Research articles for the 2021-06-08

A macroprudential view on portfolio rebalancing and compression
Veraart, Luitgard Anna Maria,Zhang, Yuliang
We analyse the consequences of post-trade risk reduction services for systemic risk in derivatives markets. Our focus is on portfolio rebalancing, which is a mechanism of injecting new trades to reduce the overall counterparty exposure, and portfolio compression, which is a mechanism to reduce the outstanding notional amount by trades termination and replacement. We first provide a mathematical characterisation of (optimal) portfolio rebalancing. Then, we explore the effects of these services on the financial system from a network perspective by considering contagion arising from only partial repayments in networks of variation margin payments. We provide sufficient conditions for portfolio rebalancing to reduce systemic risk. We also investigate the effects under a scenario where financial institutions react to stress strategically and make delayed payments.

A novel framework to model commodity markets
Papenfuß, Patric,Schischke, Amelie,Rathgeber, Andreas
In this study, we develop a framework to unite two contrary perspectives on commodity markets, the fundamental theory investigating price behaviour based on micro-and macroeconomic attributes, as well as the empirical perspective, which observes joint movements in commodity prices on exchanges.By its application on industrial metal markets, we detect significant responses of prices to innovations in cross-commodity, microeconomic variables. To jointly model commodity markets, we base our framework on a Global Vector Autoregression Model (GVAR).First, VAR models, consisting of supply, demand, price and exogenous macroeconomic variables, are estimated to represent the individual markets. Second, these individual models are aggregated by weights into a GVAR model, considering information on co-trading, co-consumption and co-production of the commodities. Further, the responses of variables to shocks in the commodity markets are investigated by Generalized Impulse Response Functions (GIRF) and a Generalized Forecast Error Variance Decomposition (GFEVD) analysis.In the empirical analysis of our study, we apply the framework to the most traded industrial metals.The numerous significant results of the GIRF analysis, especially in the cross-commodity dimension, show the importance of modelling markets together. Our framework is able to represent the strong co-movement in commodity prices. Further, we detect two clusters, aluminium and copper, as well as lead and zinc, respectively. Hereby, microeconomic variables have no significant impact within the commodity-specific perspective, while in cross-commodity dimension they are determining, even on price variables, which highlights the necessity for their inclusion.

Bank Board Structure and Loan Syndication
Baran, Lindsay,Dennis, Steven,Shukla, Maneesh
We study the impact of bank board structure on loan syndication and find both monitoring quality and connections of the lead bank’s board have a positive effect on three measures of the ability to syndicate a larger portion of a loan. Board monitoring quality plays a more dominant role during the financial crisis and following a negative reputation shock to the lead arranger. Board member connectedness is dominant for lower reputation lead arrangers. Our results are robust to an instrumental variable approach for endogeneity. Overall, we conclude that lead arranger board quality serves as a credible signal to participant banks.

Bank Safety-oriented Culture and Lending Decisions
Tang, Ning,Hasan, Iftekhar,Lin, Chih-Yung,Lu, Chien-Lin
In this study, we investigate the effects of bank safety-oriented culture on loan contracts. We propose a new measure that derives a bank’s safety-oriented culture from its business model. We provide several validation tests to confirm that our measure can represent the safety-oriented culture of banks. Our empirical results show that banks with a safety-oriented culture increase the probability of signing a contract with low risk borrowers and that they charge lower loan spreads. We also find that these banks ask for more loan covenants to protect their creditor’s rights. Finally, banks with a safety-oriented culture suffer less from borrowers’ defaults and have higher market responses around the dates of loan announcements. Also, our findings reject the alternative hypothesis that banks with a safety-oriented culture only accept less risky lending due to their conservative risk attitude, thus destroying market value for banks.

Bank credit and economic growth: a dynamic threshold panel model for ASEAN countries
Ho, Sy Hoa,Saadaoui, Jamel
While it is widely recognized that the development of a sound financial system may contribute to foster economic growth, the relation between economic growth and financial activities is complex. In this perspective, our contribution investigates the existence of threshold effects in the relationship between economic growth and bank credit. Our sample of ASEAN countries is examined over the period spanning from 1993 to 2019. We use the approach of Kremer et al. (2013) to estimate threshold effects in a dynamic panel where a group of explanatory variables can be endogenous. Our results do not confirm the vanishing effect of finance on economic growth. We found a threshold of 96.5% (significant at the 5% level) for the credit-to-GDP ratio, the threshold variable. In the short run, for observations inferior or equal to the threshold, the positive effect of bank credit expansion on economic growth is around 0.08 (significant at the 1% level). Whereas, for observations superior to the threshold, the positive effect of bank credit expansion on economic growth is around 0.02 (significant at the 1% level). The role of exporting firms is essential in ASEAN countries as they are more export-oriented than other regions in the world economy. Our results may indicate that the beneficiary of the credit (firms versus households), the structural features (export-led growth), and the regional heterogeneity have to be considered in empirical investigations of threshold effects in the relation between economic growth and bank credit. This empirical evidence may help to formulate sound policy recommendations.

Climate Change Transition Risk on Sovereign Bond Yield Spreads
Ryan, Laura Simone,Sklibosios Nikitopoulos, Christina,Richards, Kylie-Anne,Puente M., Diego,Collender, Sierra
We challenge the narrative that climate change transition risk is not being priced into sovereign bond yield spreads. Climate change transition risk, as measured by carbon dioxide emissions, natural resources rents and renewable energy consumption, are factored into sovereign bond yield spreads. Higher transition risk results in higher default risk and hence, higher costs of debt in international capital markets. Countries with higher carbon emissions and natural resources rents incur a higher risk premium on sovereign borrowing costs. Moreover, countries with higher renewable energy consumption relative to total consumption are rewarded with a discount on sovereign borrowing cost. Using a sample of data from 23 developed and 21 emerging markets from 2000-2018, we show that governments who perform poorly in managing their climate transition, may encounter increased sovereign borrowing costs, liquidity constraints, reduced capacity to effectively manage climate transition and the inability to finance economic recovery from severe climate shocks or natural disasters. Given the threat climate change poses to the global economy, we hypothesise an increase in the significance of transition risk factors as determinants of sovereign bond yield spreads.

Commodities, Crude Oil, and Diversified Portfolios
Till, Hilary
With concerns on inflation flaring up, there has been renewed interest in potentially including commodities in diversified portfolios. This article builds off prior research in examining which commodities to include and in what size. The article briefly reviews the relevant literature and proposes a novel and uncomplicated portfolio solution, which takes into consideration both historical results and plausible new paradigms. In addition, an investor would be able to implement this portfolio solution through deeply liquid futures markets.

Corporate Governance and Tax Avoidance: Evidence from Governance Reform
Kerr, Jon N.,Price, Richard A.,Román, Francisco J.,Romney, Miles A.
Prior literature struggles to find evidence in U.S. settings to support the Desai and Dharmapala (2006) theory on how corporate governance affects tax avoidance. Most studies rely on equity incentive compensation as their governance proxy. We use a Mexican setting to examine this association and find firms with stronger governance engage in less tax avoidance. We rely on both a hand-collected governance index and governance reform to show improved corporate governance pushes tax avoidance toward a new equilibrium. Supplementary analyses show associations between governance and tax avoidance are greatest for tax-cost-sensitive family-owned firms and non-cross-listed firms with naturally weaker governance. A one standard deviation increase in governance corresponds to an increase of between one and three percentage points in a firm’s effective tax rate. Our findings suggest these governance reforms effectively reduce rent extraction by majority shareholders and identify Board independence and audit committees as channels responsible for decreased tax avoidance.

Deep Learning Statistical Arbitrage
Jorge Guijarro-Ordonez,Markus Pelger,Greg Zanotti

Statistical arbitrage identifies and exploits temporal price differences between similar assets. We propose a unifying conceptual framework for statistical arbitrage and develop a novel deep learning solution, which finds commonality and time-series patterns from large panels in a data-driven and flexible way. First, we construct arbitrage portfolios of similar assets as residual portfolios from conditional latent asset pricing factors. Second, we extract the time series signals of these residual portfolios with one of the most powerful machine learning time-series solutions, a convolutional transformer. Last, we use these signals to form an optimal trading policy, that maximizes risk-adjusted returns under constraints. We conduct a comprehensive empirical comparison study with daily large cap U.S. stocks. Our optimal trading strategy obtains a consistently high out-of-sample Sharpe ratio and substantially outperforms all benchmark approaches. It is orthogonal to common risk factors, and exploits asymmetric local trend and reversion patterns. Our strategies remain profitable after taking into account trading frictions and costs. Our findings suggest a high compensation for arbitrageurs to enforce the law of one price.

Deep Learning Statistical Arbitrage
Guijarro-Ordonez, Jorge,Pelger, Markus,Zanotti, Greg
Statistical arbitrage identifies and exploits temporal price differences between similar assets. We propose a unifying conceptual framework for statistical arbitrage and develop a novel deep learning solution, which finds commonality and time-series patterns from large panels in a data-driven and flexible way. First, we construct arbitrage portfolios of similar assets as residual portfolios from conditional latent asset pricing factors. Second, we extract the time series signals of these residual portfolios with one of the most powerful machine learning time-series solutions, a convolutional transformer. Last, we use these signals to form an optimal trading policy, that maximizes risk-adjusted returns under constraints. We conduct a comprehensive empirical comparison study with daily large cap U.S. stocks. Our optimal trading strategy obtains a consistently high out-of-sample Sharpe ratio and substantially outperforms all benchmark approaches. It is orthogonal to common risk factors, and exploits asymmetric local trend and reversion patterns. Our strategies remain profitable after taking into account trading frictions and costs. Our findings suggest a high compensation for arbitrageurs to enforce the law of one price.

Do Large Hedgers and Speculators React to Events? A Stability and Events Analysis
Gurrib, Ikhlaas
Using CFTC’s COT data, this letter analysed whether large hedgers and large speculators were influenced by major economic events of the 1990s. Eight major economics events are looked at over 10-year period, and findings support that these informed players were hardly affected by major events. The trading determinant model, mean equation model and, risk and return relationship model suggested the behaviour and performance of these key market players were stable, and any significant structural break were short lived. The use of SD as a measure of risk captured more breaks in the risk and return relationship model, due to its higher sensitiveness to futures prices in the 29 US futures markets.

Do Markets Know More?: India’s Banking Sector through the Lens of PBR
Pratap, Bhanu,Neogi, Ranajoy,Jose, Jibin
This article is an enquiry into the determinants of price-to-book ratio (PBR) of scheduled commercial banks (SCBs) in India. Our empirical analysis indicates that variations in PBR have linkages with financial and economic cycles. It also captures the ‘franchise value’ of banks and shares a close correlation with indicators relating to profitability and viability of banks. This article, therefore, suggests that PBR may be considered as an alternative measure of bank value.

Do You Feel Lucky? Lottery Jackpot Winnings and Retail Trading around Neighborhoods
Bui, Dien Giau,Chan, Yu-Ju,Lin, Chih-Yung,Lin, Tse-Chun
Using lottery jackpot winnings within neighborhoods as exogenous shocks, we examine whether feeling lucky affects retail stock purchases. We find that retail investors who trade through brokerage branches located close to stores that sell jackpot-winning tickets buy more stock shares than their counterparts. More importantly, these retail buys tend to lose money. We also find that these retail investors tend to purchase lottery-like stocks, linking the luck-driven trading motive to the traded targets under the common theme of gambling. We substantiate our results via several sets of falsification tests and robustness checks. Overall, feeling lucky induces retail investors to trade aggressively and leads to welfare losses.

Does CSR Engender Trust? Evidence From Investor Reactions to Corporate Disclosures
Berkovitch, Jonathan,Israeli, Doron,Rakshit, Atanu,Sridharan, Suhas A.
We investigate whether a firm’s corporate social responsibility (CSR) activities engender investor trust. Motivated by the observation that investor trust facilitates greater informational efficiency of security prices, we address our question by examining the relation between CSR and three dimensions of stock price discovery: (1) the speed with which stock prices reflect earnings news, (2) the level of investor uncertainty before and during earnings announcements, and (3) earnings response coefficients. We find robust evidence in support of the hypothesis that CSR enhances investor trust in firms. Specifically, we find that firms with higher levels of CSR enjoy greater intraperiod timeliness and efficiency of reported earnings, lower investor uncertainty before and during earnings announcements, and higher earnings response coefficients. Using regression discontinuity design, we identify a causal effect of the passage of CSR-related initiatives on the speed with which stock prices reflect earnings news. Our inferences are robust to controls for characteristics of reported earnings, firm information environment, and alternative measures of CSR. Our study provides direct evidence that CSR affects stock price informativeness and sheds light on a desirable capital market consequence of CSR.

Electricity prices and tariffs to keep everyone happy: a framework for fixed and nodal prices coexistence in distribution grids with optimal tariffs for investment cost recovery
Iacopo Savelli,Thomas Morstyn

Some consumers, particularly households, are unwilling to face volatile electricity prices, and they can perceive as unfair price differentiation in the same local area. For these reasons, nodal prices in distribution networks are rarely employed. However, the increasing availability of renewable resources and emerging price-elastic behaviours pave the way for the effective introduction of marginal nodal pricing schemes in distribution networks. The aim of the proposed framework is to show how traditional non-flexible consumers can coexist with flexible users in a local distribution area. Flexible users will pay nodal prices, whereas non-flexible consumers will be charged a fixed price derived from the underlying nodal prices. Moreover, the developed approach shows how a distribution system operator should manage the local grid by optimally determining the lines to be expanded, and the collected network tariff levied on grid users, while accounting for both congestion rent and investment costs. The proposed model is formulated as a non-linear integer bilevel program, which is then recast as an equivalent single optimization problem, by using integer algebra and complementarity relations. The power flows in the distribution area are modelled by resorting to a second-order cone relaxation, whose solution is exact for radial networks under mild assumptions. The final model results in a mixed-integer quadratically constrained program, which can be solved with off-the-shelf solvers. Numerical test cases based on both 5-bus and 33-bus networks are reported to show the effectiveness of the proposed method.

Engines of Power: Electricity, AI, and General-Purpose Military Transformations
Jeffrey Ding,Allan Dafoe

Major theories of military innovation focus on relatively narrow technological developments, such as nuclear weapons or aircraft carriers. Arguably the most profound military implications of technological change, however, come from more fundamental advances arising from general purpose technologies, such as the steam engine, electricity, and the computer. With few exceptions, political scientists have not theorized about GPTs. Drawing from the economics literature on GPTs, we distill several propositions on how and when GPTs affect military affairs. We call these effects general-purpose military transformations. In particular, we argue that the impacts of GMTs on military effectiveness are broad, delayed, and shaped by indirect productivity spillovers. Additionally, GMTs differentially advantage those militaries that can draw from a robust industrial base in the GPT. To illustrate the explanatory value of our theory, we conduct a case study of the military consequences of electricity, the prototypical GPT. Finally, we apply our findings to artificial intelligence, which will plausibly cause a profound general-purpose military transformation.

Exchange Rate Accounting in a Multi-Currency World
Jiang, Zhengyang
I develop an accounting framework to attribute FX movements in incomplete markets to SDF and non-SDF shocks. This framework allows a general characterization of FX comovements and SDF-FX pass-through. Importantly, Triangular arbitrage across currencies implies a tight constraint between SDF correlations and FX correlations, which produces counterfactual implications about FX comovements if the SDF-FX pass-through is symmetric across countries. This result suggests that asymmetry is an inherent feature of equilibrium FX dynamics in incomplete markets, which further generates international spill-over, heterogeneous Backus-Smith coefficients, and additional FX comovements.

Explicit no arbitrage domain for sub-SVIs via reparametrization
Mingone, Arianna,Martini, Claude
The no Butterfly arbitrage domain of Gatheral SVI 5-parameters formula for the volatility smile has been recently described. It requires in general a numerical minimization of 2 functions altogether with a few root finding procedures. We study here the case of some sub-SVIs (all with 3 parameters): the Symmetric SVI, the Vanishing Upward/Downward SVI, and SSVI, for which we provide an explicit domain, with no numerical procedure required.

Exploring Inefficiencies in the Primary Catastrophe Bond Market: Focus on the Issuer Effect
Chatoro, Marian,Pantelous, Athanasios A.,Shao, Jia
Most catastrophe bonds issued in the primary market are sold by the same issuers every year, and within each year. Significant similarities in the bond characteristics, therefore, are anticipated which ultimately leads to similarities in pricing for these bond issuers over time. In this paper, using a very rich database with primary catastrophe bond data from June 1997 to March 2020, and proposing a novel random intercept model, the variations in catastrophe bond premiums introduced by the differences between issuers are captured, analysed and found to be significant. The issuer effect appears to be stronger for smaller issuers, based on issue size; for less consistent issuers, based on years of issue in the primary market; and for issuers primarily conducting insurance business, as opposed to re-insurers and other multi-line issuers. Further, we identify the three independent factors that have the largest impact on premiums. Our results give strong evidence to believe that the primary catastrophe bond market remains inefficient, and that factors external to the underlying risk might still impact premiums.

Factors of predictive power for mineral commodities
Papenfuß, Patric,Schischke, Amelie,Rathgeber, Andreas
In our study, we individually forecast 26 metal prices one-month ahead and outperform the predefined benchmark model, a random-walk (with drift) in 18 (18) cases. These forecasts are based on an overview over a large set of potential predictors for mineral commodities, originating from studies which only consider a selection of attributes and apply them to predict specific commodities or commodity indices. We pre-select the relevant, commodity-specific, individual factors through a correlation analysis, followed by a BIC based regression selection.The results of our out-of-sample, one-month ahead forecasts show a significant outperformance for 18 of the 26 commodities considered, especially those in the minor metals sector. The differences in predictability between the metal groups are remarkable, as we are able to forecast 13 of 17 minor metals, 5 of 6 industrial metals, but no precious metal, highlighting the heterogeneity in metal commodity markets. Focusing on the influential factors, the value factor has a dominating, highly significant, negative effect in the prediction and determination of prices.

Firm Location and the Value-Growth Premium
Ambrose, Brent W.,Chen, Yifan,Simin, Timothy T.
We investigate the value-growth premium puzzle by merging insights from urban economics and finance that relate firm location to its stock performance. The value-growth premium in locations with high historical house price appreciation is 3.6% larger per year than the premium in areas that experienced little house price appreciation. The link between housing value appreciation and the cross-section of returns supports investment-based models explaining the value premium; moreover we find the house price channel reduces growth firm returns rather than increasing returns of value firms. House price appreciation remains significant after controlling for common explanations of the premium.

Gli obblighi di trasparenza degli investitori istituzionali in materia ambientale e sociale: un cortocircuito logico? (Institutional Investors’ Non-Financial Reporting: Why the EU Regulatory Framework Should Be Updated)
Felicetti, Raffaele
The Big Three (BlackRock, Vanguard, and State Street Global Advisors - SSGA) have increasingly committed to caring about environmental and social (E & S) issues. While their E & S commitment has received some scrutiny in the United States, in Europe it did not receive much academic attention so far. In this paper, I create a unique dataset of 83 European companies and assess the Big Three’s aggregate and individual ownership in such companies. I then collect data on how BlackRock â€" the one, among the Big Three, that committed the most to E & S issues â€" promoted its E & S agenda in 2020 in such companies. I find that E & S issues are discussed overwhelmingly through private engagements, while are almost never raised through shareholder proposals. In light of this evidence, I then explain that, by focusing mainly on the disclosure of the most significant votes, also with regards to non-financial issues, the current European framework on the disclosure of E & S information is based on a misconception: that the EU market is characterized by traditional shareholder activism, where shareholders put forward many proposals, including on E & S issues, and voice is conducted through the most typical tool: voting. I conclude by exploring the policy-making implications of my findings. In particular, I argue that, if the dissemination of E & S information on the markets is a desirable policy goal, then the regulatory framework should be updated with the introduction of a disclosure regime for those private engagements in which E & S matters are discussed.

Good Governance and Civil Service Accountability in Nigeria - Problems and Prospects
Bello, Dr. Matthew F.
The civil service is the engine room of modern government. It comprises an assemblage of career officials, recruited in a civil capacity to serve the citizenry. By their training, they are equipped to champion the course of development by faithful implementation and evaluation of government polices and programmes. They are expected to do this in a transparent and accountable manner. Over the past decades, accountability which is a core feature of good governance has been central in public sector management. Accountability is important for effective performance in the public sector because both elected and non-elected officials need to show the public that they are performing their responsibilities in the best possible way and using the resources provided them effectively and efficiently. This paper is aimed at examining good governance and the impediments to public accountability in Nigeria, and recommends remedial actions for effective public accountability and performance in Nigerian public sector management. The article adopts qualitative method in gathering data from various sources. It traced the absence of accountability in public sector management in Nigeria to the incursion of the military into the Nigerian public administration. It shows with relevant examples how the culture of non accountability and poor performance has eaten deep into the fabric of the society. It therefore proposes some measures to address the malaise of public accountability in Nigeria. The article contends that unless good governance is in place with public accountability carefully observed, effective public sector performance cannot be realized

Greening Through Finance?
Fan, Haichao,Peng, Yuchao,Wang, Huanhuan,Xu, Zhiwei
This paper investigates how green credit regulation affects firms’ loan conditions and their economic and environmental performance. In a simple theoretical model, with strengthened green credit regulations, banks raise loan interest rates to nonabatement firms. Firms that were formerly indifferent to pollution abatement must predetermined their abatement and production strategies. Using disaggregated firm-level data, we find that, after the reinforcement of green credit regulation, noncompliant firms saw a larger increase in interest rates, decrease in loan amounts, and more difficulty in access to loans. We further find different impacts on large and small firms in terms of their loans and their financial and economic responses. Regarding the impact on firms’ environmental performance, although all of these firms reduced their total emissions, the reductionsare realized in dissimilar ways; large firms reduced their emission intensity by investing more in adopting abatement facilities, while small firms simply choose to produce less.

How does stock market co-move with domestic economic policy uncertainty? New evidence from symmetric thermal optimal path method
Ying-Hui Shao,Yan-Hong Yang

We revisit the dynamic relationship between stock market and domestic economic policy uncertainty (EPU) with the symmetric thermal optimal path (TOPS) method. We observe totally different interaction pattern in emerging and developed markets. Economic policy uncertainty can drive stock market in China, while stock market plays a leading role in the UK and the US. Meanwhile, the lead-lag relationship of the three countries react significantly when extreme events happen. Our findings have important implications for investors and policy makers.

Inflexibility and Corporate Cash Policy
Gu, Lifeng,Li, Tong
Firms with higher inflexibility to adjust their scale hold more cash than flexible firms due to precautionary considerations. This finding is confirmed in a regression discontinuity design that potentially mitigates endogeneity concerns. Consistent with the precautionary motive, inflexible firms spend more cash than flexible firms following the COVID-19 outbreak. Moreover, we find that the well-known secular uptrend in corporate cash holdings is much more pronounced among inflexible firms. The role of increasing cash flow volatility and higher intangible capital in explaining the cash uptrend is weaker among flexible firms. By examining variations in excess stock returns, we show that the marginal value of cash increases with inflexibility. Our paper sheds new lights on the determinants of corporate cash policy and highlights the role of inflexibility in corporate decisions.

Kredi/Mevduat Oranı (KMO) Gelişiminin Kredi Faiz Oranlarına Etkisi: Nedensellik Analizi ile Türkiye Üzerine Bir İnceleme [The Effects of Loan to Deposit Ratio (LDR) Development on Loan Interest Rates: An Examination upon Turkey by Causality Analysis]
Kartal, Mustafa Tevfik,Çeti̇n, Abdurrahman,Tan, Ömer Faruk
Turkish Abstract: 2002 sonrasında bankacılık sektörünün büyüme sürecine girmesiyle birlikte finansal göstergelerde gelişme yaşanmaktadır. Önemli göstergelerden bazıları aktif büyüklüğü, kredi hacmi ve özkaynak karlılığıdır. Bir diğer önemli gösterge ise KMO’dur. 2006 yılsonunda %71,18 seviyesinde olan KMO, 2012 Mart ayında ilk kez %100’ü geçerek %100,38 oranına ulaşmış, 2018 Haziran ayında %123,9 oranı ile tarihi zirve yaptıktan sonra düşüş eğilimine girerek 2019 Eylül ayında %112 olmuştur. KMO’daki artış eğiliminin faiz oranları üzerinde baskı oluşturduğu düşünülmektedir. Bu amaçla, 2006/1-2019/9 dönemindeki aylık veriler kullanılarak Türkiye’de KMO ile seçilmiş faiz türleri arasındaki nedensellik ilişkisi incelenmiştir. Çalışma sonucunda, KMO ile mevduat faiz oranı arasında nedensellik ilişkisi bulunduğu belirlenmiştir. Dolayısıyla, Türkiye’de kredi faizlerindeki artışın önlenmesi için, KMO gelişiminin kontrol altında tutulmasına ve böylece temel fonlama kaynağı olan mevduat faizlerinin artışının önlenmesine yönelik tedbirler alınmalıdır.English Abstract: There has been a development in financial indicators with the banking sector come up with the growth process after 2002. Some of the important indicators are asset size, loan volume, and return on equity. One of the other important indicators is LDR. LDR was at the level of 71.18% as of 2006 end, exceeding 100% for the first time in March 2012 and reached 100.38%, after peaking at the level of 123.9% in June 2018, it entered into a downward trend and became 112% in September 2019. It is thought that the increasing trend in LDR puts pressure on interest rates. For this aim, causality relationship between LDR and selected interest rate types is examined in Turkey by using monthly data for the period of 2006/1-2019/9. As a result of the study, it is defined that there is a causality relationship between LDR and deposit interest rate. Therefore, necessary precautions should be taken to keep the development of LDR under control and hence prevent the increase of deposit interest rates, which is the main source of funding, in order to prevent the increase in the loan interest rate in Turkey.

LGBTQ-Friendly Employee Policies and Corporate Innovation
Fatmy, Veda,Sihvonen, Jukka,Vähämaa, Sami
This paper contributes to the literature by examining whether LGBTQ-friendly employee policies foster corporate innovation. Using data on U.S. firms from 2003 to 2017, we document that LGBTQ friendliness has a positive influence on innovation intensity and quality. Specifically, our results demonstrate that LGBTQ-friendly firms produce more patents, have more patent citations, and are associated with higher innovation quality as measured by patent originality, generality, and internationality. Furthermore, our empirical findings indicate that LGBTQ friendliness is positively associated with the firm-level concentration of innovative talent. Overall, our results are consistent with the view that diversity considerations and inclusive corporate policies may lead to competitive advantages for the firm.

Legal Origins and Informal Financial Development
An, Jiafu,Lin, Chen
We study the impact of legal origins on informal financial development using a new, manually georeferenced dataset in a novel empirical framework. In the 19th century, the Europeans arbitrarily designed colonial borders that partitioned many ethnicities across multiple countries in Africa. By comparing the bordering regions with different legal origins but belonging to the same ethnic homeland, we discover that the common law regions have better informal financial development today. Our mechanism analyses suggest that places with a common law origin maintain a style of social control that supports private market interactions, breeds good legal culture, and promotes information flow.

Market Timing, Farmer Expectations, and Liquidity Constraints
Albuquerque, Rui A.,Araujo, Bruno,Brandao-Marques, Luis,Mosse, Gerivásia,Vletter, Pippy,Zavale, Helder
This paper uses data on farmers' price expectations from a randomized survey of smallholder farmers in Mozambique. Survey data show that across all crops most interviewed farmers expect prices to be higher in the lean season. Yet, farmers report selling most of their output shortly after harvest when prices are lower. We find that higher expected prices and lower current sale prices are associated with increased storage for liquidity constrained farmers versus unconstrained farmers. We develop an intertemporal model of market timing in the presence of liquidity constraints that is consistent with these findings and discuss other model predictions.

Modeling Portfolios with Leptokurtic and Dependent Risk Factors
Piero Quatto,Gianmarco Vacca,Maria Grazia Zoia

Recently, an approach to modeling portfolio distribution with risk factors distributed as Gram-Charlier (GC) expansions of the Gaussian law, has been conceived. GC expansions prove effective when dealing with moderately leptokurtic data. In order to cover the case of possibly severe leptokurtosis, the so-called GC-like expansions have been devised by reshaping parent leptokurtic distributions by means of orthogonal polynomials specific to them. In this paper, we focus on the hyperbolic-secant (HS) law as parent distribution whose GC-like expansions fit with kurtosis levels up to 19.4. A portfolio distribution has been obtained with risk factors modeled as GClike expansions of the HS law which duly account for excess kurtosis. Empirical evidence of the workings of the approach dealt with in the paper is included.

National Blockchain Laws as a Threat to Capital Markets Integration
Lehmann, Matthias
Various states have started providing private law frameworks for blockchain transfersand crypto assets. The first acts have been adopted by France and Liechtenstein,while a commission of the British government sees no difficulties in extending propertyprotection under the Common law to crypto assets. In the US, an amendment to theUniform Commercial Code has been suggested, which has not stopped some Statesgoing their own, different way. The aim in all cases is to promote the use of moderndistributed ledger technology and enhance investor protection.While these initiatives will increase legal certainty, they differ significantly. Thishas an important downside: there is a strong risk that the blockchain will be madesubject to diverging legal rules. Similar to the world of intermediated securities, variousnational laws will need to be consulted to determine the rights and privileges ofinvestors. This may increase transaction costs, thwart interoperability and producethorny conflict-of-laws problems. Markets risk being fragmented into nationalsegments, with an inevitable diminution of their depth and liquidity.As a remedy, this article suggests developing uniform rules for the blockchain.Before national legislators and judges once again divide the world throughidiosyncratic rules, the private law of crypto assets should be harmonised to thehighest degree possible. Uniform rules should ideally be forged at the global level, byfora like the International Institute for the Unification of Private Law (UNIDROIT), theUnited Nations Commission on International Trade Law (UNCITRAL), and the HagueConference on Private International Law. In the absence of world-wide rules,uniformisation of private law should take place at the regional level, for instance by theEuropean Union. The article makes specific suggestions as to how this can beachieved and what the content of those rules should be.

On The Contribution of Interest Expense (Income) on Total Output
Mehedi Nizam, Ahmed
A decrease in interest rate in traditional view of monetary policy transmission is linked to a lower cost of borrowing which eventually results into a greater spending in investment and a bigger GDP. However, a decrease in interest rate is also linked to a decrease in interest income which, in turn, affects the aggregate demand and total GDP. So far, no concerted effort has been made to investigate this positive inter-relation between interest income and GDP in the existing literature. Here in the first place we intuitively describe the inter-relation between interest income and output and then provide a micro-foundation of our intuitive reasoning in the context of a small endowment economy with finitely-lived identical households. Then we try to uncover the impact of nominal interest income on the macroeconomy using multiplier theory for a panel of some 04 (four) OECD countries. We define and calculate the corresponding multiplier values algebraically and then we empirically measure them using impulse response analysis under structural panel VAR framework. Large, consistent and positive values of the cumulative multipliers indicate a stable positive relationship between nominal interest income and output. Moreover, variance decomposition of GDP shows that a significant portion of the variance in GDP is attributed to interest income under VAR/VECM framework. Finally, we have shown how and where our analysis fits into the existing body of knowledge.

On the “mementum” of Meme Stocks
Costola, Michele,Iacopini, Matteo,Santagiustina, Carlo
The meme stock phenomenon has yet to be explored. In this note, we provide evidence that these stocks display common stylized facts for the dynamics of price, trading volume, and social media activity. Using a regime-switching cointegration model, we identify the meme stock “mementum” which exhibits a different characterization compared to other stocks with high volumes of activity (persistent and not) on social media. Understanding these properties helps investors and market authorities in their decisions.

Optimal Target-Date Funds for Observed Savings Rates
Gabudean, Radu,Gomes, Francisco,Michaelides, Alexander,Zhang, Yuxin
We study optimal life-cycle portfolio allocation and investigate the implications for optimal target-date fund (TDF) design. We show that any proposed savings rate must be explicitly linked to optimal TDF design and quantify that effect; for example, for a participant with moderate risk aversion, an increase in savings rate from 10 to 15% generates higher financial wealth accumulation and should come with a 5-10% reduction in equity allocation. Further, we quantify the extent to which the investing environment and participant characteristics affect optimal TDF investment policy. Lastly, we compare such optimal policy against the observed universe of U.S. TDF products. We find that the existing TDF products do not cover all the optimal cases we investigated and often have sub-optimal design features. We show how observed portfolio allocations can move closer to optimal ones.

Options on Bonds: Implied Volatilities from Affine Short-Rate Dynamics
Matthew Lorig,Natchanon Suaysom

We derive an explicit asymptotic approximation for the implied volatilities of Call options written on bonds assuming the short-rate is described by an affine short-rate model. For specific affine short-rate models, we perform numerical experiments in order to gauge the accuracy of our approximation.

Price Informativeness with Equity Market Factors
Clarke, Roger G,de Silva, Harindra,Thorley, Steven
Price informativeness measures how and when information is aggregated into asset prices. We study the price informativeness of realized earnings growth for U.S. stocks with a focus on exposures to factors that have historically outperformed the market index. Our study includes the largest one thousand stocks from 1975 to 2019 and approximately 180 thousand individual corporate net income observations aligned by report date. Capitalization-weighted cross-sectional regressions of monthly stock returns on past, concurrent, and future reports of earnings growth produce coefficients that are averaged over time. Stock returns are sensitive to concurrent and realized earnings growth reports up to 15 months into the future, but not to old earnings reports. The decomposition of the Value, Momentum, Small Size, Low Beta, and Profitability factor active returns into components that are explained and unexplained by earnings helps in understanding the anomalous nature of their positive market-relative performance.

Short-Selling Threats and Bank Risk Taking.
Bui, Dien Giau,Hasan, Iftekhar,Lin, Chih-Yung,Thoa, Nguyen
This study uses a difference-in-differences approach with the Securities and Exchange Commission’s Regulation SHO as the focus and examine whether the threat of short-selling can twist banks’ decisions. Our results show that leverage, operating risk, systemic risk, tail risk, and stock volatility are lower for treatment than for control banks listed in the Russell 3000 index. The evidence shows that treatment banks face looser short-selling constraints under the regulation, which reduces risk-taking. Additionally, these effects are driven mainly by treatment banks hampered by poor corporate governance. Overall, our paper provides novel evidence that short-selling threats can stabilize the financial market.

Sovereign debt dynamics with serial defaults
Bougias, Alexandros,Episcopos, Athanasios
This paper introduces serial defaults in the structural model of Jeanneret (2015. Journal of Financial and Quantitative Analysis 50, 963-985). We consider a government that can default multiple times, deciding endogenously the default thresholds and the optimal leverage. Under the extended model, the sovereign credit spreads are higher and carry a positive serial default premium. Model calibration to eight serial defaulting countries suggests that the average market-implied serial default premium is 57.98 basis points and accounts for 16.07% of the total credit spread. The countries with the highest exposure to serial defaults are Argentina, Brazil, Egypt, and Turkey.

Strategic Alliances and Lending Relationships
Khan, Urooj,Lin, Vincent,Ma, Zhiming,Stice, Derrald
We provide new insights on the value of strategic alliances from a debt financing perspective. We find that firms entering a strategic alliance receive a lower interest spread when they borrow from banks that have previously lent to their strategic partners, compared to loans from other banks. Importantly, this effect varies with the information and accounting environments of borrowing firms. The effect is stronger when a borrower’s transparency and accounting quality is low. We also find that strategic alliances lead borrowers to receive non-price loan term benefits in the form of larger loan amounts and less concentrated loan syndicates. Last, in addition to obtaining more favorable loan terms when dealing with alliance-related banks, we document that borrowers have a higher likelihood of obtaining debt financing from alliance-related banks than from other banks, evidence that strategic alliances are another channel through which lending relationships are formed.

The Allocation of Talent and Financial Development, 1897 to 1936
Lin, Chen,Ma, Chicheng,Sun, Yuchen,Xu, Yuchen
We examine how the supply of talent affected financial development, based on a historical experiment that abruptly changed the allocation of talent in early 20th- century China. A millennium-long meritocratic institution, the imperial civil examination system had firmly linked Chinese intellectual and educational ambitions to government service. The abolition of this system in 1905, however, released the learned elites from the scholar-official system and they looked to modern industries for new opportunities of wealth and status. By analyzing the data of 281 prefectures between 1897 and 1936, we find that regions where there were more candidates for the civil examination produced more bankers and students of finance after 1905; this translated to a greater development of modern banks. From the aspect of the early development of modern finance, our findings coincide with Murphy, Shleifer and Vishny’s (1991) view on the growth implications of the allocation of talent to innovative industries.

The Effect of Credit, Liquidity and Rollover Risk on Bondholder Wealth in Mergers and Acquisitions
Jankowitsch, Rainer,Pauer, Florian
We analyze M&A announcements and focus on the potential impact of these deals on bond prices in the US corporate bond market. In particular, we investigate the effect of changes in credit, liquidity and rollover risk. This is important, as especially target firms are often small with rather illiquid bonds and show maturity concentrations. M&A transactions can significantly change the debt maturity structure and liquidity risk of these bonds. We find the size of the average announcement return of target bonds is 40 bp and increases by around 50% for target firms with a low debt dispersion and illiquid bonds. Furthermore, we document a permanent increase of 15% in the liquidity of these bonds. We find only small negative returns for acquirer bonds, which can be explained by the difference in size. Overall, we provide important new insights concerning bond price effects around M&A announcements.

The Effect of Creditor Rights on Corporate Leverage and Investments: The Role of the Firm Type
Canipek, Aras,Kind, Axel H.,Wende, Sabine
Stronger creditor rights can reduce credit costs and thus may allow firms to increase leverage and investments, but also increase distress costs and thus may prompt firms to lower leverage and undertake risk-reducing but unprofitable investments. Using a German bankruptcy law reform, on average, we find evidence consistent with the latter. We also hypothesize and find evidence that the effect of creditor rights depends on the firm type (most importantly, the firm size), as it influences the effect of creditor rights on credit costs and distress costs and thus which effect outweighs. Our understanding not only reconciles the mixed empirical evidence of existing studies, but also has important implications for optimal bankruptcy design. In particular, it points to a menu of procedures in which a debtor-friendly and creditor-friendly procedure co-exist and thus allow different types of firms to utilize the prevailing overweight.

The Influence of Liquidity Information on Liquidity Holdings in the Banking System
Lu, Yao
I study how liquidity information influences banks' liquidity holdings, using the disclosure of bank liquidity coverage ratio (LCR) mandated for a group of large US banks. While the disclosure rule aims to increase liquidity in the banking system, I find that non-disclosing banks responded by reducing liquid asset holdings due to the impact of liquidity information on banks' strategic interactions in holding liquidity. I use bank network relationships to measure how much a bank learns from the disclosure, and find that banks learning more cut their liquidity significantly more. In the aggregate, the new disclosure rule lowered liquidity in the banking system, concentrated liquidity within a group of large disclosing banks, and ultimately increased systemic risk. My findings highlight the important, and potentially unanticipated, influence of liquidity information on the liquidity and stability of the banking system.

The Influence of Media Slant on Short Sellers
Knill, April M.,Liu, Baixiao,McConnell, John J.,McKenzie, Glades
Using the positive shift in tone of Fox News coverage of macroeconomic news after the Republican Bush election in 2000, we investigate whether media slant influences the investment decisions of short sellers. We find that firms headquartered in Republican-leaning townships with Fox News availability experienced a relative decrease in short interest post the 2000 election. We further find that the relative decrease is more pronounced for firms that are more subject to investors’ home bias. We interpret our findings to suggest that short sellers, as sophisticated as they may be, are not immune to the slant in media coverage.

The Internal Capital Markets of Global Dealer Banks
Gupta, Arun
This study uncovers the existence of a trillion-dollar internal capital market that played a central role in the financing of dealer banks during the 2008 Global Financial Crisis. Hand-collecting a novel set of dealer microdata at the subsidiary level, I present the first set of facts on the evolution of interaffiliate loans between U.S. primary dealers and their (primarily foreign) siblings. First, the aggregate size of these dealer internal capital markets quadrupled from $335 billion in 2001 to $1.2 trillion by 2007. Second, 25 percent of total repurchase agreements and 61 percent of total securities lending reported on U.S. primary dealer balance sheets were sourced internally from sibling dealers by year-end 2007. Third, internal securities lending collapsed by 55 percent during the 2008 crisis. These facts suggest that incorporating internal capital market dynamics may be fruitful for future research on dealer behavior and market liquidity.

The Russian practice of applying cluster approach in regional development
Victor Grebenik,Yuri Tarasenko,Dmitry Zerkin,Mattia Masolletti

The article considers the practice of applying the cluster approach in Russia as a tool for overcoming economic inequality between Russian regions. The authors of the study analyze the legal framework of cluster policy in Russia, noting that its successful implementation requires a little more time than originally planned. Special attention is paid to the experience of benchmarking.

The equivalent constant-elasticity-of-variance (CEV) volatility of the stochastic-alpha-beta-rho (SABR) model
Jaehyuk Choi,Lixin Wu

This study presents new analytic approximations of the stochastic-alpha-beta-rho (SABR) model. Unlike existing studies that focus on the equivalent Black-Scholes (BS) volatility, we instead derive the equivalent constant-elasticity-of-variance (CEV) volatility. Our approach effectively reduces the approximation error in a way similar to the control variate method because the CEV model is the zero vol-of-vol limit of the SABR model. Moreover, the CEV volatility approximation yields a finite value at a zero strike and thus conveniently leads to a small-time asymptotics for the mass at zero. The numerical results compare favorably with the BS volatility approximations in terms of the approximation accuracy, small-strike volatility asymptotics, and no-arbitrage region.

Trade Policy Uncertainty and Global Stock Returns: Evidence from the 2016 US Presidential Election
Bui, Dien Giau,Hasan, Iftekhar,Lin, Chih-Yung,Vaike, Chris
Pástor and Veronesi (2012) develop a general equilibrium model to examine the relation between policy uncertainty and asset prices. Extending to their study, we develop a novel measure of firms’ uncertainty about the change in bilateral trade flows between each country and the US. We investigate the effect of trade policy uncertainty on the stock returns of firms in 52 countries around the 2016 US presidential election. Our findings show that firms with greater uncertainty about trade policy experience more negative stock returns during the election. Our results further show that this effect is more prominent for riskier firms or firms with more firm-specific information in their stock prices. Additionally, this effect becomes stronger in countries with closer social, economic, and political integration with the US or with stronger investor protection.

Transition versus physical climate risk pricing in euro area financial markets: A text-based approach
Bua, Giovanna,Kapp, Daniel,Ramella, Federico,Rognone, Lavinia
This study analyses the pricing of climate risk in equity markets. To this end, we first collect authoritative and scientific texts on the topic of physical and transition risk and build two novel vocabularies. Following, we apply the cosine-similarity approach suggested by Engle et al. 2020 to compare both vocabularies with a corpus of European daily news and construct two novel physical and transition climate risk indices covering the period 2005-2021. Finally, these time series are integrated into an asset pricing model to test the sensitivity of daily equity returns to climate shocks, controlling for several climate exposure metrics. Our results suggest that news on physical risk and transition risk carry relevant information which is reflected in asset prices. Firms with poor environmental and Environmental, Social, and Governance (ESG) performances, as well as firms with high Greenhouse Gas (GHG) emissions underperform when transition risk rises. Analogously, excess returns of firms with low environmental and ESG scores decline in the event of physical risk news. While investors appear to penalise high climate risk exposure, no evidence of outperformance of less exposed firms can be found, suggesting negative screening as a predominant investment strategy.

Wealth Inequality: Opportunity or Unfairness?
Haliassos, Michael,Jansson, Thomas,Karabulut, Yigitcan
This paper presents evidence of a new propagation mechanism for wealth inequality, based on differential responses, by education, to greater inequality at the start of economic life. It is motivated by a novel positive cross-country relationship between wealth inequality and perceptions of opportunity and fairness, which holds only for the more educated. Using unique administrative micro data and a quasi-field experiment of exogenous allocation of households, the paper finds that exposure to a greater top 10\% wealth share at the start of economic life in the country leads only the more educated placed in locations with above-median wealth mobility to attain higher wealth levels and position in the cohort-specific wealth distribution later on. Underlying this effect is greater participation in risky financial and real assets and in self-employment, with no evidence for a labor income, unemployment risk, or human capital investment channel. This differential response is robust to controlling for initial exposure to fixed or other time-varying local features, including income inequality, and consistent with self-fulfilling responses of the more educated to perceived opportunities, without evidence of imitation or learning from those at the top.

What Data Augmentation Do We Need for Deep-Learning-Based Finance?
Liu Ziyin,Kentaro Minami,Kentaro Imajo

The main task we consider is portfolio construction in a speculative market, a fundamental problem in modern finance. While various empirical works now exist to explore deep learning in finance, the theory side is almost non-existent. In this work, we focus on developing a theoretical framework for understanding the use of data augmentation for deep-learning-based approaches to quantitative finance. The proposed theory clarifies the role and necessity of data augmentation for finance; moreover, our theory motivates a simple algorithm of injecting a random noise of strength $\sqrt{|r_{t-1}|}$ to the observed return $r_{t}$. This algorithm is shown to work well in practice.

What determines the risk-pricing of local state-owned enterprise bond in China?
Wang, Yabin,Wu, Sharon Xiaohui
Focusing on local state-owned enterprise (SOE) bond credit spreads in China during the period 2013 to 2020, we disentangle a province premia component from firms' fundamentals and present evidence of an increasing subnational debt market fragmentation since 2018, which is shown to be associated with previous local SOE default incidences and local government fiscal space. An endogenously estimated local debt to GDP threshold that would exert impact on the province premia is found to be lower than the debt sustainability thresholds suggested by the World Bank and the IMF. Our study sheds lights on the needs for a more market-based risk-pricing and its important implications on debt market functioning, as well as the hidden cost of local government debts beyond its conventional sustainability concerns.

When and for Whom are Roth Conversions Most Beneficial? A New Set of Guidelines, Cautions and Caveats
McQuarrie, Edward F.
Much has changed since penalty-free Roth conversions were inaugurated in 2010. Tax rates have gone up and down. The re-characterization provision went away. Heirs can no longer stretch out inherited Roth accounts over a lifetime. Medicare surcharges were expanded and began to adjust for inflation. The age to begin Required Minimum Distributions was pushed out to age 72 and the IRS changed the RMD divisor tables to further slow the pace of distribution. Given these developments it seemed worthwhile to re-examine the rationale for Roth conversions. That effort exposed multiple flaws in conventional wisdom: • Future tax rates need not be higher for a conversion to pay off;• Nor is it all that helpful to pay the tax on conversion from outside funds;• Nor are Roth conversions especially beneficial for top bracket taxpayers as compared to middle class taxpayers;• Rather, the greatest benefit accrues to taxpayers who can make the conversion partly in the zero percent tax bracket, i.e., during a year with no other taxable income.While the benefits from a Roth conversion are often small and slow to arrive, a Roth conversion will almost always pay off if given enough time, i.e., for life spans that extend past 90 and so long as annual distributions from converted amounts are not taken. Roth conversions work because of compounding, which requires the conversion to be left undisturbed for a long time. The paper elucidates the role played by the mathematics of compounding in underwriting the success of Roth conversions.

Which Investors to Protect? Evolving Conceptions of the American Shareholder, 1900-Present
Russell, Jacob Hale
A system of investor protection rests on a theory of which investors need protection. This chapter surveys the composition and perception of individual investors in American capital markets from 1900 to the present. The retail investor base has expanded remarkably during that time. Beyond the statistics, distinct “images” of the shareholderâ€"that is, perceptions of the prototypical American investorâ€"have dominated at different moments of U.S. securities law history. Although no one image will ever capture the full complexity of capital markets, I attempt to identify prevailing images in specific eras of securities regulation history, by examining comments by policymakers and industry participants. These images influence policy priorities and design.

Who are Active Risk Managers? Exploring the Association of Personality with Insurance Decisions.
Dudek, Thomas
Personality plays a crucial role in people’s decisions and behavior and hence their socio-economic outcomes. For example, personality predicts educational attainment, occupational choices and income. Personality is also related to financial decision-making, especially to savings and investment decisions. Few studies, however, have investigated the relationship between personality traits and insurance decisions. This paper explores the association of risk tolerance, the big five personality traits and locus of control with people’s health insurance decisions using longitudinal survey data. Because all of these traits have been linked to financial decision-making, it is best practice to incorporate all traits into statistical decision-making models in order to reveal least biased and potentially causal estimates. Results confirm some previous research associating personality with risky decisions: Self-reported risk tolerance, neuroticism and locus of control are significant predictors of insurance choices.