert reviews. To our knowledge, this is the first practical systemic method for the financial network intervention and risk mitigation problem; our validated approach potentially improves the risk management and control capabilities of financial experts.

Removing non-smoothness in solving Black-Scholes equation using a perturbation method
Endah R.M. Putri,Lutfi Mardianto,Amirul Hakam,Chairul Imron,Hadi Susanto

Black-Scholes equation as one of the most celebrated mathematical models has an explicit analytical solution known as the Black-Scholes formula. Later variations of the equation, such as fractional or nonlinear Black-Scholes equations, do not have a closed form expression for the corresponding formula. In that case, one will need asymptotic expansions, including homotopy perturbation method, to give an approximate analytical solution. However, the solution is non-smooth at a special point. We modify the method by {first} performing variable transformations that push the point to infinity. As a test bed, we apply the method to the solvable Black-Scholes equation, where excellent agreement with the exact solution is obtained. We also extend our study to multi-asset basket and quanto options by reducing the cases to single-asset ones. Additionally we provide a novel analytical solution of the single-asset quanto option that is simple and different from the existing expression.

Retail Investor Trade and the Pricing of Earnings
Michels, Jeremy
I examine how retail investor trade is associated with the pricing of earnings by measuring retail investor trade with the number of Robinhood users holding a firm’s shares. My findings show that net retail purchasing during the earnings announcement is associated with a more pronounced market response to earnings surprises for positive earnings surprises but a more muted response for negative earnings surprises. Further intraday analysis suggests that retail investors respond to more extreme stock returns following the earnings announcement instead of the earnings news itself. Finally, in smaller firms, and for both the most positive and negative earnings surprises, returns drift upward following the earnings announcement when retail trade is high. Overall, the results show that retail trade is associated with significant changes in how the market prices earnings information, both in the immediate earnings announcement window and over longer horizons.

Eno, Florence
This study sought to investigate secondary school teachers' knowledge and application of ICT in the teaching of physics. It investigated: physics teachers' knowledge of ICT and the academic achievement of physics students; physics teachers' accessibility to ICT facilities and the academic achievement of physics students and physics teachers' utilization of ICT facilities and academic achievement of physics students. This study was conducted in Calabar Municipality Local Government Area of Cross River State. The survey design was adopted, the target population comprised of 48 secondary schools, 107 physics teachers and 2000 physics students in SS II class in Secondary School, Calabar Municipality. The samples of the study were selected using the simple random sampling procedure. It employed questionnaires and physics achievement test (PAT) as a guide in data collection. The data collected were analyzed using Pearson Correlation. And the study showed that three variables: knowledge accessibility and utilization of ICT were related to the academic achievement of the physics students. This study recommended among others that physics teachers should make use of technology in their lessons to enhance learners understanding of concepts.

Social capital and small business productivity: The mediating roles of financing and customer relationships
Christopher Boudreaux,George Clarke,Anand Jha

How does an entrepreneur's social capital improve small informal business productivity? Although studies have investigated this relationship, we still know little about the underlying theoretical mechanisms driving these findings. Using a unique Zambian Business Survey of 1,971 entrepreneurs administered by the World Bank, we find an entrepreneur's social capital facilitates small business productivity through the mediating channels of firm financing and customer relationships. Our findings identify specific mechanisms that channel social capital toward an informal business' productivity, which prior studies have overlooked.

Zetzsche, Dirk A.,Woxholth, Jannik
The European Commission published its new Digital Finance Strategy on 24 September 2020 (DFS 2020). One of the centerpieces of the Strategy is the draft regulation on a pilot regime for market infrastructures based on distributed ledger technology (known as PilotR). The PilotR Proposal foresees a regulatory sandbox approach for the European Single Market, offering firms a set of exemptions from EU financial law allowing them to test distributed ledger technologies (DLTs) in certain activities related to trading, clearing, and settlement. Besides offering room for experiment, the PilotR Proposal supports the education of EU regulators about DLTs in this context, which may come to form the basis for foundational changes to EU law. The PilotR Proposal constitutes a significant step towards a future-proof EU fintech framework. We appreciate the European scale of PilotR, with an ‘EU Passport’ and ongoing cooperation across competent authorities and the ESMA. PilotR is characterized by an innovative ‘Business Plan Approach’ where the DLT operator defines governance functions and liabilities of entities operating, and connected to, DLT. Through this Business Plan Approach, PilotR promotes innovation while demanding business-specific risk mitigation, avoiding one-size-fits-all approaches. This bold regulatory move, however, prompts legal questions regarding the enforceability of business-induced rules vis-à-vis the nodes that do not qualify as operators as well as third parties. Furthermore, the PilotR Proposal would benefit from three amendments: First, EU legislators should articulate a clear link between the priorities laid down in the DFS 2020 and PilotR, along with an explanation of how PilotR fits into a broader set of measures to support innovation. Second, PilotR is characterized by a narrow scope with a relatively long timeline for testing, thereby the degree of mutual learning will be reduced. Third, being limited to authorized MiFID firms and CSDs only, regulatory leniency will be reserved for incumbents only â€" despite PilotR’s expressed objective to benefit innovative start-ups.

Technical Note: Parameterised-Response Zero-Intelligence (PRZI) Traders
Dave Cliff

This brief technical note introduces PRZI (Parameterised-Response Zero Intelligence), a new form of zero-intelligence trader intended for use in simulation studies of auction markets. Like Gode & Sunder's classic Zero-Intelligence Constrained (ZIC) trader, PRZI generates quote-prices from a random distribution over some specified domain of discretely-valued allowable quote-prices. Unlike ZIC, which uses a uniform distribution to generate prices, the probability distribution in a PRZI trader is parameterised in such a way that its probability mass function (PMF) is determined by a real-valued control variable s in the range [-1.0, +1.0] that determines the strategy for that trader. When s is zero, a PRZI trader behaves identically to the ZIC strategy, with a flat/rectangular PMF; but when s is close to plus or minus one the PRZI trader's PMF becomes asymptotically maximally skewed to one extreme or the other of the price-range, thereby enabling the PRZI trader to act in the same way as the "Shaver" strategy (SHVR) or the "Giveaway" strategy (GVWY), both of which have recently been demonstrated to be surprisingly dominant over more sophisticated, and supposedly more profitable, trader-strategies that incorporate adaptive mechanisms and machine learning. Depending on the value of s, a PRZI trader will behave either as a ZIC, or as a SHVR, or as a GVWY, or as some hybrid strategy part-way between two of these three previously-reported strategies. The novel smoothly-varying strategy in PRZI has value in giving trader-agents plausibly useful "market impact" responses to imbalances in an auction-market's limit-order-book, and also allows for the study of co-adaptive dynamics in continuous strategy-spaces rather than the discrete spaces that have traditionally been studied in the literature.

The Asymmetric Rank Effect for Winning and Losing Portfolios
Quispe-Torreblanca, Edika
This paper shows that patterns which prior literature has attributed to preferences for selling extreme-ranked positions (rank effects) can be traced to different responses of investors when their portfolio performance fluctuates over time. I show that when investors face poorly performing portfolios, they are predisposed to liquidate their best stocks; otherwise, their rank preferences attenuate and show some shift towards selling their worst positions. These findings are consistent with investors becoming more risk averse after observing underperforming portfolios. The results shed light on two prominent anomalies, the excess volatility of returns, and the equity premium puzzle.

The Banker's Oath And Financial Advice
Weitzel, Utz,Kirchler, Michael
Financial misbehavior is widespread and costly. The Dutch government legally requires every employee in the financial sector to take a Hippocratic oath, the so-called ``banker's oath.'' We investigate whether moral nudges that directly and indirectly remind financial advisers of their oath affect their service. In a large-scale audit study, professional auditors confronted 201 Dutch financial advisers with a conflict of interest. We find that when auditors apply a moral nudge, referring to the banker's oath, advisers are less likely to prioritize bank's interests. In additional prediction tasks, we find that Dutch regulators expect stronger effects of the oath than observed.

The Capital Ratio and the Interest Rate Spread: The Panel Threshold Regression Approach
Botshekan, Mahmoud,Golbabaei, Ali
Using balanced annual observations of insured US commercial banks, this paper investigates the nonlinear impacts of the lagged capital ratio on the interest rate spread by employing the panel threshold regression model with one and two threshold variables which divide our sample into two and four regimes, respectively. The threshold variables we use are the change in capital ratio, the main components of change in the capital ratio, namely change in the capital or change in risk-weighted asset and ROE changes. In single threshold models, regimes that correspond to the higher change in capital ratio, higher contribution of capital to the change in capital ratio, and higher contribution of the risk-weighted asset to the change in the capital ratio show a stronger impact of the lagged capital ratio on the interest rate spread. In the case of using lagged ROE changes as threshold variable, surprisingly banks that are less exposed to the fall in ROE (as a result of increasing the capital ratio) tend more to raise the interest rate spread to offset the fall. In the panel threshold regression model with two threshold variables and four regimes, we find similar results.

The Corporate Objective Revisited: The Shareholder Perspective
Goranova, Maria L.,Ryan, Lori Verstegen
Shareholder value maximization has spurred a long-standing and heated debate between the proponents of a unified corporate objective function and the supporters of multi-constituency goals of the corporation. We weigh in on the corporate purpose debate from a different point of view: that of the shareholders. Specifically, we seek to critically assess the assumptions about shareholders embedded in the shareholder value maximization doctrine and examine the implications of three contemporary shareholding practices: (a) shareholders investing concurrently in competing firms, (b) residual-risk bearing decoupling, and (c) heterogeneous shareholder interests. Our critique draws out the challenges that contemporary shareholder practices pose for corporate governance and highlights the need for strategic corporate governance, or governance policies and practices that prioritize the sustainable competitive advantage of the firm.

The Effects of Mandatory ESG Disclosure around the World
Krueger, Philipp,Sautner, Zacharias,Tang, Dragon Yongjun,Zhong, Rui
We examine the effects of mandatory ESG disclosure around the world using a novel dataset. Mandatory ESG disclosure increases the availability and quality of ESG reporting, especially among firms with low ESG performance. Mandatory ESG reporting has in turn beneficial effects on firm’s information environment: analysts’ earnings forecasts become more accurate and less dispersed after ESG disclosure becomes mandatory. On the real side, negative ESG incidents become less likely, and stock price crash risk declines, after mandatory ESG disclosure is enacted. These findings suggest that mandatory ESG disclosure has beneficial informational and real effects.

The Impact of Brazil on Global Grain Dynamics: A Study on Cross-Market Volatility Spillovers
Felipe Avileis,Mindy Mallory

Brazil rose as a global powerhouse producer of soybeans and corn over the past 15 years has fundamentally changed global markets in these commodities. This is arguably due to the development of varieties of soybean and corn adapted to climates within Brazil, allowing farmers to double-crop corn after soybeans in the same year. Corn and soybean market participants increasingly look to Brazil for fundamental price information, and studies have shown that the two markets have become cointegrated. However little is known about how much volatility from each market spills over to the other. In this article we measure volatility spillover ratios between U.S. and Brazilian first crop corn, second crop corn, and soybeans. We find that linkages between the two countries increased after double cropping corn after soybeans expanded, volatility spillover magnitudes expanded, and the direction of volatility spillovers flipped from U.S. volatility spilling over to Brazil before double cropping, to Brazil spilling over to U.S. after double cropping.

The Journey of a thousand miles: a decade of impact of foreign shareholders on the performance of the Chinese commercial banks
Gurdgiev, Constantin
We analyze the impact of foreign shareholdings on the performance of 28 Chinese commercial banks over a period of 2010-2019, capturing the period prior to and following the reforms of 2014. Using panel data GMM with instrumental variables, we consider bank performance from three perspectives: profitability, quality of assets and liquidity. The individual performance indicators are return on equity (ROE), non-performing loan (NPL) ratio, loan-to-deposit ratio, and loan loss coverage ratio. We find that foreign shareholdings have a significant negative impact on ROE. Increase in foreign investment is coincident with growth in the size of Chinese commercial banks in terms of assets that is faster than the increases in the banks’ return on capital. These findings are intuitively justified: if foreign investors increase banks’ appetite for growth, growth in assets under management will tend to outpace growth in returns on assets in the earlier stages of new investments. From the quality perspective, we show that banks’ NPL ratio is negatively correlated with foreign shareholdings and the correlation is significant both statistically and empirically. NPL ratios fall in the banks with more foreign participation. This result stands contrasted by the fact that some foreign investors (activist and hedge funds), seek to invest in Chinese listed banks with higher NPLs. In terms of liquidity performance, foreign share ownership has a significant negative influence on banks’ loan-to-deposit ratio. Loan loss coverage ratio significantly increases, along with the increasing foreign participation in Chinese commercial banks shareholdings. Combined, these effects suggest significant positive twin effect of foreign shareholdings on Chinese commercial banks risk profiles. As the result, Chinese banks with higher foreign shareholdings are better prepared to sustain losses from bad loans and state risks and have lower risk exposures to bad loans. The combined effects of our findings strongly suggest that Chinese banks’ ROE can be expected to pick up in the near future with further financial opening in the sector and the greater involvement of foreign investors that comes along with it.

The Low-volatility Anomaly and the Adaptive Multi-Factor Model
Robert A. Jarrow,Rinald Murataj,Martin T. Wells,Liao Zhu

The paper provides a new explanation of the low-volatility anomaly. We use the Adaptive Multi-Factor (AMF) model estimated by the Groupwise Interpretable Basis Selection (GIBS) algorithm to find those basis assets significantly related to low and high volatility portfolios. These two portfolios load on very different factors, indicating that volatility is not an independent risk, but that it's related to existing risk factors. The out-performance of the low-volatility portfolio is due to the (equilibrium) performance of these loaded risk factors. The AMF model outperforms the Fama-French 5-factor model both in-sample and out-of-sample.

The Relationship Between COVID-19 and Capital Structure
Closs, Lucia
The purpose of this study is to determine the change in capital structure of firm’s in the United States during the time of COVID-19 and to see if the pandemic was a determinant of capital structure during this time. This research also looks at firm’s in groups of aggressive and conservative based on their leverage compared to their industry average to see if there was any difference in leverage change between these groups. The research used a sample of 1159 firms from non-financial firms in the United States for the years 2018-2020. Comparing the leverage between the pre-pandemic period to the pandemic period showed changes that were not statistically significant. The regression results found that the pandemic decreased firms’ leverage for the data with all the firm’s aggressive firms and an increase in leverage in conservative firms. This study contributes to the literature by providing empirical evidence on the impact of the COVID-19 pandemic on firms' capital structure in the United States.

The fundamental theorem of asset pricing for self-financing portfolios
Eckhard Platen,Stefan Tappe

Consider a financial market with nonnegative semimartingales which does not need to have a num\'{e}raire. We are interested in the absence of arbitrage in the sense that no self-financing portfolio gives rise to arbitrage opportunities, where we are allowed to add a savings account to the market. We will prove that in this sense the market is free of arbitrage if and only if there exists an equivalent local martingale deflator which is a multiplicative special semimartingale. In this case, the additional savings account relates to the finite variation part of the multiplicative decomposition of the deflator.

Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model
Liao Zhu,Robert A. Jarrow,Martin T. Wells

The purpose of this paper is to test the time-invariance of the beta coefficients estimated by the Adaptive Multi-Factor (AMF) model. The AMF model is implied by the generalized arbitrage pricing theory (GAPT), which implies constant beta coefficients. The AMF model utilizes a Groupwise Interpretable Basis Selection (GIBS) algorithm to identify the relevant factors from among all traded ETFs. We compare the AMF model with the Fama-French 5-factor (FF5) model. We show that for nearly all time periods with length less than 6 years, the beta coefficients are time-invariant for the AMF model, but not for the FF5 model. This implies that the AMF model with a rolling window (such as 5 years) is more consistent with realized asset returns than is the FF5 model.

Time-Invariance Coefficients Tests with the Adaptive Multi-Factor Model
Zhu, Liao,Jarrow, Robert A.,Wells, Martin T.
The purpose of this paper is to test the time-invariance of the beta coefficients estimated by the Adaptive Multi-Factor (AMF) model. The AMF model is implied by the generalized arbitrage pricing theory (GAPT), which implies constant beta coefficients. The AMF model utilizes a Groupwise Interpretable Basis Selection (GIBS) algorithm to identify the relevant factors from among all traded ETFs. We compare the AMF model with the Fama-French 5-factor (FF5) model. We show that for nearly all time periods with length less than 6 years, the beta coefficients are time-invariant for the AMF model, but not for the FF5 model. This implies that the AMF model with a rolling window (such as 5 years) is more consistent with realized asset returns than is the FF5 model.

To What Extent do Labor Market Outcomes respond to UI Extensions?
Aiwei Huang

Unemployment benefits in the US were extended by up to 73 weeks during the Great Recession. Equilibrium labor market theory indicates that extensions of benefit duration impact not only search decisions by job seekers but also job vacancy creations by employers. Most of the literature focused on the former to show partial equilibrium effect that increment of unemployment benefits discourage job search and lead to a rise in unemployment. To study the total effect of UI benefit extensions on unemployment, I follow border county identification strategy, take advantage of quasi-differenced specification to control for changes in future benefit policies, apply interactive fixed effects model to deal with unobserved shocks so as to obtain unbiased and consistent estimation. I find that benefit extensions have a statistically significant positive effect on unemployment, which is consistent with the results of prevailing literature.

Turn-of-the-Year Effect in Asia Pacific Stock Markets: New Evidence
Huynh, Nhan
This paper examines a well-known seasonal anomaly - the turn-of-the-year (TOY) effect in fifteen Asia Pacific stock indices by using an updated dataset and forward-looking methods. The analysis utilizes daily dataset that spans from January 2000 to December 2018. Applying the Ordinary Least Square (OLS) regression and EGARCH approach, the results of this paper suggest that the TOY effect becomes detectable again after the GFC in developed stock markets with tax year not ending in December. Oppositely, the magnitude of this anomaly has diminished in the emerging financial markets after the GFC, which is consistent with the EMH. The evidence of the leverage effect in the unconditional volatility is proposed that volatility in negative shocks is considerably higher than that of positive shocks across examined stock indices. This phenomenon is more conspicuous in mature stock indices compared to emerging indices. The positive connection between the leverage effect and stock market volatility is propositioned as diminishing magnitude of this effect during the stable market condition after the GFC. Our findings lend reinforcement to the conclusion that some Asia Pacific stock markets satisfy the weak form of the EMH.

Understanding Japanese Household Portfolios
Aoki, Kosuke,Michaelides, Alexander,Nikolov, Kalin
Why do Japanese households hold so few stocks? We use a quantitativelife-cycle portfolio choice model to argue in favour of two main explanations.First, households have a very low level of trust in the stock market due toJapan's history of poor corporate governance. Second, stock returns toindividual stockholders have been low. Before 1990, this was due to excessivefees and commissions. Since the 1990 financial crisis, the Japanese marketitself has delivered low and volatile returns. Counterfactual analysissuggests that, if sustained, recent improvements in corporate governance andeconomic performance should lead to higher stock market participation.

Using Satellite Imagery and Deep Learning to Evaluate the Impact of Anti-Poverty Programs
Luna Yue Huang,Solomon Hsiang,Marco Gonzalez-Navarro

The rigorous evaluation of anti-poverty programs is key to the fight against global poverty. Traditional evaluation approaches rely heavily on repeated in-person field surveys to measure changes in economic well-being and thus program effects. However, this is known to be costly, time-consuming, and often logistically challenging. Here we provide the first evidence that we can conduct such program evaluations based solely on high-resolution satellite imagery and deep learning methods. Our application estimates changes in household welfare in the context of a recent anti-poverty program in rural Kenya. The approach we use is based on a large literature documenting a reliable relationship between housing quality and household wealth. We infer changes in household wealth based on satellite-derived changes in housing quality and obtain consistent results with the traditional field-survey based approach. Our approach can be used to obtain inexpensive and timely insights on program effectiveness in international development programs.

Virtual Competition and Cost of Capital: Evidence from Telehealth
Cornaggia, Kimberly Rodgers,Li, Xuelin,Ye, Zihan
Using the staggered implementation of telehealth parity laws in the U.S. Healthcare industry, we find causal evidence that virtual competition affects U.S. hospitals' cost of capital through a credit risk channel. Financial statements indicate that rural hospitals lose patients to urban hospitals in the same state after states require equivalent reimbursement of remote and in-person services. These effects increase rural hospital bankruptcy risk indicated by leverage and Z-Score. This increased financial stress translates into lower credit ratings and a higher cost of capital for rural hospitals. Controlling for bond characteristics, we find that affected rural hospitals' new bond costs rise by 20 - 38 bps relative to urban hospital bonds issued in the same state and in the same year. Secondary market yields of outstanding rural bonds increase by a significant 8 - 17 bps. Overall, we conclude that virtual competition in healthcare provision exacerbates healthcare inequality between rural and urban areas.

Weathering the Storm: How Foreign Aid and Institutions Affect Entrepreneurship Following Natural Disasters
Christopher Boudreaux,Anand Jha,Monica Escaleras

This study examines how foreign aid and institutions affect entrepreneurship activity following natural disasters. We use insights from the entrepreneurship, development, and institutions literature to develop a model of entrepreneurship activity in the aftermath of natural disasters. First, we hypothesize the effect of natural disasters on entrepreneurship activity depends on the amount of foreign aid received. Second, we hypothesize that natural disasters and foreign aid either encourages or discourages entrepreneurship activity depending on two important institutional conditions: the quality of government and economic freedom. The findings from our panel of 85 countries from 2006 to 2016 indicate that natural disasters are negatively associated with entrepreneurship activity, but both foreign aid and economic freedom attenuate this effect. In addition, we observe that foreign aid is positively associated with entrepreneurship activity but only in countries with high quality government. Hence, we conclude that the effect of natural disasters on entrepreneurship depends crucially on the quality of government, economic freedom, and foreign aid. Our findings provide new insights into how natural disasters and foreign aid affect entrepreneurship and highlight the important role of the institutional context.

What Incentivizes Managers to Engage in Financial Misreporting? An Analysis of Stock Delta, Option Delta, and Vega
Xu, Bo,Lee, Jay Junghun
Previous studies have provided mixed evidence on the relation between managers’ equity incentives and financial misstatements. These studies often measure equity incentives with the sensitivity of a manager’s stock and option portfolio to changes in equity price (i.e., portfolio delta) and/or the sensitivity of her option portfolio to changes in equity risk (i.e., vega). We hypothesize and find that the mixed results are attributable to the measurement error in portfolio delta because option compensation causes a manager’s incentive structure to be convex while stock compensation makes it linear. Splitting the portfolio delta into stock delta and option delta, we provide evidence that option delta has a dominating effect over stock delta and vega in explaining the likelihood and extent of financial misstatements. We also find that the positive association between option delta and misreporting variables is mainly driven by the effect of CEO’s option delta rather than that of CFO’s option delta. Our findings contribute to the literature by revealing the differential effects that stock delta, option delta, and vega have on providing managers with incentives for financial misreporting.

Whats the worth of a promise? Evaluating the indirect effects of a program to reduce early marriage in India
Shreya Biswas,Upasak Das

One important dimension of Conditional Cash Transfer Programs apart from conditionality is the provision of continuous frequency of payouts. On the contrary, the Apni Beti Apna Dhan program, implemented in the state of Haryana in India from 1994 to 1998 offers a promised amount to female beneficiaries redeemable only after attaining 18 years of age if she remains unmarried. This paper assesses the impact of this long-term financial incentivization on outcomes, not directly associated with the conditionality. Using multiple datasets in a triple difference framework, the findings reveal a significant positive impact on years of education though it does not translate into gains in labor participation. While gauging the potential channels, we did not observe higher educational effects beyond secondary education. Additionally, impact on time allocation for leisure, socialization or self-care, age of marriage beyond 18 years, age at first birth, and post-marital empowerment indicators are found to be limited. These evidence indicate failure of the program in altering the prevailing gender norms despite improvements in educational outcomes. The paper recommends a set of complementary potential policy instruments that include altering gender norms through behavioral interventions skill development and incentives to encourage female work participation.

Which Corporate ESG News does the Market React to?
Serafeim, George,Yoon, Aaron
Using a dataset that classifies firm-level ESG news as positive and negative, we examine how stock prices react to different types of ESG news. We analyze 111,020 firmâ€"day observations for 3,126 companies and find that prices react only to issues identified as financially material for a given industry by sustainability accounting standards, and the reaction is larger for news that is positive, receive more attention, and that is related to social capital issues. We conclude that investors differentiate in their reactions based on whether the news is likely to affect a company’s fundamentals, and therefore their reactions are motivated by a financial rather than a nonpecuniary motive.