Research articles for the 2021-06-30

"Stabilizer" or "catalyst"? How does green technology innovation affect the risk of stock price crash: an analysis based on the quantity and quality of patents
Ge-zhi Wu,Daming You

In order to explore the relationship between corporate green technological innovation and the risk of stock price crash, First, we analyzed the data of listed companies in China from 2008 to 2018, and constructed indicators for the quantity and quality of corporate green technology innovation. The study found that the quantity of green technology innovation is not related to the risk of stock price crash, while the quality of green technology innovation is negatively related to the risk of stock price crash. Secondly, we further studied the impact of corporate ownership on the relationship between the quality of green technological innovation and the risk of stock price crash, and found that in non-state-owned enterprises, the quality of green technological innovation is negatively correlated with the risk of stock price collapse, while in state-owned enterprises, the quality of green technological innovation is positively correlated with the risk of stock price collapse. Furthermore, we studied the mediating effect of the number of negative news reports in the media of listed companies on the relationship between the quality of corporate green technology innovation and the stock price crash.Finally, we conducted a DID regression by using the impact of exogenous policy shocks on the quality of green technology innovation, and the main results passed the robustness test.

Application of deep reinforcement learning for Indian stock trading automation
Supriya Bajpai

In stock trading, feature extraction and trading strategy design are the two important tasks to achieve long-term benefits using machine learning techniques. Several methods have been proposed to design trading strategy by acquiring trading signals to maximize the rewards. In the present paper the theory of deep reinforcement learning is applied for stock trading strategy and investment decisions to Indian markets. The experiments are performed systematically with three classical Deep Reinforcement Learning models Deep Q-Network, Double Deep Q-Network and Dueling Double Deep Q-Network on ten Indian stock datasets. The performance of the models are evaluated and comparison is made.

Benefits of Enterprise Risk Management: A Systematic Review of Literature
Naik, Sankalp ,, Ch. V. V. S. N. V. Prasad
Objective - In an enhanced climate of risk complexities, the firm's stakeholders desire a risk management framework that promises the benefits of efficiencies, transparencies, and solutions for interrelated risks. Enterprise risk management (ERM) is widely seen as a suitable instrument to address these issues. However, not all are convinced of ERM's benefits. This necessitates a review of extant literature and collating it to generate interrelated insights. This paper reviews articles on ERM from the management and finance domain and catalogs the benefits of ERM.Methodology/Technique: â€" This paper reviews 129 articles addressing ERM benefits. It examines the academic disciplines of journals publishing ERM studies by looking into their H Indices, SJR scores, and ABDC rankings to assess ERM's impact and acceptability among scholars. The research articles are analyzed for their subject domains, geographic scope, and methodology used in exploring the relationship between ERM adoption and its benefits to the firm. Collating and reviewing these articles enables the mitigation of data gaps. These studies were primarily from accounting, finance, management, corporate governance, and strategy domains.Findings â€" Improved cost-effectiveness, earnings stability, increased profitability, improved decision making, better risk communication, competitive advantage, better resource allocation, enhanced firm value, and performance are the key benefits of ERM adoption identified in this study. A knowledge gap is presented around assessing ERM benefits and extending ERM research scope to developing countries like India.Novelty â€" The study catalogs the benefits of ERM and makes a strong case for ERM adoption among firms.Type of Paper - Review

Bounded rationality for relaxing best response and mutual consistency: An information-theoretic model of partial self-reference
Benjamin Patrick Evans,Mikhail Prokopenko

While game theory has been transformative for decision-making, the assumptions made can be overly restrictive in certain instances. In this work, we focus on some of the assumptions underlying rationality such as mutual consistency and best-response, and consider ways to relax these assumptions using concepts from level-$k$ reasoning and quantal response equilibrium (QRE) respectively. Specifically, we provide an information-theoretic two-parameter model that can relax both mutual consistency and best-response, but can recover approximations of level-$k$, QRE, or typical Nash equilibrium behaviour in the limiting cases. The proposed approach is based on a recursive form of the variational free energy principle, representing self-referential games as (pseudo) sequential decisions. Bounds in player processing abilities are captured as information costs, where future chains of reasoning are discounted, implying a hierarchy of players where lower-level players have fewer processing resources.

CEO Compensation: Evidence From the Field
Edmans, Alex,Gosling, Tom,Jenter, Dirk
We survey directors and investors on the objectives, constraints, and determinants of CEO pay. 67% of directors would sacrifice shareholder value to avoid controversy on CEO pay, implying they face significant constraints other than participation and incentive compatibility. These constraints lead to lower pay levels and more one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Respondents view intrinsic motivation and reputation as stronger motivators than incentive pay. They believe pay matters to CEOs not to finance consumption, but because it affects perceptions of fairness. The need to fairly recognize the CEO’s contribution explains why flow pay responds to performance, even though CEOs’ equity holdings already provide substantial consumption incentives, and why peer firm pay matters beyond retention concerns. Fairness also matters to investors, with shareholder returns an important reference point. This causes CEO pay to be affected by external risks, in contrast to optimal risk sharing.

COVID-19, Credit Risk and Macro Fundamentals
Dubinova, Anna,Lucas, Andre,Telg, Sean
We investigate the relationship between macro fundamentals and credit risk, rating migrations and defaults during the start of the COVID-19 pandemic. We find that credit risk models that use macro fundamentals as covariates overestimate credit risk incidence due to the unprecedented drops in economic activity in the first lockdowns. We argue that this break in the macro-credit linkage is less affected if we take an unobserved components modeling framework, both at shorter and longer credit risk horizons.

Co - Movements and Dynamic Linkages between Gold Price and CNX Nifty
Perumal, Kalungan,Veluchamy, Ramanujam,Lingaraja, Kasilingam
This paper an attempt to examine the movement and linkages (relationship) between Gold price and CNX Nifty index during the period from 2000 to 2018. By testing the normality, stationary, movements and linkages of sample variables through the econometric tools like descriptive statistics, ADF, ARMA and granger causality. It is found that the test results of granger causality are statistically significant at 5 % confidence level. Hence, there is a relationship between gold price and stock market index (CNX Nifty). It is find that the individual investors have often trusted gold as a better investment. Therefore our findings suggest that investors may design appropriate investments with gold and stock market are best investment alternatives during the study period.

Company Visit Disclosure Regulation and Analysts’ Information Acquisition
Ke, Bin,Kong, Dongmin,Liu, Shasha
There is a debate on whether company visits, an important channel of analysts’ information acquisition, should be regulated similar to management disclosure under Regulation Fair Disclosure. Exploiting a Shenzhen Stock Exchange regulation, this study examines the impact of forcing the timely disclosure of analysts’ company visits on analysts’ information acquisition. We find that the regulation creates a chilling effect on analysts’ private information acquisition activities, negatively affecting analysts’ stock coverage, company visits and research report issuance. However, for the analysts who do issue earnings forecasts following the regulation, we find no evidence that the accuracy of such forecasts is lower, consistent with a rational expectation equilibrium.

Decision making with dynamic probabilistic forecasts
Peter Tankov,Laura Tinsi

We consider a sequential decision making process, such as renewable energy trading or electrical production scheduling, whose outcome depends on the future realization of a random factor, such as a meteorological variable. We assume that the decision maker disposes of a dynamically updated probabilistic forecast (predictive distribution) of the random factor. We propose several stochastic models for the evolution of the probabilistic forecast, and show how these models may be calibrated from ensemble forecasts, commonly provided by weather centers. We then show how these stochastic models can be used to determine optimal decision making strategies depending on the forecast updates. Applications to wind energy trading are given.

Early Exercise of American Call Options under Negative Interest Rates
Schneider, Jochen,Helms, Nils
Although negative interest rates have been a phenomenon observed in capital markets for years, little research has been done on the impact of negative interest rates on stock option valuations. This paper shows that the fundamental assumption of equivalence between American and European call options at negative riskless interest rates is no longer universal. The findings are illustrated by means of an example. Furthermore, there are implications for practical trading with options.

Emotions in Macroeconomic News and their Impact on the European Bond Market
Sergio Consoli,Luca Tiozzo Pezzoli,Elisa Tosetti

We show how emotions extracted from macroeconomic news can be used to explain and forecast future behaviour of sovereign bond yield spreads in Italy and Spain. We use a big, open-source, database known as Global Database of Events, Language and Tone to construct emotion indicators of bond market affective states. We find that negative emotions extracted from news improve the forecasting power of government yield spread models during distressed periods even after controlling for the number of negative words present in the text. In addition, stronger negative emotions, such as panic, reveal useful information for predicting changes in spread at the short-term horizon, while milder emotions, such as distress, are useful at longer time horizons. Emotions generated by the Italian political turmoil propagate to the Spanish news affecting this neighbourhood market.

Energy security: key concepts, components, and change of the paradigm
Julia Edigareva,Tatiana Khimich,Oleg Antonov,Jesus Gonzalez

The authors of the study conduct a legal analysis of the concept of energy security. Energy is vital for sustainable development, and sustainability is not only at the heart of development, but also economic, environmental, social and military policies. To ensure the sustainability of the policy, 'security' seems to be a mandatory goal to achieve. The article critically assesses the change in the energy paradigm.

Explaining Caste-based Digital Divide in India
R Vaidehi,A Bheemeshwar Reddy,Sudatta Banerjee

With the increasing importance of information and communication technologies in access to basic services like education and health, the question of the digital divide based on caste assumes importance in India where large socioeconomic disparities persist between different caste groups. Studies on caste-based digital inequality are still scanty in India. Using nationally representative survey data, this paper analyzes the first-level digital divide (ownership of computer and access to the internet) and the second-level digital divide (individual's skill to use computer and the internet) between the disadvantaged caste group and the others. Further, this paper identifies the caste group-based differences in socioeconomic factors that contribute to the digital divide between these groups using a non-linear decomposition method. The results show that there exists a large first-level and second-level digital divide between the disadvantaged caste groups and others in India. The non-linear decomposition results indicate that the caste-based digital divide in India is rooted in historical socioeconomic deprivation of disadvantaged caste groups. More than half of the caste-based digital gap is attributable to differences in educational attainment and income between the disadvantaged caste groups and others. The findings of this study highlight the urgent need for addressing educational and income inequality between the different caste groups in India in order to bridge the digital divide.

Factors Affecting Non-Performing Loan Portfolio in Micro-Lending: Evidence from Sri Lanka
Anuradha, Niluka
This study identified pre-loan and post loan evaluation factors on non-performing loans in micro-lending based on the Gami Pubuduwa loan scheme of Hatton National Bank of Sri Lanka. Microcredit officers and actual non-performing loan clients were the samples of the study. Pre-loan evaluation factors were identified based on the CAMPARI model while the post-loan evaluation factors evaluated through three basic management functions. Data were collected using questionnaires. The CAMPARI model was tested using the binomial sign test. The study found the importance of proper consideration of the ability of the borrower and purpose of the loan in prior loan evaluation to reduce non-performing loans in microlending. Further poor financial management practices of actual nonperforming loan clients were identified as a significant post-loan evaluation factor of non-performing loans by both microcredit officers and actual non-performing loan clients. Credit officers were on the opinion that poor operational management practices as a post-loan evaluation factor of non-performing loans. Findings provide implications to micro-lending institutions on the importance of pre-loan evaluation and post-loan evaluation in reducing the non-performing loans.

Fundamental Arbitrage Under the Microscope: Evidence from Detailed Hedge Fund Transaction Data
Lunghi, Sandro,Schmidt, Daniel,von Beschwitz, Bastian
We exploit detailed transaction and position data for a sample of long-short equity hedge funds to study the trading activity of fundamental investors. We find that hedge funds exhibit skill in opening positions, but that they close their positions too early, thereby forgoing about a third of the trades’ potential profitability. We explain this behavior with the limits of arbitrage: hedge funds close positions early in order to reallocate their capital to more profitable investments and/or to accommodate tightened financial constraints. Consistent with this view, we document that hedge funds leave more money on the table after opening new positions, negative returns, or increases in funding constraints and volatility.

GST & Its Implication to Industry, Retail Investors in India
Bairagi, Palash
In India a cosmic changes in indirect-tax system which can say a comprehensive tax benefits or the GST (goods and services tax),that levy on manufacture, sale and consumption of goods and services at national level. The implications of GST will essentially benefits to industries& individual retail investors and similarly, the benefits to stock market. It might have some promotional benefits in terms of corporate earnings and more for ease of doing business that results a long term sustainable changes for individual retail investors &industry as a whole. The paper is going to point out the beneficiary implication of Goods and Services tax to top participants (industry and Individual retail investors)in Indian stock markets. The concluding notes highlighted that the implementation of GST will try to reduce the gap between organized and unorganized sectors, its gives an overall positive implications to the individual investors in response to cost competitiveness or uniform market practices such as consumer durability which gives direct benefits to end consumers because of a highly competitive market. It also reported that how the bill is likely to impact various sectors and gain market shares in macro-economic perspective.

Implications of Default Dependency on Portfolio Risk
Steiner, Andreas
We highlight important and specific characteristics of default risk and methodological implications. In a simulation contrasting independent, Gaussian and Clayton copulas, we also show that joint default probabilities might be a hidden source of risk in conventional portfolio models of default.

Investor Attention and the Use of Leverage
Davydov, Denis,Peltomäki, Jarkko
We investigate the effects of the use of different sources of investment leverage, i.e. securities with embedded leverage and traditional margin accounts, on the portfolio performance of retail investors, recognizing that these effects may be conditional on investor attention. We find that investors who trade on margin underperform those who do not have margin accounts, but we also find that investors who trade securities with embedded leverage show an even poorer performance than investors who trade on margin. The negative effect of leverage usage decreases with greater investor attention, measured by portfolio monitoring frequency. These results suggest that more attentive investors gain more from the use of investment leverage.

Markov-modulated Affine Processes
Kevin Kurt,Rüdiger Frey

We study Markov-modulated affine processes (abbreviated MMAPs), a class of Markov processes that are created from affine processes by allowing some of their coefficients to be a function of an exogenous Markov process. MMAPs allow for richer models in various applications. At the same time MMAPs largely preserve the tractability of standard affine processes, as their characteristic function has a computationally convenient functional form. Our setup is a substantial generalization of earlier work, since we consider the case where the generator of the exogenous process $X$ is an unbounded operator (as is the case for diffusions or jump processes with infinite activity). We prove existence of MMAPs via a martingale problem approach, we derive the formula for their characteristic function and we study various mathematical properties of MMAPs. The paper closes with a discussion of several applications of MMAPs in finance.

Maximizing Relative Wealth Using Leverage: The Role of Risk Aversion
Lundström Tjurhufvud, Christian,Peltomäki, Jarkko
Investors can use leverage to increase the returns and profit of an investment. The so-called Kelly criterion is traditionally used to determine the optimal leverage factor for maximizing an investor’s absolute wealth. However, using the Kelly criterion may lead to too risky decisions for rational investors without log utility, rendering it not applicable for risk averse investors. Further, investor success is more often than not evaluated as the relative performance against a benchmark, making the case for maximizing relative wealth rather than absolute wealth. We propose a risk-adjusted Kelly criterion based on quadratic utility for maximizing the investors’ wealth relative to a generic reference. Our model enables us to derive the optimal leverage decision for rational investors seeking to maximize relative wealth given investor risk aversion, thereby allowing risk averse investors to benefit from leverage. Quadratic utility also enables optimizing of leverage independent of the returns-density-function assumption so that the skewness and kurtosis of asset returns do not violate the assumptions of the model. Our findings demonstrate the rationale for risk averse investors to use leverage in maximizing relative wealth. Our study provides useful understanding of relative wealth accumulation using leverage and the role of risk aversion.

Open Source Cross-Sectional Asset Pricing
Chen, Andrew Y.,Zimmermann, Tom
We provide data and code that successfully reproduces nearly all crosssectional stock return predictors. Our 319 characteristics draw from previous meta-studies, but we differ by comparing our t-stats to the original papers' results. For the 161 characteristics that were clearly significant in the original papers, 98% of our long-short portfolios find t-stats above 1.96. For the 44 characteristics that had mixed evidence, our reproductions find t-stats of 2 on average. A regression of reproduced t-stats on original longshort t-stats finds a slope of 0.90 and an R2 of 83%. Mean returns aremonotonic in predictive signals at the characteristic level. The remaining 114 characteristics were insignificant in the original papers or are modifications of the originals created byHou, Xue, and Zhang (2020). These remaining characteristics are almost always significant if the original characteristic was also significant.

Operating Leverage, Profitability, and Stock Returns under Different Aggregate Funding Conditions
García-Feijóo, Luis,Jensen, Tyler,Koch, Paul
Operating leverage (OL) and profitability are interrelated determinants of stock returns. We show that the outperformance of firms with high OL is driven by periods of unconstrained aggregate funding conditions. Firms with high OL are more risky in general, but when the Fed eases funding constraints, investors bid up their stock prices to reflect lower risk and greater performance expected for these stocks. This time-varying OL effect also explains the differential performance of alternative profitability measures that treat OL differently. Our results extend research linking monetary policy, OL, and profitability by documenting important time-varying interrelations among these characteristics and returns.

Optimism Gone Bad? The Persistent Effects of Traumatic Experiences on Investment Decisions
Kim, Chi Hyun
Do memories of highly emotional stock market crashes permanently affect the investment decisions of households? The Initial Public Offerings of Deutsche Telekom during 1996- 2000 provide an optimal base to address this question, as it is known for its emotional character and is reputedly “the last time Germans invested in stocks.” Using Socio-Economic Panel (SOEP) household survey data, I show that having experienced this event leads to persistently lower stock market participation in the future. In addition, this effect is greater for households that had directly invested in Telekom shares, those being more likely to have high emotional experiences. Finally, I also show that such traumatic experiences on investment decisions have intergenerational consequences, significantly affecting how the next generation invests in the financial market.

Paying off the Competition: Market Power and Innovation Incentives
Li, Xuelin,Lo, Andrew W.,Thakor, Richard T.
How does a firm’s market power in existing products affect its incentives to innovate? We explore this fundamental question using granular project-level and firm-level data from the pharmaceutical industry, focusing on a particular mechanism through which incumbent firms maintain their market power: “reverse payment” or “pay-for-delay” agreements to delay the market entry of competitors. We first show that when firms are unfettered in their use of “pay-for-delay” agreements, they reduce their innovation activities in response to the potential entry of direct competitors. We then examine a legal ruling that subjected these agreements to antitrust litigation, thereby reducing the incentive to enter them. After the ruling, incumbent firms increased their net innovation activities in response to competitive entry. These effects center on firms with products that are more directly affected by competition. However, at the product therapeutic area level, we find a reduction in innovation by new entrants after the ruling in response to increased competition. Overall, these results are consistent with firms having reduced incentives to innovate when they are able to maintain their market power, highlighting a specific channel through which this occurs.

Predicting Individual Corporate Bond Returns
He, Xin,Feng, Guanhao,Wang, Junbo,Wu, Chunchi
This paper finds positive evidence of return predictability and investment gains for individual corporate bonds for an extended period from 1973 to 2017. Our sample consists of both public and private company bond observations. We have implemented multiple machine learning methods and designed a Fama-Macbeth-type predictive performance evaluation. In addition to robust predictability evidence, there are four main findings. First of all, we find the lagged corporate bond market return as the most important predictor, suggesting a short-term market reversal story. Second, this paper concludes that equity information is conditionally redundant for similar public and private company bond performance. Third, a model-forecast-implied long-short strategy delivers 1.48% monthly returns and 1.4% alpha during the last two decades, which substantially drops if we do not consider private company bonds. Finally, the return predictability is mainly due to the cash flow component instead of the discount rate component.

Price formation and optimal trading in intraday electricity markets
Olivier Féron,Peter Tankov,Laura Tinsi

We develop a tractable equilibrium model for price formation in intraday electricity markets in the presence of intermittent renewable generation. Using stochastic control theory, we identify the optimal strategies of agents with market impact and exhibit the Nash equilibrium in closed form for a finite number of agents as well as in the asymptotic framework of mean field games. Our model reproduces the empirical features of intraday market prices, such as increasing price volatility at the approach of the delivery date and the correlation between price and renewable infeed forecasts, and relates these features with market characteristics like liquidity, number of agents, and imbalance penalty.

Privatising Regulation To Enrich Democracy
Turnbull, Shann
This short paper by Dr Shann Turnbull makes the case for a radical rethink of the way in which financial services could be regulated. Currently regulators are pursuing a "Red Queen" approach to regulation and running ever faster to stay in the same place. Complexity can only be controlled with matching complexity, which is why current models of regulation for the financial services sector are not fit for purpose. However, these problems can be overcome by introducing of polycentric self-governance systems, of the type found in sporting organisations from local to global levels. Using this approach businesses could engage with their stakeholders to become more self-regulating and self-governing. If the UK Government were to develop this approach the UK would become a role model for the world.

Problems at Poland’s Banks are Threatening the Economy (Problemy banków zagrażają rozwojowi polskiej gospodarki)
Kawalec, Stefan
English Abstract: Until now, the banking sector has been one of the strong points of Poland’s economy. In contrast to banks in the U.S. and leading Western European economies, lenders in Poland came through the 2008 global financial crisis without a scratch, without needing state financial support. But in recent years the industry’s problems have been growing, creating a threat to economic growth and gains in living standards.For an economy’s productivity to increase, funds can’t go to all companies evenly, and definitely shouldn’t go to those that are most lacking in funds, but to those that will use them most efficiently. This is true of total external financing, and thus funding both from the banking sector and from parabanks, the capital market and funds from public institutions. In Poland, in light of the relatively modest scale of the capital market, banks play a clearly dominant role in external financing of companies. This is why the author of this text focuses on the bank credit allocation efficiency.The author points out that in the very near future, conditions will emerge in Poland which â€" as the experience of other countries shows â€" create a risk of reduced efficiency of credit allocation to business. Additionally, in Poland today, bank lending to companies is to a high degree being replaced by funds from state aid, which reduces the efficiency of allocation of external funds to companies (both loans and subsidies), as allocation of government subsidies is not usually based on efficiency. This decline in external financing allocation efficiency may slow, halt or even reverse the process, that has been uninterrupted for 28 years, of Poland’s convergence, i.e. the narrowing of the gap in living standards between Poland and the West.Polish Abstract: Sektor bankowy byÅ‚ dotychczas silnÄ… stronÄ… polskiej gospodarki. W przeciwieÅ„stwie do banków w USA i czoÅ‚owych gospodarkach Europy Zachodniej, banki w Polsce przeszÅ‚y „suchÄ… nogą” Å›wiatowy kryzys finansowy po roku 2008 i nie potrzebowaÅ‚y wówczas wsparcia finansowego paÅ„stwa. Jednakże w ostatnich latach w sektorze bankowym narastajÄ… problemy, które stwarzajÄ… zagrożenie dla rozwoju gospodarki i wzrostu poziomu życia obywateli.Po to, by rosÅ‚a produktywność gospodarki, Å›rodki finansowe powinny trafiać nie do wszystkich firm po równo i wcale nie do tych, którym najbardziej ich brakuje, lecz do tych, które wykorzystujÄ… je bardziej efektywnie. Dotyczy to Å‚Ä…cznego finansowania zewnÄ™trznego firm, a wiÄ™c zarówno z sektora bankowego i parabankowego, rynku kapitaÅ‚owego, jak i Å›rodków z instytucji publicznych. W Polsce ze wzglÄ™du na relatywnie nieduże rozmiary rynku kapitaÅ‚owego, zdecydowanie dominujÄ…cÄ… rolÄ™ w zewnÄ™trznym finansowaniu przedsiÄ™biorstw peÅ‚niÄ… banki. Dlatego Stefan Kawalec, autor niniejszej publikacji, skupia siÄ™ na efektywnoÅ›ci alokacji kredytu bankowego.Autor zwraca uwagÄ™, że w najbliższym czasie wystÄ™pować bÄ™dÄ… w Polsce okolicznoÅ›ci, które wedÅ‚ug doÅ›wiadczeÅ„ Å›wiatowych stwarzajÄ… ryzyko obniżenia efektywnoÅ›ci alokacji kredytu dla przedsiÄ™biorstw. Dodatkowo, kredyt bankowy dla przedsiÄ™biorstw jest obecnie w Polsce w dużym stopniu zastÄ™powany przez Å›rodki z pomocy publicznej, co powoduje obniżenie efektywnoÅ›ci alokacji wszystkich Å›rodków zewnÄ™trznych docierajÄ…cych do firm (zarówno w formie kredytów, jak i subwencji rzÄ…dowych), gdyż alokacja subwencji rzÄ…dowych zazwyczaj nie jest kierowana efektywnoÅ›ciÄ…. Skutkiem trwaÅ‚ego obniżenia efektywnoÅ›ci alokacji zewnÄ™trznego finansowania przedsiÄ™biorstw może być spowolnienie, zatrzymanie lub wrÄ™cz odwrócenie trwajÄ…cego nieprzerwanie od 28 lat procesu konwergencji, czyli zmniejszania luki w poziomie życia miÄ™dzy PolskÄ… a Zachodem.

Public Pension Portfolios in a World of Low Rates and Low Risk Premiums
Ren, He,Siwinski, Sarah,Yu, Calvin,Ang, Andrew
Over the 2010s, the assets of public pension plans generated significantly higher returns than their assumed, or actuarial, rates of return. In a sample of 69 US public plans with a total of $2.1 trillion of assets, the return outperformance of assets over the assumed returns was over 200 basis points for the 10 years ending June 30, 2009. The outperformance is driven by their asset allocations being mostly exposed to economic growth, which constitutes nearly 75% of the total portfolio variance. Based on capital markets assumptions with lower returns to growth-sensitive assets, pension plans are less likely to outperform their assumed returns and may also experience significant downturns in scenarios when growth slows. In addition, the forecasted returns for fixed income over the next 10 years are expected to be significantly lower than the historical experience over the last few decades due to much lower starting yields. Optimal pension allocations more likely to meet current return targets generally involve increasing allocations to alternatives and using leverageâ€"explicitly or through portable alpha strategies.

Robust Deep Hedging
Lütkebohmert, Eva,Schmidt, Thorsten,Sester, Julian
We study pricing and hedging under parameter uncertainty for a class of Markov processes which we call generalized affine processes and which includes the Black-Scholes model as well as the constant elasticity of variance (CEV) model as special cases. Based on a general dynamic programming principle, we are able to link the associated nonlinear expectation to a variational form of the Kolmogorov equation which opens the door for fast numerical pricing in the robust framework. The main novelty of the paper is that we propose a deep hedging approach which efficiently solves the hedging problem under parameter uncertainty. We numerically evaluate this method on simulated and real data and show that the robust deep hedging outperforms existing hedging approaches, in particular in highly volatile periods.

Signal Strength, Conflicting Signals and Beliefs Updating: Evidence From Sell-Side Analysts' Forecasts
Astaiza-Gómez, José
I empirically study how confirmatory bias works for strong and contradictory signals using data on sell-side analysts. I first model an agent who is prone to confirmatory bias and whose task is to value a stock based on a signal, and introduce the effects of the signal strength by relaxing Rabin and Schrag's (1999) assumption of a constant bias severity. Afterwards I use target prices to measure forecast bias and the growth in Earnings Per Share as signals, and regress analysts' forecast bias over different deciles of favorable signals interacted with prior negative forecast bias in a dynamic panel data model. I find that analysts do not react positively to favorable signals when the prior is pessimistic, except for sufficiently strong signals which cause analysts to issue more optimistic target prices.

State-Owned Commercial Banks
Panizza, Ugo
This paper builds a new dataset on bank ownership and reassesses the links between state-ownership of banks and each of financial development, economic growth, financial stability, bank performance, liquidity creation, and lending cyclicality. Using panel data to estimate the short-and medium-term relationship between state-ownership and financial depth, the paper shows that there is no robust correlation between these two variables. The paper also finds no evidence of a negative correlation between state-ownership of banks and economic growth (if anything, the relationship is positive but rarely statistically significant). Looking at financial instability, the paper finds that banking crises predict increases in state-ownership but that there is no evidence that high state-ownership predicts banking crises. Focusing on bank performance, the paper shows that data for the period 1995-2009 are consistent with existing evidence that state owned banks are less profitable than their private counterparts in emerging and developing economies. However, more recent data show no difference between the profitability of private and public banks located in emerging and developing economies. The paper also corroborates the existing literature which shows that in emerging and developing economies lending by state-owned banks is less procyclical than private bank lending. Exploring the role of fiscal fundamentals, the paper does not find any difference in countercyclicality between high and low debt countries, but it finds that countercyclical lending by state-owned banks substitutes, rather than complement, countercyclical fiscal policy. It also finds that lending by state-owned banks helps smoothing production in labor intensive industries and in industries with a large share of small firms.

Stock Market Winners: Conditional Probabilities, Elapsed Times, and Post-Event Returns
Bessembinder, Hendrik
Some common stocks display extreme positive performance. Between 1973 and 2020, 3,615 U.S.-listed stocks generated at least a 5x cumulative gross return relative to a prior low point, and also had a minimum inflation-adjusted market capitalization of $500 million. Among these, 29.8% repeated the performance (to achieve a 25x multiple), 9.7% repeated twice (to achieve a 125x multiple), and 2.4% did so a third time (to achieve a 625x multiple). In general, a substantial portion of the superior performance accrued prior to the year in which the multiple was attained. However, stocks that attained these multiples showed little or no evidence of positive market-adjusted returns in subsequent months, implying that the existence of extreme positive performers does not simply reflect long horizon return momentum.

Strengthening Bank Stability after the Crisis
Gelman, Michael,Greenberg, Doron,Khan, Zaheer,Rosenboim, Mosi
During normal times, strengthening the financial stability of banks is associated with contradictory effects on returns. In this paper, we establish that liquidity and capital ratios had a positive impact on bank returns during the first three years following the global financial crisis. Our results are robust to different endogeneity and robustness tests. We identify deposit franchise and risk management as two key channels through which stronger financial stability improved bank returns. Our study contributes to a better understanding of the time- varying effects of financial stability and of the benefits of liquidity and capital ratios during normal times and not only in crisis periods.

Tax Enforcement and Firm Investment Efficiency: Evidence from Staggered Implementation of Tax Administration Information System
Wu, Fan
This paper examines how increased tax enforcement accompanied by the new tax administration system impacts firm investment efficiency, exploiting the staggered implementation of the third phase of the Golden Tax Project (GTP III) in China. Consistent with the monitoring role of tax authorities (Desai et al., 2007), I find that firms improved their investment efficiency after the local tax office adopted the new system. This effect is more pronounced when tax authorities previously suffered from resource constraints, when the tax enforcement is further enhanced through local fiscal pressure, and when firms have a higher ex-ante propensity to avoid taxes. An analysis of the potential mechanisms of this investment efficiency effect reveals that increased tax enforcement serves as a substitute for corporate governance in that it has positive spillover effects on financial reporting quality and that investments are more responsive to market prices.

The COVID-19 and Stock Return Volatility: Evidence from South Korea
Pyo, Dong-Jin
This study examines the impact of the number of coronavirus cases on regime-switching in stock return volatility. This study documents the empirical evidence that the COVID-19 cases had an asymmetric effect on the regime of stock return volatility. When the stock return is in the low volatility regime, the probability of switching to the high volatility regime in the next trading day increases as the number of cumulative cases increases. In contrast, in the high volatility regime, the effect of cumulative cases on the transition probability is not statistically significant. This study also documents the evidence that the government measures against the pandemic contribute to promoting the high volatility regime of the KOSPI during the pandemic. Besides, this study projects future stock prices through the Monte Carlo simulation based on the estimated parameters and the predicted number of the COVID-19 new cases. Under a scenario where the number of new cases rapidly increases, stock price indices in Korea are expected to be in a downward trend over the next three months. On the other hand, under the moderate scenario and the best scenario, the stock indices are likely to continue to rise.

The Commercial Banks’ Credit Risk Efficiency: Empirical Evidence from Kosovo
Sahiti, Arbana,Sahiti, Arben
Commercial banks' credit risk management is a function that focuses on events that may affect the achievement of objectives. Improper management will result in negative consequences or results. Therefore, banks usually pay more attention to events with a higher probability and impact of a direct loss of revenue and capital than events that may result in positive effects. This research adopts secondary data and seeks to analyze credit risk management of commercial banks in Kosovo through a developed DEA (Data Envelopment Analysis) model. The study covers seven commercial banks in Kosovo for the period 2008-2016 and uses Tobit regression to determine credit risk efficiency. The estimation results show a statistically significant positive relationship between bank efficiency, capital adequacy, and loans. Moreover, the study found that banks' efficiency factors, including profitability, deposits, costs, banks size, GDP growth, and inflation, are not statistically significant.

The Fed'S Discount Window in &Quot;Normal&Quot; Times
Ennis, Huberto M.,Klee, Elizabeth C.
We study new transaction-level data of discount window borrowing in the U.S. between 2010 and 2017, merged with quarterly data on bank financial con- ditions (balance sheet and revenue). The objective is to improve our under- standing of the reasons for why banks use the discount window during periods outside financial crises. We also provide a model of the decision of banks to borrow at the window, which is helpful for interpreting the data. We find that decisions to gain access and to borrow at the discount window are meaning- fully correlated with some relevant banks' characteristics and the composition of banks' balance sheets. Banks choose simultaneously to obtain access to the discount window and hold more cash-like liquidity as a proportion of assets. Yet, conditional on access, larger and less liquid banks tend to borrow more from the discount window. In general, our findings suggest that banks could, in principle, adapt their operations to modulate, and possibly reduce, their use of the discount window in "normal" times.

The Motivating Role of Sentiment in ESG Performance: Evidence from Japanese Companies
Vuong, Ngoc,Suzuki, Yoshihisa
The paper investigates investor sentiment’s role in boosting Japanese companies to enhance their environmental, social, and corporate governance (ESG) performance. Using ESG scores of 367 firms between 2005 and 2019 from the ASSET4 database, we find that negative sentiment in the previous year, both firm and market level, can be a stimulation for the company’s commitments to its ESG activities next year. Notably, the moderating effect of the business sector and economic cycle on the sentiment-ESG inference are detected in our study differentiating between corporate and market sentiment, which have never been reported before. In detail, we discover that the impact of firm-specific sentiment is less pronounced for high-sensitive ESG firms. On the other hand, the driving force of market sentiment on corporate social behaviors weakens when economic recessions happen. Our results are robust after controlling for potential endogeneity issues and using alternative proxies for market sentiment.

The insider problem in the trinomial model: a discrete-time jump process approach
Hélène Halconruy

In an incomplete market underpinned by the trinomial model, we consider two investors : an ordinary agent whose decisions are driven by public information and an insider who possesses from the beginning a surplus of information encoded through a random variable for which he or she knows the outcome. Through the definition of an auxiliary model based on a marked binomial process, we handle the trinomial model as a volatility one, and use the stochastic analysis and Malliavin calculus toolboxes available in that context. In particular, we connect the information drift, the drift to eliminate in order to preserve the martingale property within an initial enlargement of filtration in terms of the Malliavin derivative. We solve explicitly the agent and the insider expected logarithmic utility maximisation problems and provide a hedging formula for replicable claims. We identify the insider expected additional utility with the Shannon entropy of the extra information, and examine then the existence of arbitrage opportunities for the insider.

XRP Network and Proposal of Flow Index
Aoyama, Hideaki
XRP is a modern crypto-asset (crypto-currency) developed by Ripple Labs, which has been increasing its financial presence. We study its transaction history available as ledger data. An analysis of its basic statistics, correlations, and network properties are presented. Motivated by the behavior of some nodes with histories of large transactions, we propose a new index: the ``Flow Index.'' The Flow Index is a pair of indices suitable for characterizing transaction frequencies as a source and destination of a node. Using this Flow Index, we study the global structure of the XRP network and construct bow-tie/walnut structure.

한국의 í™"폐환상에 관한 연구 (Money Illusion: Evidence from Korea)
Kwon, Ohik,Kim, Kyusik,Hwang, In Do
Korean Abstract: 본고ëŠ" 우리나라 성인ë"¤ì´ í™"폐환상(money illusion)을 지니ëŠ"지 여부를 가계 설문조사를 통하여 검증하였다. í™"폐환상이란 경제주체ë"¤ì´ 물가변동을 고려한 후의 실질가치가 ì•„ë‹Œ í™"폐의 명목가치를 ì¤'심으로 생각하고 판단하ëŠ" 성향을 말한다. 우리나라 성인의 대í'œí'œë³¸(ì „êµ­ 성인 남녀 500명)을 대상으로 검증한 ê²°ê³¼, 기존 문헌의 질문을 이용한 설문조사에서ëŠ" í™"폐환상이 뚜렷이 발견되었다. 즉 일반거래나 주택거래, 금융거래의 손익과 임금 수준을 평가하ëŠ" 데 있어 많은 ì'답자가 실질가격의 ë³€í™"보다 명목가격의 ë³€í™"를 ì¤'시하ëŠ" 것으로 나타났다. 그러나 조금 다른 맥락의 질문을 제시한 경우에ëŠ" í™"폐환상 가설과 부합하지 ì•ŠëŠ" 결과도 나타났다. 즉 명목가격을 명시적으로 제시하지 ì•Šê³ , 인í"Œë ˆì´ì…˜ì´ 발생하ëŠ" 상황에서 앞으로의 투자계획을 ë°"ê¿€ 것인지 질문한 경우에ëŠ" 인í"Œë ˆì´ì…˜ì„ 감안하여 포트폴리오를 조정하겠다ëŠ" 합리적인 ì'답이 많이 나ì™"다. 또한 경제주체가 경험한 인í"Œë ˆì´ì…˜ìœ¨ì´ 낮을수록 í™"폐환상이 ë†'게 나타나ëŠ" ë"± 합리적 무관심(rational inattention) 현상과 부합하ëŠ" 결과도 발견되었다. 아울러 ì'답자ë"¤ì€ í™"폐환상 외에도 손실회í"¼(loss aversion), 준거점 의존성(reference dependence), í"„레이밍 효과(framing effect) ë"± 다ì–'í•œ 행태적 편향(behavioral biases)을 지닌 것으로 나타났다.English Abstract: This paper tests whether Korean households exhibit money illusion by surveying a representative sample of the adult population, 500 men and women living in the nation. Money illusion refers to the tendency to think and assess in terms of nominal monetary values, rather than real values controlling for inflation. When the survey questions from the existing money illusion literature were used, compelling evidence of money illusion was found: A majority of respondents relied on the change in nominal rather than real prices when assessing the profitability of transactions of houses, consumer goods, and financial products. However, evidence inconsistent with the money illusion hypothesis was also found in the answers to questions in a different context where nominal prices were not explicitly presented: When asked whether they would like to change their investment plan in a situation where inflation was present, respondents answered rationally that they would change the investment portfolio in consideration of inflation. We further found evidence consistent with the rational inattention phenomenon?the lower the experienced inflation, the stronger the respondent’s money illusion. In addition, respondents were found to have various behavioral biases other than money illusion, such as loss aversion, reference dependence, and framing effects.