Research articles for the 2021-05-20

An Experiment on Network Density and Sequential Learning
Krishna Dasaratha,Kevin He

We conduct a sequential social-learning experiment where subjects each guess a hidden state based on private signals and the guesses of a subset of their predecessors. A network determines the observable predecessors, and we compare subjects' accuracy on sparse and dense networks. Accuracy gains from social learning are twice as large on sparse networks compared to dense networks. Models of naive inference where agents ignore correlation between observations predict this comparative static in network density, while the finding is difficult to reconcile with rational-learning models.

Convergence of Social Policy and Labour Regulation: The European Equation
Gant, Jennifer L. L.
Labour and employment 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 globalisation,2 the differences in labour regulation between jurisdictions can become an issue in cross-border business transactions and may even affect a multi-national company’s choice of investment. The flexibility of labour regulation can 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 benefit from a cheaper labour force.3Legal systems within the EU have been on a process of slow convergence since the 1950s. However, in examining legal systems with a view to determining their core similarities, some exhibit areas of convergence while other aspects remain quite different.4 Even when comparing those systems that are similar, there remain distinctive characteristics distinguishing one from another. There are differences that seem irreconcilable even within legal groups such as those jurisdictions adhering to the common law or civil law systems. While certain rules and solutions may seem alike, legal cultures and traditions can differ significantly,5 leading to fundamental differences in approach to regulation and policy initiatives. These differences in approach are influenced by aspects of culture and history which cannot easily be separated from the legislative process. Convergence therefore becomes more difficult with culture bound areas of the law, such as labour and employment.EU social policy has aimed to harmonise standards based on a minimum floor of rights7 to a level which is more reflective of what is present in the more socially progressive countries, such as France. However, lack of concrete EU wide definitions have made coordination in social policy difficult. Though similar terms to describe elements of procedure may be used, the ideologies and policies informing the objectives of those procedures create a barrier to mutual understanding and an obstacle to coordinated action. The question remains then as to how it may be possible to find a means of coordinating the law in order to create a more balanced environment for cross border business. In discovering the influences on the aims of socially oriented regulation, it may be possible to identify areas where coordination and perhaps convergence may be realistically attempted and to work around those areas in which the different social aims make such convergence impossible or at least improbable in the near future.In order to attempt an alignment of labour systems in the EU, which of itself is a potentially unrealistic suggestion, at least in the current political climate and particularly following the United Kingdom’s referendum outcome and pending exit from the EU, an understanding of the fundamental values which have influenced a country’s approach to employment law and social policy 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. Though the current political crisis of 2016 gives little hope toward this end, an understanding of the underlying factors that influence jurisdictional approaches to social policy and employment law may be a useful exercise in the event that the crisis is resolved and harmonisation, or at least a managed convergence, again becomes an aim of EU social policy.8 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 and employment regulation are based, and the differences between them. A typically top-down technical analysis would only expose a positivist view of the law,9 isolated from its constituent parts without which it would not exist in its current form. The comparative perspective presented is not only useful for the development of solutions, but also for the discovery of other alternatives.10 This unique methodology could then be relied upon as a means finding a path to greater coordination by attempting to align systemic values in the future, should the EU survive the political turmoil that has engulfed 2016.

Corporate Rescue in the United Kingdom: Past, Present and Future Reforms
Omar, Paul,Gant, Jennifer L. L.
The modern law relating to both personal and corporate insolvency is currently contained in the Insolvency Act 1986.3 Although of some vintage now, the IA 1986 was the governmental response to the report and recommendations of a multi-disciplinary committee tasked with reviewing insolvency law and practice in the late 1970s.4 The Cork Report influenced the implementation of the IA 1986, which brought together in one statute both personal bankruptcy and corporate insolvency and at the same time effected a radical reconstruction of the law relating to all forms of insolvency, including the introduction of the concept of corporate rescue through the use of two new procedures: the corporate voluntary arrangement5 and administration. During the early years following the passage of the IA 1986, a number of issues were observed relating to the underutilisation of the new procedures in comparison to receivership, which was often preferred by principal creditors. This led to reforms at the turn of the millennium with the aim of making the rescue procedures more efficient and beneficial to all manner of debtors and providing greater benefits to unsecured creditors.The reforms, though enacted through the Insolvency Act 2000 and Enterprise Act 2002,6 were brought into force at the same time over 2003-2004, constituting a radical change to almost every part of the insolvency framework. The two texts have not been the end of reforms, however, nor should they be. As the effects of globalisation and recession have affected business practices and regulation over the period since the promulgation of the reforms, so too must insolvency systems evolve to meet the changing paradigm of economic recovery. In so doing, modern insolvency systems with effective forms of corporate rescue can play their part in recovering from the financial crisis by helping to create an environment where business failure and associated unemployment can be mitigated. This article seeks to chart the direction of reforms in the post-2003 era and to offer, in light of the analysis of the success (or otherwise) of these reforms, a prediction of the future direction of the law.

Debt Maturity, Callability, and Dynamic Capital Structure
Flor, Christian Riis,Lester, Jacob
In a dynamic framework, this paper studies a firm’s optimal capital structure choice in terms of the maturity and call premium of the debt. The firm’s capital structure is optimized accordingto a trade-off between a tax advantage of debt, bankruptcy costs and debt issuance costs. The central result of the paper is that the firm issues perpetual debt with a small positive call premium. This implies that debt restructuringis non-deterministic and that the call premium is the key parameter that controls the equity holders’ ex post restructuringincen tives. However, in the special case of non-callable debt we generally find that finite maturity is optimal.

Dependence Modeling and Risk Assessment of a Financial Portfolio with ARMA-APARCH-EVT models based on HACs
Dodo Natatou Moutari,Hassane Abba Mallam,Diakarya Barro,Bisso Saley

This study aims to widen the sphere of pratical applicability of the HAC model combined with the ARMA-APARCH volatility forecast model and the extreme values theory. A sequential process of modeling of the VaR of a portfolio based on the ARMA-APARCH-EVT-HAC model was discussed. The empirical analysis conducted with data from international stock market indices clearly illustrates the performance and accuracy of modeling based on HACs.

Effect of Student Loans on Income Inequality in the United States
Ahmed, Ashraf,Kabir, M. Adnan
Student loan is a pervasive problem in the United States. Historically, higher education has been a major driver of intergenerational mobility in the United States. The current student loan has increased substantially over the years, surpassing credit card and auto loans. Using panel data from all States, this paper attempts to empirically predict if income inequality is affected by student loans. Statistical analysis points towards student loan exacerbating income inequality. Other variables such as private college tuition and household poverty have a highly significant negative effect on income inequality. The overall results suggest that increased access to higher education at the expense of higher student loans may be countervailing to the income distribution dynamics of the United States.

Estimation of economic losses due to milk fever and efficiency gains if prevented: evidence from Haryana, India
A. G. A. Cariappa,B. S. Chandel,G. Sankhala,V. Mani,R. Sendhil,A. K. Dixit,B. S. Meena

Calcium (Ca) requirement increases tenfold upon parturition in dairy cows & buffaloes and its deficiency leads to a condition called milk fever (MF). Estimation of losses is necessary to understand the depth of the problem and design preventive measures. How much is the economic loss due to MF? What will be the efficiency gain if MF is prevented at the advent of a technology? We answer these questions using survey data and official statistics employing economic surplus model. MF incidence in sample buffaloes and cows was 19% and 28%, respectively. Total economic losses were calculated as a sum total of losses from milk production, mortality of animals and treatment costs. Yearly economic loss due to MF was estimated to be INR 1000 crores (US$ 137 million) in Haryana. Value of milk lost had the highest share in total economic losses (58%), followed by losses due to mortality (29%) and treatment costs (13%). Despite lower MF incidence, losses were higher in buffaloes due to higher milk prices and market value of animals. The efficiency gain accruing to producers if MF is prevented, resulting from increased milk production at decreased costs was estimated at INR 10990 crores (US$ 1.5 billion). As the potential gain if prevented is around 10 times the economic losses, this study calls for the use of preventive technology against MF.

Exploring trade-offs between landscape impact, land use and resource quality for onshore variable renewable energy: an application to Great Britain
R. McKenna,I. Mulalic,I. Soutar,J. M. Weinand,J. Price,S. Petrovic,K. Mainzer

The ambitious Net Zero aspirations of Great Britain (GB) require massive and rapid developments of Variable Renewable Energy (VRE) technologies. GB possesses substantial resources for these technologies, but questions remain about which VRE should be exploited where. This study explores the trade-offs between landscape impact, land use competition and resource quality for onshore wind as well as ground- and roof-mounted photovoltaic (PV) systems for GB. These trade-offs constrain the technical and economic potentials for these technologies at the Local Authority level. Our approach combines techno-economic and geospatial analyses with crowd-sourced scenicness data to quantify landscape aesthetics. Despite strong correlations between scenicness and planning application outcomes for onshore wind, no such relationship exists for ground-mounted PV. The innovative method for rooftop-PV assessment combines bottom-up analysis of four cities with a top-down approach at the national level. The results show large technical potentials that are strongly constrained by both landscape and land use aspects. This equates to about 1324 TWh of onshore wind, 153 TWh of rooftop PV and 1200-7093 TWh ground-mounted PV, depending on scenario. We conclude with five recommendations that focus around aligning energy and planning policies for VRE technologies across multiple scales and governance arenas.

Financial Results of the Banking Sector in Q1 2021
Zubov, Sergey
In Q1 2021, banks formed reserves in advance in the required amount. Therefore, there was no sharp decline in profits owing to the gradual abolition of easing in terms of the formation of reserves for large corporate loans. Nevertheless, compared to 2020, we should expect a slight deterioration in the bank profitability. The reason is a possible reduction in the credit supply amidst growing credit risks and a decrease in income from currency revaluation due to the strengthening of the ruble.

Studies in Convergence? Post-Crisis Effects on Corporate Rescue and the Influence of Social Policy: The EU and the USA
Gant, Jennifer L. L.
The financial crisis and the sovereign debt crisis that it precipitated in a number of peripheral EU Member States heralded massive changes in insolvency, corporate rescue and employment protection policies. The US and the EU both suffered greatly in the wake of the crisis, but their recoveries have occurred along very different tracks. The US has managed to regain much of its position in terms of relative growth and the UK has outpaced the recoveries of those European countries that are members of the European Monetary Union. The purpose of this treatise is to explore the context of the 2007-2008 financial crisis in the US and in the EU, its impact on legal reform in corporate rescue and restructuring and those aspects of social policy implicated within insolvency systems (notably collective redundancy and transfers of undertakings), whether or not the corporate rescue and employee protection systems can be seen to be converging, in view of the different socio-economic, political and cultural aspects of the US and the EU, such convergence might be beneficial or, indeed, possible.

The Cost of Bank Insolvencies: A Socio-Economic Rights Analysis
Gant, Jennifer L. L.
High risk banking practices were a central factor of the financial crisis of 2007-2008 and the world is still feeling the aftershocks. Sovereign debt, austerity, and the degradation of social benefits, employee rights, and even the democratic framework of sovereign nations have been only some of the negative results. Given the complicated nature of modern financial markets, complex and remote financial instruments, and the banking industry, it is uncertain as to whether the current banking regulation and reforms can provide an effective safety net to avoid the social costs associated with future financial crises. It could be that it is time for a paradigm shift in the way in which banking and lending are approached from a philosophical perspective, taking into account a renewed understanding of the purpose and character of debt and lending, particularly when dealing with those debt transactions affecting individuals. Considering the juxtaposition of wealth maximisation, a fundamental aim of banking and finance, to the potential social costs when profit focussed activities go wrong, it could be possible that a neo-liberal and economically focussed approach to banking regulation and reform may need to be shifted to reflect the actual social costs of capitalism. The purpose of this paper is to examine the fundamental underpinnings of the UK’s approach to banking and lending with a focus on the apparent theoretical or philosophical approach to banking and regulation within the economy with reference to Coase’s “The Problem of Social Costs” and whether or not his framework of analysis is relevant to the regulation of today’s financial markets. The origins of the financial crisis in irresponsible banking and lending practices will be explored as well as the social costs the financial crisis and the specific impact of lending practices on the consumer. Historic views on debt will be presented with a view to tracing how those views have changed in the modern age, particularly in consideration of the banking industry’s approach to debt selling. There will also be brief look at some of the post crisis regulatory reforms that have occurred and a critical analysis of the neo-liberal economic approach in this area, followed by a conclusion that will comment on whether or not the current approach and underpinning theoretical framework can be adequate to circumvent the social costs of irresponsible banking practices in the future.

The Covid-19 Crisis. Impacts And Risks For The Italian Financial System In A Comparative Perspective
Linciano, Nadia,Caivano, Valeria,Fancello, Francesco,Gentile, Monica
La versione italiana di questo documento è disponibile al seguente link: present Report analyses the economic impact of the Covid-19 pandemic as of the first semester of 2020 both in the domestic and in the international framework. Some analysis are updated to September and October 2020. The pandemic is a shock exogenous to the economic and the financial system, that symmetrically hit the supply and the demand side. It has also spread asynchronously over the globe, thus contributing to the persistence of its economic consequences. Many uncertainties about its severity and length make it difficult to forecast the development of the crisis, although it is clear that financial markets and the bank sector may become an amplifier of the shock and that pre-existent vulnerabilities as well as policy measures will be key to defeat the crisis. At the upsurge of the Covid-19 disease, Italy was already experiencing a weak economic growth; Italian non-financial, listed firms were showing a profitability growth lower than their European peers; domestic stock market has never recovered the levels achieved before the 2008 global financial crisis. At the same time, public deficit was under control as well as the conditions prevailing on sovereign debt markets; Italian banks were more resilient than they were in the past; households remained characterised by low debt levels and a high ratio of financial wealth to disposable income.The lockdown introduced in Italy last March as a containment measure of the pandemic has severely affected both the supply side and the demand side of the economy. Similar, although lower, effects were recorded in the major Eurozone countries. During the first term of 2020, both domestic and foreign financial markets experienced heightened turmoil and recorded severe losses only partially recovered in the following months thanks to the unprecedented policy measures adopted in the euro area and at the domestic level. Overall, the pandemic poses many downside risks to economic recovery, also because of the escalation of new Covid-19 cases across countries. The crisis also delivers some important lessons. First, policy makers need timely forecast of macroeconomic and financial risks, which only innovative analysis based on real-time and high frequency data may grant. Second, international cooperation is key, given the global dimension of the crisis and the looming risks driven by increasing geopolitical tensions and by a no-deal Brexit. Third, the pandemic is accelerating digitalisation of financial services and sustainable and responsible investments, that might require an update in the regulatory agenda.The Covid-19 crisis is deeply changing and will probably keep changing the economic and social framework. Both financial markets regulators and supervisors, as well as policy makers in general, need to develop tools and skills allowing a timely action whereas required by rapidly evolving conditions. The data driven approach already prompted by the 2008 global financial crisis need to be strengthened further, also through the application of investigation methods based on data science and data analytics.

The Experience and Lessons of Public Offerings on the Stock Markets of the USA, China and Russia
Abramov, Alexander E.,Kosyrev, Andrey,Radygin, Alexander,Chernova, Maria
Public offerings have been playing an increasingly important role in fundraising for an accelerated development of businesses in the new economy. The IPO market has triggered an intense competition between the USA and China. Russia’s stock market has stayed away from these processes. The experience of the USA and China shows that for the IPO market to properly develop, it is not sufficient just to introduce some formal changes in the specific procedures for handling certain types of stock market transactions, or any new tax incentives. It is necessary to launch more profound institutional changes targeting the motives of stock issuers, investors and government departments.

Valuation of European Options under an Uncertain Market Price of Volatility Risk
Bartosz Jaroszkowski,Max Jensen

We propose a model to quantify the effect of parameter uncertainty on the option price in the Heston model. More precisely, we present a Hamilton-Jacobi-Bellman framework which allows us to evaluate best and worst case scenarios under an uncertain market price of volatility risk. For the numerical approximation the Hamilton--Jacobi--Bellman equation is reformulated to enable the solution with a finite element method. A case study with butterfly options exhibits how the dependence of Delta on the magnitude of the uncertainty is nonlinear and highly varied across the parameter regime.

Keywords: Uncertain market price, Volatility risk, Hamilton-Jacobi-Bellman equation, Finite element method, Uncertainty quantification

What Matters in a Characteristic?
Langlois, Hugues
We investigate how expected returns and comovements in international stock markets depend on different components of firm characteristics. We use cross-sectional regressions to decompose each characteristic into country, industry, and adjusted components. We then use these characteristic components to capture time-varying alphas and factor exposures in an asset pricing model with latent factors. We show that systematically decomposing characteristics into components is crucial to model jointly expected returns and comovements; country and adjusted components capture systematic risk exposures and alphas, respectively, and increase model fit compared to benchmark models. Contrary to the U.S. market, alphas in other developed and emerging markets are significant. However, trading strategies using predicted alphas do not generate significant out-of-sample, risk-adjusted, and net of transaction costs returns, indicating that estimated alphas are related to limits-to-arbitrage.