Research articles for the 2021-04-27
arXiv
The use of multiple hypothesis testing adjustments varies widely in applied economic research, without consensus on when and how it should be done. We provide a game-theoretic foundation for this practice. Adjustments are often appropriate in our model when research influences multiple policy decisions. While control of classical notions of compound error rates can emerge in special cases, the appropriate adjustments generally depend on the nature of scale economies in the research production function and on economic interactions between policy decisions. When research examines multiple outcomes this motivates their aggregation into sufficient statistics for policy-making rather than multiple testing adjustments.
arXiv
We introduce a new system of stochastic differential equations which models dependence of market beta and unsystematic risk upon size, measured by market capitalization. We fit our model using size deciles data from Kenneth French's data library. This model is somewhat similar to generalized volatility-stabilized models in (Pal, 2011; Pickova, 2013). The novelty of our work is twofold. First, we take into account the difference between price and total returns (in other words, between market size and wealth processes). Second, we work with actual market data. We study the long-term properties of this system of equations, and reproduce observed linearity of the capital distribution curve. Our model has two modifications: for price returns and for equity premium. Somewhat surprisingly, they exhibit the same fit, with very similar coefficients. In the Appendix, we analyze size-based real-world index funds.
arXiv
We analyze characteristics' joint predictive information through the lens of out-of-sample power utility functions. Linking weights to characteristics to form optimal portfolios suffers from estimation error which we mitigate by maximizing an in-sample loss function that is more concave than the utility function. While no single characteristic can be used to enhance utility by all investors, conditioning on momentum, size, and residual volatility produces portfolios with significantly higher certainty equivalents than benchmarks for all investors. Characteristic complementarities produce the benefits, for example momentum mitigates overfitting inherent in other characteristics. Optimal portfolios' returns lie largely outside the span of traditional factors.
SSRN
Through a recently issued interpretive letter, the Office of the Comptroller of the Currency (OCC) put forth an unprecedented legal interpretation in an attempt to expand its authority to charter national trust companies under 12 U.S.C. § 27(a). Specifically, Interpretive Letter 1176 (IL 1176), declares that national trust companies may be chartered to primarily or even solely exercise nonfiduciary powers, including banking powers.This Article assesses IL 1176 and concludes that Section 27(a) cannot reasonably be interpreted to enable the OCC to charter national trust companies to even primarily, let alone solely, engage in banking and other nonfiduciary activities for two main reasons:⢠A national trust company cannot engage in banking and nonfiduciary activities directly through the exercise of banking powers conferred with a national bank charter, but instead, is limited to exercising the fiduciary powers permitted under 12 U.S.C. § 92a. This is what Congress intended in empowering the OCC to charter national trust companies and how that authority has always been construed.⢠Nor can a national trust company engage in banking and nonfiduciary activities indirectly through the fiduciary powers permitted under Section 92a because an activity must be âfiduciaryâ within the meaning of Section 92a for it to be permitted thereunder. This is how Section 92a has always been interpreted and, despite IL 1176 purporting to supersede this precedent, it remains the cornerstone of the OCCâs multi-state fiduciary rule. Therefore, Section 92a cannot, as is asserted in IL 1176, be interpreted to permit national trust companies to engage in nonfiduciary activitiesby bootstrapping state law.Thus, this Article concludes that the OCC lacks the authority to charter national trust companies to engage in banking and other nonfiduciary activities because they cannot lawfully engage in such activities directly or indirectly. IL 1176âs conclusions to the contrary are entirely lacking in validity.It seems that the OCC is attempting, through IL 1176, to accomplish with its national trust company chartering authority what it has so far failed to achieve in its recent campaign to create the so-called âfintech charterâ under its national bank chartering authority. Both efforts fundamentally reinterpret and expand the OCCâs chartering authority by administrative fiat for the same goal: create a charter that confers all the benefits of being a bank without any of the accompanying burdens or obligations. Just as there is a unity of purpose, IL 1176 unfortunately threatens many of the same disturbing policy implications as are prompted by the fintech charterâ"namely, a dismantling of the separation of banking and commerce and extension of the federal safety net to large commercial and technology enterprises. Fortunately, for the reasons set out this Article, this new front in the OCCâs quest to expand its chartering authority in unprecedented ways is just as contrary to law as the fintech charter effort itself. So, if the OCC continues down this path of expanding its trust company chartering authority, IL 1176 should meet the same legal fate and be set aside.
arXiv
The purpose of this study is to measure the benefits and costs of using biochar, a carbon sequestration technology, to reduce the B.C Wine Industry's carbon emissions. An economic model was developed to calculate the value-added for each of the three sectors that comprise the BC Wine industry. Results indicate that each sector of the wine value chain is potentially profitable, with 9,000 tonnes of CO2 sequestered each year. The study is unique in that it demonstrates that using biochar, produced from wine industry waste, to sequester atmospheric CO2 can be both profitable and environmentally sustainable.
arXiv
We discuss a class of explicitly solvable mean field type control problems/mean field games with a clear economic interpretation. More precisely, we consider long term average impulse control problems with underlying general one-dimensional diffusion processes motivated by optimal harvesting problems in natural resource management. We extend the classical stochastic Faustmann models by allowing the prices to depend on the state of the market using a mean field structure. In a competitive market model, we prove that, under natural conditions, there exists an equilibrium strategy of threshold-type and furthermore characterize the threshold explicitly. If the agents cooperate with each other, we are faced with the mean field type control problem. Using a Lagrange-type argument, we prove that the optimizer of this non-standard impulse control problem is of threshold-type as well and characterize the optimal threshold. Furthermore, we compare the solutions and illustrate the findings in an example.
SSRN
This research study analyses, from a fund managerâs perspective, the performance of liquidity adjusted risk modeling in obtaining optimal and coherent economic capital structures, subject to meaningful operational and financial constraints as specified by the fund manager. Specifically, the paper proposes a re-engineered and robust approach to optimal economic capital allocation, in a Liquidity-Adjusted Value at Risk (L-VaR) framework, and particularly from the perspective of trading portfolios that have both long and short trading. This paper expands previous approaches by explicitly modeling the liquidation of trading portfolios using machine learning techniques, over the holding period, with the aid of an appropriate scaling of the multiple-assetsâ L-VaR matrix along with GARCH-M technique to forecast conditional volatility and expected return. Moreover, in this paper, the authors develop a dynamic nonlinear portfolio selection model and an optimization algorithm which allocates both economic capital and trading assets by minimizing L-VaR subject to the constraints that the expected return, trading volume and liquidation horizon should meet the budget limits set by the fund manager. The empirical results strongly confirm the importance of enforcing financially and operationally meaningful nonlinear and dynamic constraints, when they are available, on the L-VaR optimization procedure.JEL Classifications: C10, C13, G20, and G28 Keywords: Economic Capital; Emerging Markets; GARCH; GCC Financial Markets; Liquidity-Adjusted Value at Risk; Liquidity Risk; Machine Learning; Portfolio Management; Risk Management.References: Al Janabi, M.A.M., Ferrer, R., and Shahzad, S. J. H., (2019). âLiquidity-adjusted value-at-risk optimization of a multi-asset portfolio using a vine copula approachâ. Physica A: Statistical Mechanics and its Applications, Volume 536, Article 122579.Al Janabi, M.A.M., Arreola-Hernández, Jose, Berger, Theo, Khuong Nguyen, Duc, (2017), âMultivariate Dependence and Portfolio Optimization Algorithms under Illiquid Market Conditionsâ, European Journal of Operational Research, Vol. 259, No. 3, pp. 1121-1131.Al Janabi, M.A.M. (2021a), âIs Optimum Always Optimal? A Revisit of the Mean-Variance Method under Nonlinear Measures of Dependence and Non-Normal Liquidity Constraintsâ. Journal of Forecasting, Vol. 40, No. 3, pp. 387-415.Al Janabi, M.A.M. (2021b), âMultivariate Portfolio Optimization under Illiquid Market Prospects: A Review of Theoretical Algorithms and Practical Techniques for Liquidity Risk Managementâ. Journal of Modelling in Management, Vol. 16, No. 1, pp. 288-309. Al Janabi, M.A.M. (2014), âOptimal and Investable Portfolios: An Empirical Analysis with Scenario Optimization Algorithms under Crisis Market Prospectsâ, Economic Modelling, Vol. 40, pp. 369-381.Al Janabi, M.A.M. (2015), âScenario Optimization Technique for the Assessment of Downside-Risk and Investable Portfolios in Post-Financial Crisisâ, Int. J. of Financial Engineering, Vol. 2, No. 3, pp. 1550028-1 to 1550028-28. Al Janabi, M.A.M. (2013), âOptimal and Coherent Economic-Capital Structures: Evidence from Long and Short-Sales Trading Positions under Illiquid Market Perspectivesâ, Annals of Operations Research, Vol. 205, No. 1, pp. 109-139.Al Janabi, M.A.M. (2012), âOptimal Commodity Asset Allocation with a Coherent Market Risk Modelingâ, Review of Financial Economics, Vol. 21, No. 3, pp. 131-140.Al Janabi, M.A.M. (2011), âA Generalized Theoretical Modeling Approach for the Assessment of Economic Capital under Asset Market Liquidity Risk Constraintsâ, Service Industries Journal, Vol. 31, No. 13 & 14, pp. 2193-2221. Al Janabi, M. A.M. (2008), âIntegrating liquidity risk factor into a parametric value at risk Methodâ, Journal of Trading, Vol. 3, No. 3, pp. 76â"87.Arreola-Hernandez, J. and Al Janabi, M.A.M. (2020), âForecasting of dependence, market and investment risks of a global index portfolioâ. Journal of Forecasting, Vol. 39, No. 3, pp. 512-532.Further Reading:Arreola-Hernandez, J., Hammoudeh, S., Khuong, N.D., Al Janabi, M.A.M., and Reboredo, J.C., (2017), âGlobal financial crisis and dependence risk analysis of sector portfolios: a vine copula approach,â Applied Economics, Vol. 49, No. 25, pp. 2409â"2427.Arreola-Hernandez, J., Al Janabi, M.A.M., Hammoudeh, S. and Nguyen, D.K. (2015), âTime lag dependence, cross-correlation and risk analysis of U.S. energy and non-energy stock portfolios,â Journal of Asset Management, Vol. 16, No. 7, pp. 467-483.Asadi, S., and Al Janabi, M.A.M. (2020), âMeasuring market and credit risk under Solvency II: Evaluation of the standard technique versus internal models for stock and bond marketsâ, European Actuarial Journal, Vol. 10, No. 2, pp. 425â"456.Grillini, S., Sharma, A., Ozkan, A., & Al Janabi, M.A.M. (2019), âPricing of time-varying illiquidity within the Eurozone: Evidence using a Markov switching liquidity-adjusted capital asset pricing modelâ. International Review of Financial Analysis, Vol. 64, pp. 145-158.Uddin, M.S., Chi, G., Al Janabi, M.A.M., and Habib, T., (2020), âLeveraging random forest in micro-enterprises credit risk modeling for accuracy and interpretabilityâ. International Journal of Finance & Economics, Early View: https://doi.org/10.1002/ijfe.2346
SSRN
The present study has attempted to discuss the association between corporate hedging theories and the usage of foreign currency loans by companies listed in India. A total of 349 non-financial companies were selected, and the data for the financial year ending 31st March, 2018 were considered for the analysis. The descriptive statistics indicate that 55% of the sample companies had borrowed funds in foreign currency. The companies were highly levered and maintained adequate short-term assets to honor short term obligations. A logit model was employed for analyzing the cross-sectional data. The dependent variable being binary (â0â for non-user of foreign currency loans and â1â for foreign currency loan user), the study found the variable âindustry typeâ to have a significant association with usage of foreign currency loans. Companies from the manufacturing sector were likely to use foreign currency loans than companies from the services sector. Debt to net worth, export to sales, revenue (log of revenue) were the variables that significantly influenced the likelihood of companies raising foreign currency loans. Interest coverage ratio had a negative influence on the likelihood of companies opting for foreign currency loans. Hosmer and Lemeshow test showed that the model is a good fit indicating 73% accuracy in predicting the users of foreign currency loans as âforeign currency loan usersâ. Theories such as financial distress, size, and extent of international operations explain why companies raise foreign currency loans.
SSRN
We propose a dependent frequency-severity model using a Gaussian copula. The copula links a latent variable of waiting time for the second claim with the claim severity. By assuming a log-normal distributed claim severity, we can analyze the effect of claim counts on the conditional expectation of severity. We propose a Monte Carlo simulation algorithm to simulate the predictive distribution of the aggregated claims amount. In an empirical example, we compare the proposed method with the conditional modeling by Garrido et al. (2016) and the mixed copula modeling by Czado et al. (2012).
arXiv
Decentralization is a centerpiece in Cameroonian's government institutions' design. This chapter elaborates a simple hierarchy model for the analysis of the effects of power devolution. The model predicts overall positive effects of decentralization with larger effects when the local authority processes useful information on how to better allocate the resources. The estimation of the effects of the 2010's power devolution to municipalities in Cameroon suggests a positive impact of decentralization on early human capital accumulation. The value added by decentralization is the same for Anglophone and Francophone municipalities; the effects of decentralization are larger for advanced levels of primary school.
SSRN
This paper broadens research literature associated with the assessment of modern portfolio risk management techniques by presenting a thorough modeling of nonlinear dynamic asset allocation and management under the supposition of illiquid and adverse market settings. This study analyses, from a fund managerâs perspective, the performance of liquidity adjusted risk modeling in obtaining optimal and coherent economic capital structures, subject to meaningful operational and financial constraints as specified by the fund manager. Specifically, the paper proposes a re-engineered and robust approach to optimal economic capital allocation, in a Liquidity-Adjusted Value at Risk (L-VaR) framework, and particularly from the perspective of trading portfolios that have both long and short trading positions and disallowing both pure long positions and borrowing constraints. This paper expands previous approaches by explicitly modeling the liquidation of trading portfolios using machine learning techniques, over the holding period, with the aid of an appropriate scaling of the multiple-assetsâ L-VaR matrix along with GARCH-M technique to forecast conditional volatility and expected return. The key methodological contribution is a different and less conservative liquidity scaling factor than the conventional root-t multiplier. Moreover, in this paper, the authors develop a dynamic nonlinear portfolio selection model and an optimization algorithm which allocates both economic capital and trading assets by minimizing L-VaR subject to the constraints that the expected return, trading volume and liquidation horizon should meet the budget limits set by the fund manager. In addition, the paper illustrates how the modified L-VaR method can be used by an equity trading unit in a dynamic asset allocation framework for reporting risk exposure, optimizing economic capital, and assessing risk reduction alternatives. The empirical results strongly confirm the importance of enforcing financially and operationally meaningful nonlinear and dynamic constraints, when they are available, on the L-VaR optimization procedure.JEL Classifications: C10, C13, G20, and G28Keywords: Economic Capital; Emerging Markets; Financial Engineering; Financial RiskManagement; GARCH, GCC Financial Markets; Liquidity Risk; Machine Learning; Portfolio Management; Liquidity-Adjusted Value at Risk.References: Al Janabi, M.A.M., Ferrer, R., and Shahzad, S. J. H., (2019). âLiquidity-adjusted value-at-risk optimization of a multi-asset portfolio using a vine copula approachâ. Physica A: Statistical Mechanics and its Applications, Volume 536, Article 122579.Al Janabi, M.A.M., Arreola-Hernández, Jose, Berger, Theo, Khuong Nguyen, Duc, (2017), âMultivariate Dependence and Portfolio Optimization Algorithms under Illiquid Market Conditionsâ, European Journal of Operational Research, Vol. 259, No. 3, pp. 1121-1131.Al Janabi, M.A.M. (2021a), âIs Optimum Always Optimal? A Revisit of the Mean-Variance Method under Nonlinear Measures of Dependence and Non-Normal Liquidity Constraintsâ. Journal of Forecasting, Vol. 40, No. 3, pp. 387-415.Al Janabi, M.A.M. (2021b), âMultivariate Portfolio Optimization under Illiquid Market Prospects: A Review of Theoretical Algorithms and Practical Techniques for Liquidity Risk Managementâ. Journal of Modelling in Management, Vol. 16, No. 1, pp. 288-309. Al Janabi, M.A.M. (2014), âOptimal and Investable Portfolios: An Empirical Analysis with Scenario Optimization Algorithms under Crisis Market Prospectsâ, Economic Modelling, Vol. 40, pp. 369-381.Al Janabi, M.A.M. (2015), âScenario Optimization Technique for the Assessment of Downside-Risk and Investable Portfolios in Post-Financial Crisisâ, Int. J. of Financial Engineering, Vol. 2, No. 3, pp. 1550028-1 to 1550028-28. Al Janabi, M.A.M. (2013), âOptimal and Coherent Economic-Capital Structures: Evidence from Long and Short-Sales Trading Positions under Illiquid Market Perspectivesâ, Annals of Operations Research, Vol. 205, No. 1, pp. 109-139.Al Janabi, M.A.M. (2012), âOptimal Commodity Asset Allocation with a Coherent Market Risk Modelingâ, Review of Financial Economics, Vol. 21, No. 3, pp. 131-140.Al Janabi, M.A.M. (2011), âA Generalized Theoretical Modeling Approach for the Assessment of Economic Capital under Asset Market Liquidity Risk Constraintsâ, Service Industries Journal, Vol. 31, No. 13 & 14, pp. 2193-2221. Al Janabi, M. A.M. (2008), âIntegrating liquidity risk factor into a parametric value at risk Methodâ, Journal of Trading, Vol. 3, No. 3, pp. 76â"87.Arreola-Hernandez, J. and Al Janabi, M.A.M. (2020), âForecasting of dependence, market and investment risks of a global index portfolioâ. Journal of Forecasting, Vol. 39, No. 3, pp. 512-532.Further Reading:Arreola-Hernandez, J., Hammoudeh, S., Khuong, N.D., Al Janabi, M.A.M., and Reboredo, J.C., (2017), âGlobal financial crisis and dependence risk analysis of sector portfolios: a vine copula approach,â Applied Economics, Vol. 49, No. 25, pp. 2409â"2427.Arreola-Hernandez, J., Al Janabi, M.A.M., Hammoudeh, S. and Nguyen, D.K. (2015), âTime lag dependence, cross-correlation and risk analysis of U.S. energy and non-energy stock portfolios,â Journal of Asset Management, Vol. 16, No. 7, pp. 467-483.Asadi, S., and Al Janabi, M.A.M. (2020), âMeasuring market and credit risk under Solvency II: Evaluation of the standard technique versus internal models for stock and bond marketsâ, European Actuarial Journal, Vol. 10, No. 2, pp. 425â"456.Grillini, S., Sharma, A., Ozkan, A., & Al Janabi, M.A.M. (2019), âPricing of time-varying illiquidity within the Eurozone: Evidence using a Markov switching liquidity-adjusted capital asset pricing modelâ. International Review of Financial Analysis, Vol. 64, pp. 145-158.Uddin, M.S., Chi, G., Al Janabi, M.A.M., and Habib, T., (2020), âLeveraging random forest in micro-enterprises credit risk modeling for accuracy and interpretabilityâ. International Journal of Finance & Economics, Early View: https://doi.
SSRN
The growth and expansion of the global financial system have a latent manifestation in the form of financial crimes, broadly involving financial and cyber frauds, money laundering, terrorist financing, corruption, and tax evasions. Increasing global integration of the financial system and the advent of digital modes of financial transactions while improving the efficiency of the financial system, have also expanded the tool-kit of the perpetrators of financial crimes. Financial crimes have huge economic, social, and psychological cost. This paper presents a global paradigm of the fight against financial crimes and, in the Indian context, highlights the need for strengthening the Gatekeepers, namely, Designated Non-Financial Businesses and Professions (DNFBPs) to curb the menace of financial crimes.
SSRN
This paper presents a spatial model to analyze the effects of the entry of Fintech lenders on credit market competition and welfare. In the model, banks compete with a Fintech lender for borrowers under asymmetric information. Both types of lenders can screen borrowers before making a loan, and their signals are conditionally independent and asymmetric. The Fintech lender will enter the market if its screening ability is sufficiently high or the credit market is not very competitive. Increased competition from Fintech entrants erodes banks' profitability. Contrary to the standard view, Fintech entry could hurt borrowers' access to credit and worsen allocative efficiency. Fintech entry crowds out banks in the long run and may reduce social welfare.
arXiv
The central idea of the paper is to present a general simple patchwork construction principle for multivariate copulas that create unfavourable VaR (i.e. Value at Risk) scenarios while maintaining given marginal distributions. This is of particular interest for the construction of Internal Models in the insurance industry under Solvency II in the European Union.
SSRN
Since the European debt crisis economists and politicians discuss intensively the sovereign-bank nexus. The high activity in sovereign bond issuance required to mitigate the burden of the Covid19 crisis will rather intensify this debate than calm it down. Surprisingly, however, we still have only limited knowledge about the impact of a home bias in sovereign exposure on bank stability. This paper provides a new way to use European stress test data to study this relationship. In addition, we explore the effect on a bankâs probability of default if the existing capital requirement privilege for EU sovereign exposures were abolished. Our results support the conceptual idea behind the nexus theory. Interestingly, the effect of a home bias on bank stability is contingent on the home countryâs solvency. If the home country is sufficiently solvent, investments in home sovereign bonds may improve bank stability. The findings clearly support the benefits of additional CET1 capital buffers. Regulation focusing on the home bias should account for heterogeneous effects depending on the home countryâs solvency.
SSRN
The paper analyzes the impact of financial performance and financial decisions on the market value of Infosys. The secondary data is used for the study. Apart from financial performance, capital structure and dividend decisions are evaluated. Data of five years is considered. Infosys has grown from a capital base of US$250 to a company with a market capitalization of US$ 30.9 billion. The findings support the irrelevance of capital structure and dividend policy on the market value of the firm. The market price show positive correlation with the revenues.
SSRN
The paper analyzes the financial performance of JK cements. The secondary data is taken from annualreports of the company. The data is analyzed using financial ratios. The data of five years have beenconsidered for the study. The paper also makes an attempt to study the correlation of debt equity ratioand dividend payout with market price of share. The findings support the irrelevance of capital structureand dividends for market price of share.
SSRN
Electronic banking is generally an extension of traditional banking, using the internet as an electric delivery channel for banking products and services. The banking today is redefined andre-engineered with the use of IT and it is sure that the future of banking will offer more sophisticated services to customers with the continuous product and process innovations. Thus there is a paradigm shift from sellerâs market to buyerâs market. So banks also change theirapproach from âConventional Banking to Convenience Bankingâ and âMass banking to Class Bankingâ. The study examines various relevant issues relating to role of IT in banking and recommends to ensure privacy and confidentiality of dataâs, implement IT and other Cyber laws properly. This will ensure the developmental role of IT in the banking industry.
SSRN
Electronic banking is generally an extension of traditional banking, using the internet as an electric delivery channel for banking products and services. The banking today is redefined and re-engineered with the use of IT and it is sure that the future of banking will offer more sophisticated services to customers with the continuous product and process innovations. Thus there is a paradigm shift from sellerâs market to buyerâs market. So banks also change their approach from âConventional Banking to Convenience Bankingâ and âMass banking to Class Bankingâ. The study examines various relevant issues relating to role of IT in banking and recommends to ensure privacy and confidentiality of dataâs, implement IT and other Cyber laws properly. This will ensure the developmental role of IT in the banking industry.
SSRN
Probability of loss to a bankâs earnings or equity on account of the movement of interestrates is termed as interest rate risk. Movement in the interest rates are driven by theliquidity and market situations and are also guided by monetary policy actions namely,changes in policy rates or special open market operations. Such changes impact theinvestment and asset-liability management of banks and hence, require the use ofsuitable tools and techniques for assessment and management of the risk. Techniquessuch as repricing gap computation, duration gap analysis, and convexity estimation aremostly used. Of late, the application of these techniques has been further expanded bymore sophisticated methods such as key rate duration and principal componentanalysis. This article presents an insight into the subject and explains the use of thesetechniques.
SSRN
A dedicated investor relations (IR) function facilitates direct and ongoing dialogue between management and shareholders. This paper examines whether this form of engagement mitigates activism that relies upon support from other shareholders. We find that IR engagement is associated with increased investor confidence in management and the board, as well as a lower likelihood of activism, with this deterrent effect becoming stronger when there are fewer frictions surrounding the development of mutual understanding and trust with investors. We also find that when firms do experience an activist campaign, firms with IR engagement have less costly and contentious campaigns, including a lower likelihood of CEO turnover, than those without such a commitment. Taken together, our findings suggest that direct and ongoing IR engagement is an important factor in achieving mutual understanding and trust between the firm and its shareholders, which deters activist investors and mitigates the costly escalation of initiated campaigns.
SSRN
It is generally said that out-of-the-money call options are expensive and one can ask the question from which moneyness level this is the case. Expensive actually means that the price one pays for the option is more than the discounted average payoff one receives. If so, the option bears a negative risk premium. The objective of this paper is to investigate the zero-risk premium moneyness level of a European call option, i.e. the strike where expectations on the optionâs payoff in both the P- and Q-world are equal. To fully exploit the insights of the option market we deploy the Tilted Bilateral Gamma pricing model to jointly estimate the physical and pricing measure from option prices. We illustrate the proposed pricing strategy on a variety of option surfaces of stock indices, assessing the stability over time of the zero-risk premium strike of a European call option.
arXiv
We consider a nonlinear random walk which, in each time step, is free to choose its own transition probability within a neighborhood (w.r.t. Wasserstein distance) of the transition probability of a fixed L\'evy process. In analogy to the classical framework we show that, when passing from discrete to continuous time via a scaling limit, this nonlinear random walk gives rise to a nonlinear semigroup. We explicitly compute the generator of this semigroup and corresponding PDE as a perturbation of the generator of the initial L\'evy process.
SSRN
This study examines the intertemporal nature of countriesâ external adjustment by using two types of oil income shocks with different timings, namely, giant oil discovery news shocks and contemporaneous oil windfalls arising from the possible exogenous changes in the international oil spot price. Empirical estimates based on a large panel of countries from 1970 to 2011 are consistent with the intertemporal model. Net foreign assets hike immediately upon oil revenue shocks, but decrease in the first five years after oil discoveries, and then increase sharply after oil production starts. Meanwhile, the external adjustments upon oil shocks are largely through the current account channel, and valuation effects only partially stabilize the current account adjustment for oil revenue shocks. Moreover, oil discoveries attract a large amount of foreign direct investment inflow to share the risk of oil extraction, and oil revenue shocks significantly increase the net holdings in low-risk foreign debt assets. Our results indicate that risk-sharing may play an important role in country portfolio diversification.
arXiv
It has been claimed that a small subset of COVID-19 public stimulus packages is sufficient to meet the short-term energy investment needs to leverage a shift toward a pathway consistent with the 1.5 {\deg}C target of the Paris Agreement. We argue that this short-sighted and public investment-led view misrepresents the grand challenges that climate change mitigation entails.
SSRN
I document a positive relationship between partisan conï¬ict and corporate credit spreads. A onestandard deviation increase in partisan conï¬ict is associated with a 1.97 basis point increase inthe next one-month corporate credit spreads after controlling for bond-issue information, ï¬rmcharacteristics, macroeconomic variables, uncertainty measures, and sentiment measures. Theresult holds when using instrumental variable to resolve endogeneity concerns. I further ï¬nd thatpartisan conï¬ict has a greater impact on corporate credit spreads for ï¬rms with higher exposure togovernment policies, including government spending policy, tax policy, trade policy and regulationpolicy. Firms that are actively involved in political activities are also more sensitive to changes inpolitical polarization. Intensiï¬ed partisan conï¬ict affects excess bond premium and inï¬uencescredit spreads primarily via discount rates.
SSRN
Government ownership of financial intermediaries is pervasive around the world. In this study, we examine the impact of the common government ownership between the brokerage and listed firms on the information production role of brokerage firms. We find that affiliated analysts issue more optimistic recommendations on stocks held by the same government as their brokerage firms. This optimistic bias is particularly strong for stocks during the economic shocks and before impending political promotion events. We also find that stocks recommended by politically affiliated analysts underperform those recommended by independent analysts, suggesting the optimism is driven by conflicts of interest rather than advantageous information. Furthermore, we find that sophisticated investors perceive the potential bias and incorporate this into their trading. Consistent with an exchange of favors story, politically affiliated brokerage firms receive more underwriting commitments during the issuance of local government debt and governments subscribe more shares during SEOs by politically affiliated brokerage firms.
arXiv
We investigate how protectionist policies influence short-run economic growth. Our empirical strategy exploits an extraordinary tax scandal that gave rise to an unexpected change of government in Sweden. A free-trade majority in parliament was overturned by a protectionist majority in 1887. The protectionist government increased tariffs. We employ the synthetic control method to select control countries against which economic growth in Sweden can be compared. We do not find evidence suggesting that protectionist policies influenced economic growth and examine channels why. New tariff laws increased government revenue. However, the results do not suggest that the protectionist government stimulated the economy by increasing government expenditure.
SSRN
Using a hand-collected data set on the Regulation A+ filings, I provide detailed information on the age, size, number of employees, financial statement items, and industrial and geographical distributions of companies that use Regulation A+. Testing the effect of Regulation A+ on the local economy, I find that the amount raised through this method of financing is negatively associated with ensuing unemployment rate. In addition, I investigate whether this new method of financing is substituting or complementing venture capital (VC) financing. The data analysis shows that Regulation A+ facilitates access to financing in regions and industries that could not attract VC-financing ex-ante. Finally, I find evidence consistent with successful Regulation A+ offerings in a region attracting ensuing VC investments through decreasing uncertainty and search cost.
SSRN
The literature argues that industry network effects imply the predictability of industry returns,while the return predictability can estimate the industry network in reverse. The paperemploys rolling window adaptive lasso regressions to test the robustness of return predictions,showing the inherent model instability of the industry network and raising caveats for usingthe adaptive lasso method to estimate the industry network with a long time series. Theout-of-sample predictability is examined by creating long-short trading portfolios based on thepredictions. With non-parametric tests, the paper discovers that the out-of-sample predictabilityexists but is primarily due to the momentum effect. The adaptive lasso portfolios performsignificantly worse than the momentum portfolio before the adjustment of risks. Based on themultifactor models, the trading portfolios also fail to continuously generate significant alphasfor risk-averse investors.
arXiv
We modify the standard model of price competition with horizontally differentiated products, imperfect information, and search frictions by allowing consumers to flexibly acquire information about a product's match value during their visits. We characterize a consumer's optimal search and information acquisition protocol and analyze the pricing game between firms. Notably, we establish that in search markets there are fundamental differences between search frictions and information frictions, which affect market prices, profits, and consumer welfare in markedly different ways. Although higher search costs beget higher prices (and profits for firms), higher information acquisition costs lead to lower prices and may benefit consumers. We discuss implications of our findings for policies concerning disclosure rules and hidden fees.
SSRN
We study the impact of the European Asset-backed Security (ABS) regulation of 2018 on residential mortgage-backed securities. We find that mortgages securitised after the regulation are characterized by a lower probability of default up to three years after origination. The ban on "cherry picking" and the enhanced investor due diligence, seem to have given banks incentive to decrease their risk-taking behaviour. This is particularly evident for high loan-to-value loans and mortgages with a hybrid interest rate type, which exhibit lower delinquencies after the new regulation. Moreover, the impossibility to securitise loans with unverified information led to an increase in quality of mortgages given to self-employed and unemployed borrowers.Further, we show that loans included in deals that meet the new "simplicity, transparency and standardisation" (STS) standards, perform better than their non-STS counterparts, despite showing, on average, significantly higher loan-to-value ratios. Overall, our findings suggest that the new European securitisation regulation has contributed to improving the credit quality of the securitisation market in Europe and, as a result, is a step in the right direction to restore trust in the European ABS market.
arXiv
Statistical significance measures the reliability of a result obtained from a random experiment. We investigate the number of repetitions needed for a statistical result to have a certain significance. In the first step, we consider binomially distributed variables in the example of medication testing with fixed placebo efficacy, asking how many experiments are needed in order to achieve a significance of 95 %. In the next step, we take the probability distribution of the placebo efficacy into account, which to the best of our knowledge has not been done so far. Depending on the specifics, we show that in order to obtain identical significance, it may be necessary to perform twice as many experiments than in a setting where the placebo distribution is neglected. We proceed by considering more general probability distributions and close with comments on some erroneous assumptions on probability distributions which lead, for instance, to a trivial explanation of the fat tail.
SSRN
This paper presents a new approach that quantifies how a credit rating agency and investors judge the effects of collateral and various covenants on syndicated loan risk. It addresses firmsâ self-selection of these contract terms by analyzing how a loanâs collateral and covenants affect: 1) the difference between the loanâs credit rating and the senior, unsecured credit rating of the borrowing firm; and 2) the difference between the borrowing firmâs senior, unsecured CDS spread and its loanâs credit spread. The results show that the rating agency and investors agree that a collateral requirement, a capital expenditure covenant, and a dividend restriction covenant are most important for reducing a loanâs credit risk. However, equity issuance and excess cashflow sweeps increase a loanâs risk.
SSRN
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.
SSRN
The digital revolution affects all economic aspects and the financial sector is not an exception. Despite the wide evidence on the impact of Information, Communication, and Technology (ICT) on the financial sector development, this topic has yet to be researched in Syria. We investigate the impact of five proxies of ICT on financial development using multiple regression model for the period 2005 to 2017. We also conduct marginal effect analysis to identify the impact of penetration of mobile phones on the financial development with war and without it. We find that there is a significant positive impact of the number of mobile subscribers on the financial development index in Syria. This result is consistent with Alshubiri et al. (2019) who find that an increase in fixed broadband has a statistically significant and positive effect on financial development in GCC countries. However, the number of telephone subscribers has insignificant impact on the Syrian financial development. The war seems to have a significant negative impact on the financial development in Syria. In addition, we find that the marginal effect of mobile subscription on the financial development index without war is larger compared to the case with war. We conclude that digital transformation has great potentials for advancing the Syrian financial sector especially if accompanied with more investment in ICT infrastructure.
SSRN
The question of optimal presentation format and choice architecture for investment decisions has gained momentum among researchers, policy makers, and practitioners alike. Motivated by the question how to provide information to investors in a way to improve financial decision-making, we conduct an investment experiment. We implement a 2 Ã 2 factorial design to test the effect of presentation format (graphical vs. tabular) and choice architecture/complexity (asset selection vs. predefined portfolios) on decision-making quality. Overall, our results suggest a differential effect of presentation format and choice architecture: Firstly, we find that the graphical presentation format lowers decision-making quality when the environment is more complex (asset selection). Secondly, within graphical presentation, decision quality is higher when the choice architecture is simplified (predefined portfolios). In addition, we find that a simplified choice architecture leads to higher risk-adjusted returns and reduces the relevance of fluid intelligence and numeracy for decision-making quality.
SSRN
I first show that there is a positive correlation between fund strategy based SRI classification and score based SRI classification. I then document that morningstar sustainability rating had a disciplining effect and fund managers started creating their portfolios more in line with their revealed ESG strategy in fund prospectus. Strategy based SRI fund, though, appears to form a consistently significant proportion of funds in bottom deciles of portfolio ESG score. Using this property of the data, I show that heterogeneity in the convexity of flow-performance relationship discussed extensively in literature is observed along the axis of strategy based SRI classification, but notalong portfolio ESG score based SRI classification. The results are robust to various measures of return and score-based SRI classifications.