# Research articles for the 2021-05-12

A rough SABR formula
Masaaki Fukasawa,Jim Gatheral
arXiv

Following an approach originally suggested by Balland in the context of the SABR model, we derive an ODE that is satisfied by normalized volatility smiles for short maturities under a rough volatility extension of the SABR model that extends also the rough Bergomi model. We solve this ODE numerically and further present a very accurate approximation to the numerical solution that we dub the rough SABR formula.

A rough SABR formula
Fukasawa, Masaaki,Gatheral, Jim
SSRN
Following an approach originally suggested by Balland in the context of the SABR model, we derive an ODE that is satisfied by normalized volatility smiles for short maturities under a rough volatility extension of the SABR model that extends also the rough Bergomi model. We solve this ODE numerically and further present a very accurate approximation to the numerical solution that we dub the rough SABR formula.

Banks' Complexity-Risk Nexus and the Role of Regulation
Martynova, Natalya,Vogel, Ursula
SSRN
We investigate the relationship between bank complexity and bank risk-taking using German banking data over the period 2005-2017. We find that more complex banking organizations tend to take on more risk, but that this complexity-risk nexus decreases over time. We study how regulatory tightenings inherent in this period, and addressing systemically important banks (SIBs) in general and complexity more specifically, alter banks' choices of complexity and risk. Banks reduce their complexity in response to regulatory tightenings, as these increase the related regulatory costs. Surprisingly, for SIBs in particular, the reduction of regulatory costs is associated with an increase in diversification benefits. As a result, they are able to lower their idiosyncratic risk more than other banks. The overall complexity-risk nexus is lower after regulatory tightenings. Thus, our results indicate that post-crisis regulation is effective in reducing banks' complexity-risk nexus.

CSDs and the reform of the settlement process
Wymeersch, Eddy
SSRN
The post-trade activities in securities has again raised considerable attention and discussions: recent public consultations of European Commission have resulted in a very active debate concentrating on three issues: new regime for settlement finality, with specific attention to the Buy-in process, the consequences of possible introduction of distributed ledger technology in the securities settlement process, and finality the widespread use of internalisation as a replacement to the CSDs. Overall, these discussions also result in a debate about the supervisory system. The debates on these topics are still open and are likely to keep us busy for quite some time. Therefore, this status questionis may be useful.

Carbon Leakage in a European Power System with Inhomogeneous Carbon Prices
Markus Schlott,Omar El Sayed,Mariia Bilousova,Fabian Hofmann,Alexander Kies,Horst Stöcker
arXiv

Global warming is one of the main threats to the future of humanity and extensive emissions of greenhouse gases are found to be the main cause of global temperature rise as well as climate change. During the last decades international attention has focused on this issue, as well as on searching for viable solutions to mitigate global warming. In this context, the pricing of greenhouse gas emissions turned out to be the most prominent mechanism: First, to lower the emissions, and second, to capture their external costs. By now, various carbon dioxide taxes have been adopted by several countries in Europe and around the world; moreover, the list of these countries is growing. However, there is no standardized approach and the price for carbon varies significantly from one country to another. Regionally diversified carbon prices in turn lead to carbon leakage, which will offset the climate protection goals. In this paper, a simplified European power system with flexible carbon prices regarding the Gross Domestic Product (GDP) is investigated. A distribution parameter that quantifies carbon leakage is defined and varied together with the base carbon price, where the combination of both parameters describes the spatially resolved price distribution, i.e. the effective carbon pricing among the European regions. It is shown that inhomogeneous carbon prices will indeed lead to significant carbon leakage across the continent, and that coal-fired electricity generation will remain a cheap and therefore major source of power in Eastern and South-Eastern Europe - representing a potential risk for the long term decarbonization targets within the European Union.

Contagion in Futures Metal Markets during the Recent Global Financial Crisis: Evidence from Gold, Silver, Copper, Zinc and Aluminium
Tsiaras, Konstantinos
SSRN
This paper seeks to investigate the time-varying dynamic conditional correlations to the five most important future metal markets, namely Gold, Silver, Copper, Zinc and Aluminium. We employ a multivariate Fractionally Integrated Generalized ARCH (FIGARCH) dynamic conditional correlation (cDCC) model to generate the potential contagion effects between the markets. The under investigation period is during the period 2006-2011. Empirical results show the existence of contagion or the increase in dynamic conditional correlation for all the pairs of markets, indicating the correlations risky from an investorâ€™s point of view and implying the portfolio strategies difficult to apply. Additionally, Zinc is proved to be the most immune future metal market. The results are of interest to policymakers who provide regulations for the future metal markets.

Contagion in crude oil future market and 3Y, 4Y and 5Y CDS markets for the post-Global Financial Crisis: A multivariate GARCH-cDCC approach
Tsiaras, Konstantinos
SSRN

Contagion in futures FOREX markets for the post-Global Financial Crisis: A multivariate FIGARCH-cDCC approach
Tsiaras, Konstantinos
SSRN
This paper seeks to investigate the time-varying conditional correlations to the futures FOREX market returns. We employ a dynamic conditional correlation (DCC) Generalized ARCH (GARCH) model to find potential contagion effects among the markets. The under investigation period is 2014-2019. We focus on four major futures FOREX markets namely JPY/USD, KRW/USD, EUR/USD and INR/USD. The empirical results show an increase in conditional correlation or contagion for all the pairs of future FOREX markets. Based on the dynamic conditional correlations, KRW/USD seems to be the safest futures FOREX market. The results are of interest to policymakers who provide regulations for the futures FOREX markets.

Contagion in major CDS markets for the post Global Financial Crisis: A multivariate AR-FIGARCH-cDCC approach
Tsiaras, Konstantinos
SSRN
We explore the time-varying conditional correlations of the Sovereing CDS spread returns for Germany, France, China and Japan against USA. We employ a cDCC-AR-FIGARCH model in order to capture potential contagion effects between the markets during the 2011-2018 post global financial crisis. Empirical results do not reject contagion for the country pairs: Germany â€" France, Germany â€" Japan and France â€" Japan while there is little support for contagion among China and the rest of the countries.

Emerging Platform Work in the Context of the Regulatory Loophole (The Uber Fiasco in Hungary)
arXiv

The study examines the essential features of the so-called platform-based work, which is rapidly evolving into a major, potentially game-changing force in the labor market. From low-skilled, low-paid services (such as passenger transport) to highly skilled and high-paying project-based work (such as the development of artificial intelligence algorithms), a broad range of tasks can be carried out through a variety of digital platforms. Our paper discusses the platform-based content, working conditions, employment status, and advocacy problems. Terminological and methodological problems are dealt with in-depth in the course of the literature review, together with the 'gray areas' of work and employment regulation. To examine some of the complex dynamics of this fast-evolving arena, we focus on the unsuccessful market entry of the digital platform company Uber in Hungary 2016 and the relationship to institutional-regulatory platform-based work standards. Dilemmas relevant to the enforcement of labor law regarding platform-based work are also paid special attention to the study. Employing a digital workforce is a significant challenge not only for labor law regulation but also for stakeholder advocacy.

Epidemics in modern economies
Torsten Heinrich
arXiv

How are economies in a modern age impacted by epidemics? In what ways is economic life disrupted? How can pandemics be modeled? What can be done to mitigate and manage the danger? Does the threat of pandemics increase or decrease in the modern world? The Covid-19 pandemic has demonstrated the importance of these questions and the potential of complex systems science to provide answers. This article offers a broad overview of the history of pandemics, of established facts, and of models of infection diffusion, mitigation strategies, and economic impact. The example of the Covid-19 pandemic is used to illustrate the theoretical aspects, but the article also includes considerations concerning other historic epidemics and the danger of more infectious and less controllable outbreaks in the future.

Exploring the Dynamic links between ICE BofA Yield Curves and First Bitcoin Capital Corp. Volatility using DECO-GARCH
Tsiaras, Konstantinos
SSRN
This paper examines the time-varying conditional correlations between FIRST BITCOIN CAP and ICE BofA Sterling Zero Coupon markets. We apply ten bivariate DECO-GARCH models in order to capture potential contagion effects between the markets for the period 2007-2020. Empirical results reveal contagion during the under investigation period regarding the ten bivariate models, showing potential volatility transmission channels among the markets. Findings have crucial implications for policymakers who provide regulations for the above derivative markets and for investors, who invest long-term into FIRST BITCOIN CAP.

Families in Corporate Venture Capital
Amore, Mario Daniele,Murtinu, Samuele,Pelucco, Valerio
SSRN
Many works at the crossroads of entrepreneurship and finance have studied corporate venture capital (CVC)â€™s decision-making and performance. We explore a neglected aspect in this literature: the presence of families as dominant owners of CVCsâ€™ parent organizations. Our data reveal that families are a key engine of corporate venturing activities: about one third of CVC deals in the US from 2000 to 2017 originated from family firms. Moreover, we find marked differences in the strategies and outcomes of family and non-family CVCs. Family CVCs syndicate more, join larger syndicates, and invest in ventures closer to the parent in terms of geography and industry - especially when the venture is informationally opaque and when the parentâ€™s CEO is a family member. Family CVCs add more value to their portfolio companies, which exhibit a higher likelihood of successful exit, better post-IPO market performance, and more valuable patents after the IPO. Family CVCs are also better able than non-family CVCs to generate shareholder value for their parent companies. Finally, family CVCs invest more during a financial crisis. Collectively, our findings are consistent with the view that family control entails a mix of risk mitigation and long-term preferences beneficial for venturing activities.

Financial Contagion and Volatility Spillover: an exploration into Bitcoin Future and FOREX Future Markets
Tsiaras, Konstantinos
SSRN
This paper examines the time-varying conditional correlations between Bitcoin future market and five FOREX future markets. A sixvariate dynamic conditional correlation (DCC) GARCH model is applied in order to capture potential contagion effects between the markets for the period 2017-2019. Empirical results reveal contagion during the under investigation period regarding the one sixvariate model, showing potential volatility transmission channels among the future markets. Findings have crucial implications for policymakers who provide regulations for the above derivative markets.

Forex and Equity Markets Spillover Effects Among USA, Brazil, Italy, Germany and Canada in the Aftermath of the Global Financial Crisis
Tsiaras, Konstantinos
SSRN
In this paper we investigate the spillover effects of FOREX and equity markets for USA, Brazil, Italy, Germany and Canada on the basis of daily data. We test for contagion co-movements for the period 2010-2018 post global financial crisis, using the trivariate AR-diagonal BEKK model. The estimated dynamic conditional correlations show the strongest contagion effects for the pairs of markets: S&P500-BOVESPA, S&P500-FTSEMIB, S&P500-DAX30 and S&P500-S&PTSX. For institutions, multinational corporations and active investors, a portfolio consisting of financial assets from the above markets is extremely risky.

From Corporate Governance to Crypto-Governance
Davidson, Sinclair
SSRN
In this paper I examine governance from a corporate perspective and then apply some of those ideas to blockchain governance. There is no need to re-discover or reinvent governance. The principles of governance have been established and understood for a long time â€" what is new is blockchain technology. The technical innovation associated with blockchain masks some commonalities with the industrial economy. Organisations in need of governance are a nexus of contracts. Blockchain applications as organisations are a nexus of smart contracts. Once this perspective is adopted, it is very clear that blockchain governance cannot simply be a strategy to decentralise and then vote as a group on all decisions. I then explain why a hypothetical blockchain foundation would have concentrated control and would be a non-profit organisation.

German title: Decentralised Finance (DeFi) â€" wie die Tokenisierung die Finanzindustrie verÃ¤ndert (Decentralised Finance â€" The Impact of Tokenization on the Financial Industry)
BrÃ¼hl, Volker
SSRN
German Abstract: Die Distributed Ledger- bzw. Blockchain-Technologie fÃ¼hrt zu einer zunehmenden Dezentralisierung von Finanzdienstleistungen (â€žDecentralised Financeâ€œ), die weitgehend ohne die Einschaltung von FinanzintermediÃ¤ren angeboten werden kÃ¶nnen. Dazu trÃ¤gt wesentlich die sog. â€žTokenisierungâ€œ von VermÃ¶gensgegenstÃ¤nden, Zahlungsmitteln und Rechten bei, die verschlÃ¼sselt als â€žKryptowerteâ€œ in verteilten Transaktionsregistern digital abgebildet werden kÃ¶nnen. Der vorliegende Beitrag erlÃ¤utert die Grundlagen und Anwendungsfelder dezentraler Finanzdienstleistungen mit Kryptowerten, die mittelfristig die gesamte Architektur des Finanzsektors verÃ¤ndern kÃ¶nnten. Dieser Trend betrifft lÃ¤ngst nicht nur die kontrovers diskutierten Zahlungsverkehrssysteme mit KryptowÃ¤hrungen wie dem Bitcoin, sondern Handelsplattformen, KapitalmÃ¤rkte oder Unternehmensfinanzierungen. Es bildet sich ein rasch wachsendes Ã–kosystem aus Startups, Technologieunternehmen und etablierten Finanzdienstleistern, fÃ¼r das jedoch noch ein verlÃ¤sslicher regulatorischer Rahmen fehlt. Die derzeit auf europÃ¤ischer Ebene diskutierte Initiative â€žMiCA (Markets in Crypto Assets)â€œ geht in die richtige Richtung, sollte aber im Interesse der WettbewerbsfÃ¤higkeit des europÃ¤ischen Finanzsektors zeitnah umgesetzt werden.English Abstract: Advances in distributed ledger technology are leading to a growing decentralisation of financial services (â€œdecentralised financeâ€) that can be offered largely without intermediation by financial institutions. An important driver for this development is the ongoing tokenisation of assets, payments and rights, which enables the digital encryption of â€œcrypto assetsâ€ on distributed ledgers. This article elaborates the foundations and fields of application of decentralised financial services with crypto assets that could challenge the established business models of financial institutions. This trend not only affects payment systems based on controversial crypto currencies such as Bitcoin, but also exchange platforms, capital markets solutions and corporate financing. A rapidly growing ecosystem of start-ups, tech companies and financial institutions is emerging, yet this ecosystem lacks a consistent regulatory framework. The European initiative MiCA (Markets in Crypto Assets) points in the right direction but needs to be adopted soon to ensure the future competitiveness of the European financial sector.

Governing Fintech and Fintech as Governance: The Regulatory Sandbox, Riskwashing, and Disruptive Social Classification
Brown, Eric,Piroska, Dora
SSRN
This article evaluates the sandbox approach as a regulatory answer to the challenges financial technology brings to finance and social relations. Taking fintech as a sociotechnological phenomenon embedded in discourses of solutionism and innovation, we show that the regulatory sandbox accepts these discourses. Instead of containing fintech, the sandbox is designed in a way that advances riskwashing of fintech even if it is disguised as risktaming. Next, we demonstrate fintechâ€™s problematic nature that regulation should control. First, we propose that through its information processing capacity, fintech accelerates the transition from bank-based to market-based finance. Second, we demonstrate that fintech as part of a fintech-financialization apparatus has catallactic and value-extracting governance effects. Third, inserting the fintech-financialization apparatus into Fourcade and Healyâ€™s argument on the social stratification effect of the data-driven economy, we argue that it also has a socially disruptive potential. We critique the regulatory sandbox for being a facilitator to this process and recommend increasing the number and power of veto players and veto points in complex regulatory regimes.

Growth Fragility and Systemic Risk Under Model Uncertainty
C. Herculano, Miguel
SSRN
The link between systemic risk and economic growth is hard to study because the relationship is believed to be nonlinear and systemic risk is unobservable. The myriad of measures proposed in the literature add model uncertainty as an additional difficulty. I use a Bayesian quantile regression to study the relevance of 33 systemic risk indicators to explain lower quantiles of output growth. Model uncertainty is tackled with sparse and dense modelling techniques that perform both model selection and shrinkage. I find that systemic risk indicators add value to quantile forecasts of GDP growth, in-sample and out-of-sample. However, less than halve of the indicators considered are selected to explain the different quantiles of economic growth.

Inflation -- who cares? Monetary Policy in Times of Low Attention
Oliver Pfäuti
arXiv

Based on a model of optimal information acquisition, I propose an approach to measure attention to inflation in the data. Applying this approach to US consumers and professional forecasters provides substantial evidence that attention to inflation in the US decreased significantly over the last five decades. Consistent with the theoretical model, attention is higher in times of volatile inflation. To examine the consequences of limited attention for monetary policy, I augment the standard New Keynesian model with a lower-bound constraint on the nominal interest rate and inflation expectations that are characterized by limited attention. Accounting for the lower bound fundamentally alters the normative implications of low attention. While lower attention raises welfare absent the lower-bound constraint, it decreases welfare when accounting for the lower bound. In the presence of the lower bound, limited attention can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. To prevent these traps, it is optimal to increase the inflation target as attention declines.

Is Competition Beneficial? The Case of Exchange Traded Funds
Kharma, Celine,Eugster, Nicolas
SSRN
New ETF creation has surged in recent years, giving investors the option to choose from a wide range of similar ETFs within each group of competitors. We identify groups of ETFs that can be considered direct competitors and examine the impact of competition on their market quality. Results show improved market quality measures when competition increases. A change equivalent to going from a monopoly to a highly competitive market results in a 29% decrease in bid-ask spreads, a 72% decrease in illiquidity, and a 52% increase in turnover. However, we find that competition has a differential impact on ETFs according to their market depth. Market quality improves with competition for large or well-performing ETFs, while it worsens for small or under-performing ETFs. A case study on ETFs banned by the SEC in March 2010 further highlights our results in the artificially controlled competitive environment of the moratorium.

Keeping up with the Joneses and the real effects of S&P 500 inclusion
SSRN
Firms added to the S&P 500 index join a prestigious and exclusive club. They want to fit in the club, which creates a â€œkeeping up with the Jonesesâ€ effect. Firms pay more attention to their index peers after inclusion and their investment, external financing, and payouts comove more with their index peers. These effects do not appear to result from the increased coordination among investors posited by the common ownership literature as inclusion does not cause a decrease in competition. Since index inclusion does not increase shareholder wealth permanently, these peer effects do not appear to benefit shareholders.

L'impact du Brexit sur l'Afrique en pÃ©riode de crise Corona: le cas de l'Afrique du Sud, du Nigeria, du Ghana et du Kenya (The impact of Brexit on Africa in Times of the Corona Crisis : The case of South Africa, Nigeria, Ghana and Kenya)
Kohnert, Dirk
SSRN

Lending Relationships Along Ownership Lines: Institutional Cross-Ownership and Bank Loan Contracts
Ma, Zhiming,Owens, Edward,Stice, Derrald,Wang, Danye
SSRN
We find that banking relationships built through institutional cross-ownership influence the granting of loans as well as loan contract terms. Specifically, firms newly added to institutional cross-ownersâ€™ portfolios are more likely to borrow from banks that previously issued loans to other firms with the same institutional cross-ownership within the previous three years. These related banks also charge lower loan interest spreads than unrelated banks, and this effect is stronger for borrowers with high information asymmetry, low accounting quality, more financial constraints, and with dedicated institutional cross-owners. Both the lending probability and interest spread effects are robust to different fixed effects specifications as well as to a difference-in-differences analysis using the quasi-experimental setting of financial institution mergers. Overall, our study provides new insights on the role of institutional cross-ownership in the formation of lending relationships.

Lockdowns as Options
van Wijnbergen, Sweder
SSRN
I show that the irreversibility of dying coupled with gradual information acquisition over time on the likely arrival and eventual effectiveness of vaccines confers a real option value to lockdown strategies that delay the incidence of a pandemic.The case for lockdown strategies becomes stronger the more likely vaccine discovery is, and the less uncertainty exists about its effectiveness.

Market Efficient Portfolios in a Systemic Economy
Kerstin Awiszus,Agostino Capponi,Stefan Weber
arXiv

We study the ex-ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner's perspective. Prices are pressured from exogenous trading actions of leverage targeting banks, which rebalance their portfolios in response to asset shocks. We characterize market inefficiency in terms of two key drivers, the banks' systemic significance and the statistical moments of asset shocks, and develop an explicit expression for the matrix of asset holdings which minimizes such inefficiency. Our analysis shows that to reduce inefficiencies, portfolio holdings should deviate more from a full diversification strategy if there is little heterogeneity in banks' systemic significance.

Measuring distortions in international markets: Below-market finance
Oecd
RePEC
The support that governments provide to their industrial producers has been a growing source of concern. Much of that support is provided by governments through the financial system, either in the form of below‑market borrowings or below-market equity. To better understand the nature and scale of this support, this report uses publicly available information for 306 of the largest manufacturing firms in 13 industrial sectors, covering the period 2005-19. It finds that below-market borrowings tend to be relatively large in heavy industries, including some that reportedly suffer from excess capacity, while below-market equity returns appear to be more common in high-tech industries such as aerospace and semiconductors. Below-market borrowings also appear to benefit firms with more than 25% government investment relatively more. These findings on below-market finance raise a number of important issues for trade rules, including in relation to transparency and the scope of subsidy disciplines.

Multilevel Monte Carlo simulation for VIX options in the rough Bergomi model
Florian Bourgey,Stefano De Marco
arXiv

We consider the pricing of VIX options in the rough Bergomi model [Bayer, Friz, and Gatheral, Pricing under rough volatility, Quantitative Finance 16(6), 887-904, 2016]. In this setting, the VIX random variable is defined by the one-dimensional integral of the exponential of a Gaussian process with correlated increments, hence approximate samples of the VIX can be constructed via discretization of the integral and simulation of a correlated Gaussian vector. A Monte-Carlo estimator of VIX options based on a rectangle discretization scheme and exact Gaussian sampling via the Cholesky method has a computational complexity of order $\mathcal O(\varepsilon^{-4})$ when the mean-squared error is set to $\varepsilon^2$. We demonstrate that this cost can be reduced to $\mathcal O(\varepsilon^{-2} \log^2(\varepsilon))$ combining the scheme above with the multilevel method [Giles, Multilevel Monte Carlo path simulation, Oper. Res. 56(3), 607-617, 2008], and further reduced to the asymptotically optimal cost $\mathcal O(\varepsilon^{-2})$ when using a trapezoidal discretization. We provide numerical experiments highlighting the efficiency of the multilevel approach in the pricing of VIX options in such a rough forward variance setting.

Obstacles to Cross-Border Insolvency and Employment Protection Coordination in the European Union: Examples from the UK and France
Gant, Jennifer L. L.
SSRN
The coordination of legal systems is a concept that has occupied the minds of legislators, political leaders and legal academics for centuries, particularly with a view towards facilitating business across borders. Within the European Union, coordination has been achieved to some extent in those legal areas which deal with the free movement of goods and capital in pursuit of free trade within the Common Market. The EU Insolvency Regulation2 is one of many attempts to coordinate the way in which member states work together on commercial matters in cross border business relationships. While it has set out rules through which cross border insolvencies can be managed, there remain gaps between the individual insolvency systems of the member states which make it more difficult to coordinate insolvency procedures than if they were more closely aligned. Definitions, derogations, procedural purpose and even the fundamental aims of insolvency remain divergent among the legal systems of the EU. This disparity between the aims of insolvency is one obstacle to cross border cooperation but the disparities themselves are influenced by factors endemic to the jurisdictions within which they are found.What is the source of the disparities between insolvency systems and is there any way that they can be aligned? Why is it that if all member states of the EU wish to promote effective and profitable cross border business transactions that aligning those systems under which such transactions operate is such a difficult problem to address and resolve? This may seem a naÃ¯ve question, but trite answers will not assist on the way to better coordination. As such, a deeper analysis of the sources of the obstacles to legal coordination may help to raise an awareness of the reasons why such obstacles exist and in so doing, perhaps make it possible to take these into account when drafting or reforming coordinating legislation in such a way as to promote a closer alignment which accounts for systemic disparities rather than attempting to force them into a common perspective.There are complex factors which exist within the social histories of each member state which contribute to the diversity of aims of legal regulation, among which are legal origin or regulatory style, the concept of freedom of contract, industrialization and collectivism, economics, politics and human rights. An examination of each of these themes among a number of others in relation to their effect on the development of legal rules and their fundamental aims are explored in detail in the thesis to which this paper is related.3 For the purpose of this paper, focus will be applied to the complexity of diverse legal development in the social policies and regulation of member states, which has an effect on the aims of insolvency law in the weight of protection given to creditors or other stakeholders such as employees. By way of example, the United Kingdom and France will be used as comparators.

Optimal Consumption under a Habit-Formation Constraint
Bahman Angoshtari,Erhan Bayraktar,Virginia R. Young
arXiv

We propose a new optimal consumption model in which the degree of addictiveness of habit formation is directly controlled through a consumption constraint. In particular, we assume that the individual is unwilling to consume at a rate below a certain proportion $0<\alpha\le1$ of her consumption habit, which is the exponentially-weighted average of past consumption rates. $\alpha=1$ prohibits the habit process to decrease and corresponds to the completely addictive model. $\alpha=0$ makes the habit-formation constraint moot and corresponds to the non-addictive model. $0<\alpha<1$ leads to partially addictive models, with the level of addictiveness increasing with $\alpha$. In contrast to the existing habit-formation literature, our constraint cannot be incorporated in the objective function through infinite marginal utility. Assuming that the individual invests in a risk-free market, we formulate and solve an infinite-horizon, deterministic control problem to maximize the discounted CRRA utility of the consumption-to-habit process subject to the habit-formation constraint. Optimal consumption policies are derived explicitly in terms of the solution of a nonlinear free-boundary problem, which we analyze in detail. Impatient always consume above the minimum rate; thus, they eventually attain the minimum wealth-to-habit ratio. Patient individuals consume at the minimum rate if their wealth-to-habit ratio is below a threshold, and above it otherwise. By consuming patiently, these individuals maintain a wealth-to-habit ratio that is greater than the minimum acceptable level. Additionally, we prove that the optimal consumption path is hump-shaped if the initial wealth-to-habit ratio is either: (1) larger than a high threshold; or (2) below a low threshold and the agent is less risk averse. Thus, we provide a simple explanation for the consumption hump observed by various empirical studies.

Proletarianisation, Labour Regulation and Socio-Economic Context in the EU: How Did We Get Here, Where Are We Going and Why?
Gant, Jennifer L. L.
SSRN
Labour regulation is a complex and ever changing area of the law fed by social and economic policy, politics, external and internal pressures, and cultural influences. In isolation, labour regulation is particular to the country in which it is found. However, in a world growing smaller due to the evolution of an international marketplace through globalisation, the differences in labour regulation between jurisdictions can become an issue in cross border business transactions and may even affect a multi-national companyâ€™s choice of investment. The flexibility or inflexibility of labour regulation will affect the attractiveness of a jurisdiction, as evidenced by the outsourcing of labour intensive sectors of many corporations to developing countries which lack the expense of protective labour regulation and minimum wage requirements. In order to even attempt an alignment of labour systems in the EU, which of itself is a potentially unrealistic suggestion, at least in the current political climate, an understanding of the fundamental values which have influenced a countryâ€™s approach labour law is vital. Any EU level coordination would require diplomacy and compromise, a full knowledge and understanding of the elements of the systems being the most important tool to guide any such process. To this end, an analysis of the historical context of labour regulation and the working classes will reveal much about the fundamental values upon which labour systems are based and any important differences existing between these values. A typically top down technical analysis would only expose a positivist view of the law, isolated from its constituent parts without which it would not exist in its current form. This unique methodology could then be relied upon as a means finding a path to greater coordination by attempting to align systemic values. This paper does not set out to solve the coordination issues or to press for harmonisation. It aims to explore the origin of the differences between the legal systems to see if there is some way that social, political and historical obstacles can be overcome in order to draw the labour law systems of member states into closer alignment. Using the historic-comparative methodology described above, the proletarianisation of labour which has occurred through industrialisation and following the French Revolution within the UK and France in particular will be examined. The emergence of labour regulation will then be discussed within its socio-cultural, economic and historical context. It is envisaged that an EU with more closely aligned legal systems would improve the effectiveness of cross border commercial enterprises and decrease what opportunities for social dumping may remain.

Risk-Seeking Behavior and its Implications for the Optimal Decision Making of Annuity Insurers
Chen, Cuixia,Lin, Yijia,Zhou, Ming
SSRN
This study investigates the risk-seeking behavior and optimal decisions of annuity providers. On the basis of a sample of U.S. life and annuity (L/A) insurers between 1997 and 2016, results show clear performance-dependent risk attitudes. Specifically, insurers with returns below aspiration levels take more risks, whereas those with returns above reference levels decrease risk seeking behavior, which supports the basic propositions of the cumulative prospect theory (CPT). Given initial evidence of mixed risk preferences in the L/A insurance industry, we derive an annuity insurer's optimal investment and business strategies in a CPT decision-making framework. We show that changing risk preferences considerably affect an annuity provider's decisions. We further illustrate how risk management changes an annuity insurer's optimal strategies. Our results suggest that risk management lowers downside risk and allows a loss-averse decision maker to assume more risk and achieve a higher level of utility.

Role of Economic devlopment with past and growth perspective.
Shaukat, Dr. Iqbal
SSRN
I highlighted the economic growth with historical and growth perspective for people and student who want to know about the economic devlopment in short time.

Sell-side Analysts' Disagreement and Stock Prices
SSRN
In this paper we test the hypothesis that sell recommendations are costlier than buy recommendations by carrying out cointegration analyses. We find that that analyst recommendations that plainly urge the investor to take action (buy, sell) are consistent with their estimated losses (gains). Importantly, we find that analysts react mildly to higher projected losses, and strongly to higher projected capital gains. Also, we find that higher projected losses are positively related to dispersion in analysts' recommendations. In summary, we find empirical evidence in favor of Womack's (1996) hypothesis that the cost of issuing a sell recommendation is greater than the cost of a buy recommendation.

Social Policy and Insolvency: Struggles towards Convergence
Gant, Jennifer L. L.
SSRN
The cooperation of European countries in matters of insolvency has a long history. It has been a 40 year project within the European Union, evolving in complexity and increasing in cooperation as the EU has expanded and changed. The culmination of this cooperation was the EU Insolvency Regulation which deals with the coordination of cross-border insolvency between member states. In 2012, INSOL Europe proposed amendments to the EIR, aimed at furthering its proper functioning by amending substantive aspects and improving technical rules. Among the fundamental issues to be resolved was the ease with which companies can â€œforum shopâ€ among member states to identify a jurisdiction providing the most advantageous environment to commence insolvency proceedings. However, goal of reducing forum shopping overall is not helped by the existence of divergent rules of employment protection among the member states.Underpinned by traditionally opposing socio-political values, the juxtaposition of insolvency law and employment protection is difficult to reconcile. However, in these times following the financial crisis and its slow recovery, business failures and unemployment are both at the forefront of economic concerns. The EU has applied itself to the intersection of employment protection and insolvency procedures within the Acquired Rights Directive, which contains provisions requiring the transfer of employment contracts to the buyer of a business or a part thereof upon its transfer, including those transfers which occur as a result of corporate rescue procedures. As the ARD provisions took the form of an EU directive, the form and method of implementation of the ARD was left to the member states as long as the intended results of the directive were achieved within national legislation. A number of derogations were also available within the ARD, including the potential to disapply the transfer provisions if the transferor were:â€œâ€¦subject to bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to [the] liquidation....â€ of a company. The application of employee transfer provisions in corporate rescue procedures has not failed to cause controversy over the 37 years since its initial implementation, significantly as the derogation for insolvency procedures was not present in the original ARD. Many EU and national cases have caused further complications, particularly in relation to how national social policies affect the aims of corporate rescue with regard to the relative favouritism of the safeguarding of employment.Social policy legislation also has an effect on how insolvency systems function in practice as the procedural outcomes can affect a variety of more vulnerable entities such as employees, their families, and the community at large. The relative protection of these more vulnerable entities differs from member state to member state according to diverse national views on the importance of social policy matters. A conception of the effectiveness of insolvency and business rescue procedures that includes a reflection upon the interaction of state and EU requirements of employee protection legislation would likely encourage a more holistic approach to improving cross-border insolvency within the EU. While such a matter is not strictly the prevue of EU insolvency law in its current scope, there are practical matters affecting how a pan-European rescue culture can function with the greatest efficiency when the conflicting goals of insolvency and the protection of employment are not recognised and, to some extent, managed.Among the EU member states that continue to exhibit fundamentally different approaches to corporate rescue and employment protection, the United Kingdom and France present two extreme examples. Through the comparison of two divergent but also highly influential EU jurisdictions, both historically and in the current political climate, an example of the obstacles facing overall convergence in this area can be demonstrated. The differences in these two jurisdictions will also help to highlight the problems associated with differing levels of social protection in terms of jurisdictional competitiveness and cross-border cooperation. This article will discuss the parallel evolution of corporate rescue and the implementation of the ARD in the UK and France with a view to illuminating these obstacles to convergence. While harmonisation in the area of social policy continues to be resisted by many member states, it could be that such harmonisation or at least convergence might assist in capturing a greater cohesiveness in cross-border business and insolvency and level the field of competition between the member states of the EU.

Stakeholder engagement and firmsâ€™ innovation: Evidence from LGBT-supportive policies
Kyaw, Khine,Treepongkaruna, Sirimon,Jiraporn, Pornsit
SSRN
There is a paucity of research on the effects corporate policies have on fostering innovative activities in firms, while research and development (R&D) investments offer a source of innovations in firms. Using governance data from Kinder, Lyndenberg, and Domini (KLD) Research and Analytics, Inc., R&D and financial data from Compustat, and market data from CRSP during the period from 1996 through 2011 this paper investigates whether Lesbian, Gay, Bisexual and Transgender (LGBT) -supportive corporate policies promote innovative activities in US firms. To the extent that LGBTâ€"friendly policies allow inclusive working environments and therefore attract and retain talents, corporate can engage more in innovative activities. The findings show that firms with LGBTâ€"supportive policies nurture employeesâ€™ commitment to the firms and engage more in innovative activities. Heckman selection model, propensity score matching (PSM) and difference-in-difference results all confirm the main findings from instrumental variable (IV) analyses.

The Commission's 2020 Proposal for a Markets in Crypto-Assets Regulation (â€˜MiCARâ€™): A Brief Introductory Overview
Gortsos, Christos
SSRN
The aim of the present University notes is to provide a brief but comprehensive overview of the European Commissionâ€™s proposal for a Regulation of the European Parliament and of the Council â€œon Markets in Crypto-Assets (â€¦)â€ (MiCAR), which was submitted on 24 September 2020. It is not based on any articles (out of an already vast existing literature) relating to the subject-area of crypto assets. It exclusively presents, in a systematic way, the recitals and the provisions of the proposed EU legislative act, several of which is reasonably expected that will be amended or even further enhanced by (inter alia) the European Parliament and the Council during the legislative procedure in the coming months. The ultimate expectation is that they could lay down a solid background for further (and apparently substantial) research in this upcoming EU regulatory framework. The nine Sections of the study fully correspond to the Titles of the proposed Regulation. Furthermore, Sub-section 1 of Section I contains a general introduction to this (proposed) legislative act in the context (inter alia) of the Commissionâ€™s 2020 â€œDigital Finance Packageâ€.

The Time-Varying Correlation between Crude oil Future and USA Bond Markets During 2005-2020: Evidence from a DCC-GARCH Model
Tsiaras, Konstantinos
SSRN
In this paper, we examine potential time-varying correlations between crude oil future and USA bond markets. We employ a dynamic conditional correlation (DCC) multivariate GARCH model in order to quantify potential contagion effects between the markets for the period 2005-2020. We divide the period in two sub-period to make the empirical analysis easier. Empirical results reveal increased conditional correlation in the first sub-period (2005-2012) and no contagion in the second sub-period (2012-2020). Results are of interest to investors, who investlong-term into the under investigation financial markets, as well as, to policymakers, who provide regulations for the under investigation derivate market.

Using social network analysis to prevent money laundering
arXiv

This research explores the opportunities for the application of network analytic techniques to prevent money laundering. We worked on real world data by analyzing the central database of a factoring company, mainly operating in Italy, over a period of 19 months. This database contained the financial operations linked to the factoring business, together with other useful information about the company clients. We propose a new approach to sort and map relational data and present predictive models, based on network metrics, to assess risk profiles of clients involved in the factoring business. We find that risk profiles can be predicted by using social network metrics. In our dataset, the most dangerous social actors deal with bigger or more frequent financial operations; they are more peripheral in the transactions network; they mediate transactions across different economic sectors and operate in riskier countries or Italian regions. Finally, to spot potential clusters of criminals, we propose a visual analysis of the tacit links existing among different companies who share the same owner or representative. Our findings show the importance of using a network-based approach when looking for suspicious financial operations and potential criminals.

Valuation Risk at European Banks: Empirical Evidence
Onorato, Mario,Battaglia, Fabio,Lascala, Orazio,Ngjela, Arber
SSRN
The risk that a financial institution will experience a loss because it did not accurately determine the fair value of the financial instruments on its balance sheet is known as Valuation Risk (VR). That risk is sometimes heightened because determining fair value is not always a simple or straightforward task. When market data is scarce or unavailable, or markets turn illiquid, banks tend to rely upon internally developed valuation models that use unobservable inputs, which may amplify VR. VR has attracted growing supervisory attention. Several supervisory agencies internationally have voiced concern over banks holding vast amounts of instruments that are potentially exposed to valuation uncertainty and the potential knock-on effects this VR could have on the stability of the financial system.Following up to our previous work discussing VR methodology and practice, this whitepaper seeks to expand the analysis by investigating European banksâ€™ exposure to VR from a more quantitative perspective. To this end, we collected the evidence available from banksâ€™ disclosures, looked for patterns, and drew as many sound conclusions as possible.However, in doing so, we encountered a frustrating reality: inadequacies in available data make it difficult to build an accurate view of these risks. We realized that the lack of data itself is an important lesson, as it informs us that crucial information is missing in banksâ€™ disclosure. This paper delivers the results of the narrower analysis allowed by the limited data and delves into the implication of these constraints. The lack of data thwarts efforts to build an accurate view of the risks truly resting on financial institutionsâ€™ balance sheets. This is a serious matter. European banks hold amounts of assets and liabilities potentially exposed to VR that exceed their regulatory capital by many multiples. Even a relatively small unexpected shock or estimation error in instrument valuations could significantly impact banksâ€™ capitalization and resilience.In the debate over VR, we believe a joint action by supervisors and standard setters to deepen banksâ€™ disclosure of their holdings of assets and liabilities potentially more exposed to VR would significantly increase transparency and risk-awareness in the financial industry. By increasing clarity and transparency around bank risks through increased disclosure, banks can enhance public trust and allow observers and analysts to better assess bank balance sheets, leading to share prices that more closely reflect bank risks.

Weak error rates for option pricing under the rough Bergomi model
Christian Bayer,Eric Joseph Hall,Raúl Tempone
arXiv

In quantitative finance, modeling the volatility structure of underlying assets is a key component in the pricing of options. Rough stochastic volatility models, such as the rough Bergomi model [Bayer, Friz, Gatheral, Quantitative Finance 16(6), 887-904, 2016], seek to fit observed market data based on the observation that the log-realized variance behaves like a fractional Brownian motion with small Hurst parameter, $H < 1/2$, over reasonable timescales. Both time series data of asset prices and option derived price data indicate that $H$ often takes values close to $0.1$ or smaller, i.e. rougher than Brownian Motion. This change greatly improves the fit to time series data of underlying asset prices as well as to option prices while maintaining parsimoniousness. However, the non-Markovian nature of the driving fractional Brownian motion in the rough Bergomi model poses severe challenges for theoretical and numerical analyses as well as for computational practice. While the explicit Euler method is known to converge to the solution of the rough Bergomi model, its strong rate of convergence is only $H$. For a simplified rough Bergomi model, we prove rate $H + 1/2$ for the weak convergence of the Euler method and, surprisingly, in the case of quadratic payoff functions we obtain rate one. Indeed, the problem of weak convergence for rough Bergomi is very subtle; we provide examples demonstrating that the rate of convergence for payoff functions well approximated by second-order polynomials, as weighted by the law of the fractional Brownian motion, may be hard to distinguish from rate one empirically. Our proof relies on Taylor expansions and an affine Markovian representation of the underlying and is further supported by numerical experiments.

Whatâ€™s My Style? Supply-Side Determinants of Debt Covenant Inclusion
Ma, Zhiming,Stice, Derrald,Williams, Christopher D.
SSRN
We examine the supply-side determinants of debt covenants included in loan agreements. Controlling for borrower characteristics, we find evidence that the covenants that lead arranger banks include in new contracts persist into future contracts for at least three years. We document that this covenant style effect is smaller when borrowers have recently violated a debt covenant or when the loan issue amount is large, and it is larger when the costs of contracting are highest and when a borrower provides collateral. We also find that the covenant style effect decreases following changes in a bankâ€™s CEO or CFO. Overall, our evidence is consistent with lendersâ€™ covenant preferences arising from strategic cost-benefit analysis informed from prior lending experiences and being related to lender expertise in negotiating, monitoring, and enforcing covenants.