Research articles for the 2021-07-13

A Lucas Critique Compliant SVAR model with Observation-driven Time-varying Parameters
Giacomo Bormetti,Fulvio Corsi

We propose an observation-driven time-varying SVAR model where, in agreement with the Lucas Critique, structural shocks drive both the evolution of the macro variables and the dynamics of the VAR parameters. Contrary to existing approaches where parameters follow a stochastic process with random and exogenous shocks, our observation-driven specification allows the evolution of the parameters to be driven by realized past structural shocks, thus opening the possibility to gauge the impact of observed shocks and hypothetical policy interventions on the future evolution of the economic system.

A Rational Inattention Theory of Echo Chamber
Lin Hu,Anqi Li,Xu Tan

A group of heterogeneous players gathers information about an uncertain state before making decisions. Each player allocates his limited bandwidth between biased sources and the other players, and the resulting stochastic attention network facilitates the transmission of news from sources to him either directly or indirectly through the other players. The limit in the bandwidth leads the player to focus on his own-biased source, resulting in occasional cross-cutting exposures but most of the time a reinforcement of his predisposition. It also confines his attention to like-minded friends who, by attending to the same primary source as his, serve as secondary sources in case the news transmission from the primary source to him is disrupted. A mandate on impartial exposures to all biased sources disrupts echo chambers but entails ambiguous welfare consequences. Inside an echo chamber, even a small amount of heterogeneity between players can generate fat-tailed distributions of public opinion, and factors affecting the visibility of sources and players could have unintended consequences for public opinion and consumer welfare.

A Universal Stress Scenario Approach for Capitalising Non-modellable Risk Factors Under the FRTB
Aichele, Martin,Crotti, Marco Giovanni,Rehle, Benedikt
EU legislators mandated the European Banking Authority to propose a stress scenario methodology for capitalising non-modellable risk factors (NMRF) as foreseen under the Basel Fundamental Review of the Trading Book (FRTB) rules for market risk. In this paper, we present the foundations of such a methodology. By design, it is universally applicable to all kinds of risk factors to which a bank may be exposed, and it caters for a wide range of data availability by adjusting the stress scenario for the number of returns observed in the calibration period. It captures non-linearities in the portfolio loss profile against changes in the NMRF, while reducing the computational effort and being simple. To motivate the values set for some parameters in the methodology, we use a set of skewed generalised ‘t’ (SGT) distributions as a generic tool for describing a wide universe of real historical returns from all asset classes. Finally, we extend the methodology from single risk factors to segments of curves or surfaces as envisaged in the FRTB.

A new firm-level model of corporate sector interactions and fragility: The Corporate Agent-Based (CAB) model
Hillman, Robert,Barnes, Sebastian,Wharf, George,MacDonald, Duncan
This paper develops a new large-scale firm-level simulation model, the Corporate Sector Agent-Based (CAB) Model, which is applied to analyse the COVID-19 shock and policy options in Barnes, Hillman, MacDonald and Wharf (2021). Agent-based models (ABMs) simulate the interaction of autonomous agents to generate emergent aggregate behaviours. The CAB model takes into account: heterogeneity across firms; a realistic customer-supplier network; interactions between firms; rule-of-thumb behaviour by firms and bankruptcy constraints.

Adverse selection in Australian private health insurance
Nguyen, Lan,Worthington, Andrew C.
We assess adverse selection in Australian private health insurance using the longitudinal data in the Household, Income, and Labour Dynamics in Australia (HILDA) Survey. Cross-sectional and balanced panel probit regressions specify the demand for health insurance as a function of self-assessed health condition, health risk factors, and socioeconomic controls including age, income, education, family structure, and welfare status. We find that while adverse selection is present, it has decreased over time, likely through a combination of deliberate government policy and changes in market conditions, combined with the impact of heterogeneous preferences and risk aversion. We also identify a tendency for advantageous selection in the insured pool.

An ICT Framework for Tourism Industry of Nepal: Prospect and Challenges
Shrestha, Deepanjal,Jeong, Seung Ryul
Information and Communication Technology (ICT) has revolutionized the world and has profound impact on the social and economic development of a country. Implementation, practice and accessibility of ICT is viewed as an integral part of any countries’ strategy today. These new technologies are becoming popular due to their ability to produce, distribute and provide instant access to massive information in no time. ICT has pervaded almost every aspect of human endeavor that may include health, education, economics, governance, entertainment etc. Tourism is one such vital industry that find enormous application of ICT in its strategic and operational level, to promise long term benefits and enhance economic growth. Tourism industry in western world and some developed countries of Asia have applied ICT for more than 30 years, and have gained tremendous benefits. Nepal which is also growing as one of the favourite tourist destinations lacks proper implementation of ICT in this industry. In our study we examined how the ICT can play a vital role in developing the tourism industry of Nepal. This study is an exploratory research based on primary data collected from tourist visiting Nepal, supported by information from tour operators, government agencies, NGOs and INGOS. A framework is devised on the basis of data and information collected and finally, discussions elaborate on the prospect and challenges of implementation of ICT in tourism industry of Nepal̀.

Asymmetric Impact of Bitcoin Sentiments on Sectoral Stock Returns
Soomro, Ishfaque Ahmed,Oad Rajput, Suresh Kumar,Anjum, Nadia,Soomro, Najma Ali
This study cross-checks the symmetric and asymmetric effects of investor’s optimistic and pessimistic sentiments of Bitcoin on 23 sectoral stock return indices (10 Islamic stock sectoral indices and one composite Islamic market index by Dow Jones Islamic market and 12 industrial indices by Kenneth R French). Results of Autoregressive Distributed Lag (ARDL) and Nonlinear ARDL models are supporting our conjecture that when investors’ are being optimistic (pessimistic) to Bitcoin they move part of their funds from stocks (Bitcoin) to Bitcoin (stocks). Second, we found asymmetric effects of both sentiment indices on the Islamic stock indices and conventional stock indices. Third, we found support for the decoupling hypothesis as Bitcoin sentiments are affecting conventional stock indices more than Islamic stock indices. Fourth, investors’ optimistic sentiments are robust than pessimistic sentiments explaining sectoral stock return indices. Fifth, insignificance of OBSI and PBSI in most of the sectoral stock indices are evidencing the hedging opportunity for Bitcoin investors.

Attention Winged Deep Neural Early Warning System: How Does it Perform in Signaling Sovereign Crises for China?
Wang, Peiwan,Yang, Yurun,Zong, Lu
This study efforts to construct an effective early warning system (EWS) to predict sovereign crises for China and distinguish different levels of leading determinants, such as macro-economic fundamentals and risk transmission factors, impact significance in signaling the volatility quantified crises. We contribute the literature for predicting the sovereign crisis in three aspects of first defining ‘Chinese-style’ sovereign crisis by referring to the national bond index high volatile state regardless of the subjectivity from rating agency judging and the verbosity from threshold selecting criteria for each determinants, first technically quantifying contagious factors given specific crisis origins by multiplying the SWARCH model estimated high volatility probabilities of contagious sources to the DCC-GARCH model estimated correlation coefficients and first implementing the statistical hypothesis test on stylized attention based neural networks to judge the inferred contributing degree’s credibility. We find the regime classification regime metric is essential to classify crises and in the predictive models horse-race, the attention mechanism based bidirectional LSTM networks outperforms others. For China, the gold price, constant price for real estate in GDP and technically quantified contagious index for between oil and CDB index are top three leading indicators drawn by the attention at appropriate significant levels.

Beta Estimation in New Zealand
Marshall, Ben R.,Nguyen, Nhut H.,Visaltanachoti, Nuttawat
Beta is an important input in the cost of capital calculations. However, it is not directly observable, so an estimate needs to be made. Beta can be easily estimated using simple regression techniques. However, there is evidence that more complex estimation procedures generate superior beta forecasts in international markets. In New Zealand, several betas out-perform OLS betas in a statistical sense. Shrinkage betas perform best generating precision improvements of up to 17% over their OLS counterparts.

CEO Social Minds and Green Loans
Chen, Tao,Lin, Chen,Zhu, Jianfei
We examine the financial and real implications of bank CEOs’ social minds induced by female socialization. We find evidence of an economically sizable and statistically significant bank CEO-daughter effect in lending behaviours, controlling for borrower industry as well as bank characteristics. In specific, the “greenness” of a bank is significantly higher, when the lead bank CEO parents a first-born daughter compared to an otherwise lender. Looking at the specific lending contracts written by banks, we find that lead banks whose CEOs parent a first-born daughter provide loans with lower spread, fewer financial covenants, and less likely to require collateral, for borrowers with better CSR performance. Furthermore, we find that bank CEOs’ parenting experience with first-born daughters would predict borrowing firms’ future CSR performance positively, suggesting banks with CEOs raising a first-born daughter would promote the corporate social activities of borrowers.

Consequences of the Australian Prudential Regulatory Authority’s Investment Performance Tests
Evans, John R.,Razeed, Abdul
The Australian Prudential Regulatory Authority (APRA) has introduced for MySuper products a publicly available comparison of investment performance over three-year rolling periods and will be introducing a similar longer-term comparison under the Your Future Your Super Performance Test. The investment performance will be compared to a reference portfolio. This paper considers the effect of holding illiquid assets and “active” investment management as part of a superannuation fund portfolio and concludes the APRA tests may have undesirable consequences for superannuation fund members.

Corporate Governance: Joining the Dots between Institutional Reform, Organisational Change and Firm Performance
Alajmi, Abdullah,Worthington, Andrew C.
Purpose â€" Examine the link between boards and audit committees and firm performance in Kuwaiti listed firms in the context of recent and extensive corporate governance regulatory reform. Design/methodology/approach â€" Panel data regression analysis with fixed effects and clustered standard errors of firm performance for 62â€"95 listed industrial and services firms in Kuwait over the period 2010â€"2017. The dependent variables are the returns on assets and equity, the debt to equity ratio and leverage and Tobin’s Q and the independent variables comprise board of directors and audit committee characteristics, including size, the number of meetings, and the numbers of independent and outside board and expert committee members. Firm size, subsidiary status, and cash flow serve as control variables.Findings â€" Mixed results with respect to the characteristics of the board of directors. Board size and independent and outsider board members positively relate only to Tobin’s Q and insiders only to debt to equity. For audit committee characteristics, committee size, independence and expertise positively relate to the return on equity and committee size and expertise only to Tobin’s Q. Of the five performance measures considered, board and audit committee characteristics together best determine Tobin’s Q.Research limitations/implications â€" Data from a single country limits generalisability and control variables necessarily limited in a developing market context. Need for qualitative insights into corporate governance reform as a complement to conventional quantitative analysis. In combining accounting and market information, Tobin’s Q appears best able to recognise the performance benefits of good corporate governance in terms of internal organisational change.Practical implications â€" The recent corporate governance code and guidelines reforms exert a mixed impact on firm performance, with audit committees not boards apparently of most influence. But recent reforms implied most change to boards of directors. One suggestion is that nonmarket reform may have been unneeded given existing market pressure on listed firms and firms anticipating regulatory change.Social implications â€" Kuwait’s corporate governance reforms likely codified corporate governance practices already in place among many of its firms in pursuit of organisational legitimacy, and while invoking substantial change to audit committees, ultimately involved little change to firm performance, at least in the short term. Some firms may also have delisted in expectation of stronger corporate governance requirements. Regardless, these direct and indirect processes both improved the overall quality of listed firm corporate governance and performance in Kuwait.Originality/value â€" Seminal analysis of corporate governance reforms in Kuwait, which have rapidly progressed from no corporate governance code and guidelines to an initially voluntary and then compulsory regime. Only known analysis to incorporate both board of directors and audit committee characteristics. Reveals that studies of the corporate governanceâ€"firm performance relationship may face difficulty in model specification, and ultimately empirical significance, given the complexity of corporate governance codes and guidelines, leads in changing firm behaviour, and self-selection of firms into and out of regulated markets.

Cost, Uncertainties and Profit in Commercial and Social Insurances
Mehedi Nizam, Ahmed
Here, we argue that the commercial for-profit insurance companies act more like a memory-less system in a way that the premiums paid by the policy holders during one accounting period will be of no avail to them during subsequent periods although the excess premiums earned in the previous periods may rest in the companies' retained earnings. Moreover, commercial insurances are subject to many over-head costs, taxations and uncertainties which are not present in the realm of social insurances. As the costs and uncertainties are greatly reduced and the profits earned in the previous periods are available to meet present and future expenditures, social insurances entail a lower amount of premium for the policy holders than its conventional commercial counterpart. The objective of this study is to quantify the extent of profit made by the commercial insurance companies born out of the premium after meeting up operating expenditures and claim settlements and how this profit evolves over time after being invested at the risk free rate. To us, this is the amount of money that would otherwise rest in a trust fund available for future claim settlement if there were equivalent social insurance schemes in place. To do so, we collect annual country level data of premium collection, claim settlement and operating expenditure incurred for 04 (four) OECD countries from OECD insurance database and extrapolate the profit trends into the future using appropriate ARIMA/ARIMA-GARCH framework. As anticipated, the profit shows an explicit upward trend after making a V-shaped recovery right after the global financial crisis of 2008.

Dynamic Spending Responses to Wealth Shocks: Evidence from Quasi-lotteries on the Stock Market
Andersen, Asger Lau,Johannesen, Niels,Sheridan, Adam
How much and over what horizon do households adjust their consumption in response to stock market wealth shocks? We address these questions using granular data on spending and stock portfolios from a large bank and exploiting lottery-like variation in gains across investors with similar portfolio characteristics. Consistent with the permanent income hypothesis, spending responses to stock market gains are immediate and persistent. The responses cumulate to a marginal propensity to consume of around 4% over a one-year horizon. The estimates differ substantially by household liquidity, but not by financial attention, as measured by the frequency of account logins.

Dynamics of the market states in the space of correlation matrices with applications to financial markets
Hirdesh K. Pharasi,Suchetana Sadhukhan,Parisa Majari,Anirban Chakraborti,Thomas H. Seligman

The concept of states of financial markets based on correlations has gained increasing attention during the last 10 years. We propose to retrace some important steps up to 2018, and then give a more detailed view of recent developments that attempt to make the use of this more practical. Finally, we try to give a glimpse to the future proposing the analysis of trajectories in correlation matrix space directly or in terms of symbolic dynamics as well as attempts to analyze the clusters that make up the states in a random matrix context.

E-Learning and its Socioeconomics
Avni Singh

While controversial, e-learning has become an essential tool for all kinds of education: especially within the kindergarten-to-twelfth sector. However, pockets of this sector lack access, mainly economically underserved students. This paper explores the options available to underserved and aptly resourced members of the kindergarten-to-twelfth educational sector: a 250-million-person market, with only 9 million students enrolled in online education. The paper also provides a brief overview of the options and challenges of making e-learning available to everyone in the kindergarten-to-twelfth educational sector. To establish whether e-learning is beneficial, it also discusses the results of a survey conducted on students and educators who have experienced e-learning, with the results showing that it is beneficial, with a general trend of teachers showing more comfort with online learning than students. The paper utilizes primary and secondary resources for this purpose, with information both from the internet, and from surveys conducted within people from the system: parents, students, and teachers.

Economic development and the structure of cross-technology interactions
Anton Bondarev,Frank C. Krysiak

Most explanations of economic growth are based on knowledge spillovers, where the development of some technologies facilitates the enhancement of others. Empirical studies show that these spillovers can have a heterogeneous and rather complex structure. But, so far, little attention has been paid to the consequences of different structures of such cross-technology interactions: Is economic development more easily fostered by homogenous or heterogeneous interactions, by uni- or bidirectional spillovers? Using a detailed description of an r&d sector with cross-technology interactions embedded in a simple growth model, we analyse how the structure of spillovers influences growth prospects and growth patterns. We show that some type of interactions (e.g., one-way interactions) cannot induce exponential growth, whereas other structures can. Furthermore, depending on the structure of interactions, all or only some technologies will contribute to growth in the long run. Finally, some spillover structures can lead to complex growth patterns, such as technology transitions, where, over time, different technology clusters are the main engine of growth.

Equal Treatment of Shareholders under the Dual Class Share Structure: Recent Development of Takeover Rules in Singapore
You, Chuanman
On 24 January 2019, a revised Singapore Code on Take-overs and Mergers (the Take-overs Code) was promulgated by the Monetary Authority of Singapore (MAS) on the advice of the Securities Industry Council (the SIC).The revisions are to ensure that takeover practices targeting at companies with the dual class share (DCS) structures are conducted in compliance with the principle of equal treatment of all shareholders. The key amendments are two-fold: (a) expanding the application of mandatory offer and its dispensation to target companies with the DCS structures. (b) clarifying the fair pricing norms for multiple classes of equity share capital of target companies with the DCS structures.The revisions feature several new Notes implementing the mandatory offer rule in the complex context of listed companies of DCS structures. These additional Notes provide greater certainty to market participants and potential business transactions. They reaffirm the fundamental principle that all shareholders, controlling or minority, multiple votes or one vote, shall be given the equal and fair opportunity to access the extra premium paid for the private benefits of control. This regulatory development manifests the policy preference towards a strong shareholder protection in Singapore. It has been positively accepted by the market for corporate control, as evidenced by respondents’ endorsement to the consultation paper. Such a regulatory update also projects transnational implications to other jurisdictions which have recently incorporated the DCS structure. For example, on 30 April 2018, the Hong Kong Exchanges and Clearing Limited (HKEX) added a new chapter to the Main Board Listing Rules for weighted voting rights listings. The Codes on Takeovers and Mergers and Share Buy-backs have yet to been amended in the HK. Given the affinity of takeover rules between Hong Kong and Singapore, the recent revisions of Singaporean Take-over Code will be a valuable reference for the future amendments to the HK Take-over Codes.

Fair Value of Earnouts: Valuation Uncertainty or Cookie Jar Reserve?
Ferguson, Andrew,Hu, Wei,Lam, Peter
This study investigates the economic consequences of fair value disclosure of earnouts required by IFRS 3 (2008). Due to the counterintuitive income statement effects of accounting for changes in financial liabilities, acquirers are likely to overstate earnout liabilities, with a reversal of unpaid earnout liability recorded as a fair value gain over the earnout period. Using a sample of completed acquisitions by Australian firms over 2001â€"2017, we find evidence of managerial opportunism in earnout accounting. We show that the enactment of IFRS 3 (2008) is associated with a significant increase in the frequency and magnitude of earnouts in public acquirers’ transactions. In addition, firms with higher leverage, greater operating cash flow, and lower profitability are more likely to overstate earnout liabilities, while high-quality auditors help curtail such reporting discretion. Further, we do not observe a mechanical relation between the reversal of earnout liability and goodwill impairment. Overall, we highlight an unintended consequence of fair value accounting on earnout contracting and acquirers’ financial reporting.

Financial Markets and Carbon Dioxide Emissions
Marshall, Ben R.,Nguyen, Nhut H.,Visaltanachoti, Nuttawat
This report considers the impact of carbon dioxide (CO2) emissions on financial markets. The following questions are addressed:• Should CO2 emissions impact stock returns?• Do CO2 emissions impact stock returns?• Should CO2 emissions impact bond yields and do they?• What are the implications of CO2 emissions for asset management?

Forest for the Trees: Aren’t Directors Responsible for Disclosures in Prospectuses?
Low, Chee Keong,Low, Tak Hay
China Forestry Holdings Company Limited raised some HK$1.68 billion, or approximately US$214.8 million, from its listing on the Main Board of the Stock Exchange of Hong Kong in December 2009. However, just over a year later, trading in its shares was suspended on discovery of serious accounting irregularities which led to its eventual winding-up and the delisting of its shares in June 2015 and February 2017 respectively.For their respective failures in discharging their duties as sponsors for the listing, UBS AG and Standard Chartered Securities (Hong Kong) Limited were reprimanded and fined by the Hong Kong Securities and Futures Commission. Yet, rather inexplicably, no action appears to have been taken to hold some of the directors who authorised the prospectus accountable. This article avers that such inaction does not bode well for the development of the capital markets in Hong Kong as it ignores the important gate keeping role assumed by all directors during the initial public offering process when substantial funds are raised from the public.

Geometric insights into robust portfolio construction with gearing
Lara Dalmeyer,Tim Gebbie

We investigate and extend the results of Golts and Jones (2009) that an alpha-weight angle resulting from unconstrained quadratic portfolio optimisations has an upper bound dependent on the condition number of the covariance matrix. This implies that better conditioned covariance matrices produce weights from unconstrained mean-variance optimisations that are better aligned with each assets expected return. We provide further clarity on the mathematical insights that relate the inequality between the $\alpha$-weight angle and the condition number and extend the result to include portfolio optimisations with gearing constraints. We provide an extended family of robust optimisations that include the gearing constraints, and discuss their interpretation.

How do Suppliers Benefit from Customers’ Voluntary Disclosure? The Effect of Customers’ Earnings Guidance on Upstream Firms’ Investment Efficiency
Chiu, Peng-Chia,Jiu, Lili,Yu, Po-Hsiang
We explore whether and how the issuance of customers’ financial forward-looking information affects the investment efficiency of their upstream firms. Using earnings guidance as a proxy for forward-looking information, we find that firms wherein customers disclose earnings forecasts invest more efficiently than those where customers withhold forward-looking information. Our findings hold after controlling for a set of firm characteristics, employing alternative model specifications and measurements, and using the 2011 Thailand flood as a quasi-experiment. Further analyses offer support that the positive impact of customers’ earnings guidance on upstream firms’ investment efficiency is stronger for customers issuing more informative, disaggregated, and accurate forecasts and suppliers with weaker bargaining power. We also observe an asymmetric response of suppliers’ investments toward customers’ good-news versus bad-news forecasts. Furthermore, by conducting a textual-based analysis, we find that suppliers’ investment efficiency increases with more embedded supply chain relevant information in customers’ earnings guidance reports. Overall, our findings suggest that suppliers benefit from customers’ earnings guidance to better assess their investment decisions, thereby achieving greater investment efficiency.

Information Disclosure and Financial Fragility
Huang, Xuesong
I study how banks and other financial intermediaries can use information disclosure to prevent self-fulfilling bank runs. I begin with a finite-agent version of Diamond and Dybvig (1983) with correlated liquidity shocks and sequential service. I allow the intermediary to inform each investor about the withdrawal decisions of previous investors. Adding information disclosure creates a withdrawal game with sequential signaling, and I argue using examples that it is natural to introduce an equilibrium concept placing restrictions on agents’ off equilibrium beliefs. I use the concept of forward induction equilibrium (Cho, 1987) that generalizes the “intuitive” criterion. I provide conditions under which the induced withdrawal game has a unique forward induction equilibrium and no bank run occurs. In other words, disclosing withdrawal information can promote financial stability.

Inside Debt and Shadow Banking
Deng, Kebin,Ge, Wenxia,He, Jing
This study examines the effect of inside debt arising from CEO compensation deferral policies on shadow banking. We construct a parsimonious model that shows that increased bank inside debt leads to increased shadow banking. Using a CEO compensation deferral policy imposed on the Chinese banking industry in 2010, we empirically test our theoretical prediction on the effect of inside debt on shadow banking proxied by non-principal-guaranteed wealth management products. We find that banks that adopt the CEO compensation deferral policy exhibit higher levels of shadow banking than their counterparts and that this result is not contingent on bank size or the extent of government control. Moreover, the effect of inside debt on shadow banking is stronger in banks with higher loan-to-deposit and non-performing-loan ratios and in banks with CEO turnover, suggesting that the compensation deferral policy induces CEOs, especially newly appointed CEOs, to do more shadow banking to circumvent regulations regarding the balance-sheet risk and to boost performance.

Micro-level dynamics in hidden action situations with limited information
Stephan Leitner,Friederike Wall

The hidden-action model provides an optimal sharing rule for situations in which a principal assigns a task to an agent who makes an effort to carry out the task assigned to him. However, the principal can only observe the task outcome but not the agent's actual action. The hidden-action model builds on somewhat idealized assumptions about the principal's and the agent's capabilities related to information access. We propose an agent-based model that relaxes some of these assumptions. Our analysis lays particular focus on the micro-level dynamics triggered by limited information access. For the principal's sphere, we identify the so-called Sisyphus effect that explains why the optimal sharing rule can generally not be achieved if the information is limited, and we identify factors that moderate this effect. In addition, we analyze the behavioral dynamics in the agent's sphere. We show that the agent might make even more of an effort than optimal under unlimited information, which we refer to as excess effort. Interestingly, the principal can control the probability of making an excess effort via the incentive mechanism. However, how much excess effort the agent finally makes is out of the principal's direct control.

Moral Hazard in Ancillary Private Health Insurance in Australia
Nguyen, Lan,Worthington, Andrew C.
We assess moral hazard in Australian ancillary or extras (nonhospital) private health insurance (PHI) relating to dental care services using the longitudinal data in the Household, Income and Labour Dynamics in Australia (HILDA) Survey. Cross-sectional probit regressions specify dental care (the most important expenditure component of ancillary cover) as a function of endogenous PHI policy holding, self-assessed health condition, health risk factors and socioeconomic controls including age, income, education, family structure and welfare status. We find that moral hazard is present resulting in the possible overuse of dental care services by PHI holders, bearing in mind this is overuse in relative rather than absolute terms. However, we also find using dynamic analysis that while there is no evidence of pent-up demand (previously uninsured policyholders accessing more dental care services initially) any sort of PHI holding, however sporadic, is always associated with significantly more likely use of dental care services than persons that have never held PHI. This supports the role of PHI in fostering good health care behavior and possibly countering ex ante moral hazard.

Mortality and Healthcare: a Stochastic Control Analysis under Epstein-Zin Preferences
Joshua Aurand,Yu-Jui Huang

This paper studies optimal consumption, investment, and healthcare spending under Epstein-Zin preferences. Given consumption and healthcare spending plans, Epstein-Zin utilities are defined over an agent's random lifetime, partially controllable by the agent as healthcare reduces mortality growth. To the best of our knowledge, this is the first time Epstein-Zin utilities are formulated on a controllable random horizon, via an infinite-horizon backward stochastic differential equation with superlinear growth. A new comparison result is established for the uniqueness of associated utility value processes. In a Black-Scholes market, the stochastic control problem is solved through the related Hamilton-Jacobi-Bellman (HJB) equation. The verification argument features a delicate containment of the growth of the controlled morality process, which is unique to our framework, relying on a combination of probabilistic arguments and analysis of the HJB equation. In contrast to prior work under time-separable utilities, Epstein-Zin preferences facilitate calibration. The model-generated mortality closely approximates actual mortality data in the US and UK; moreover, the efficacy of healthcare can be calibrated and compared between the two countries.

Multiplicative Error Models: 20 years on
Fabrizio Cipollini,Giampiero M. Gallo

Several phenomena are available representing market activity: volumes, number of trades, durations between trades or quotes, volatility - however measured - all share the feature to be represented as positive valued time series. When modeled, persistence in their behavior and reaction to new information suggested to adopt an autoregressive-type framework. The Multiplicative Error Model (MEM) is borne of an extension of the popular GARCH approach for modeling and forecasting conditional volatility of asset returns. It is obtained by multiplicatively combining the conditional expectation of a process (deterministically dependent upon an information set at a previous time period) with a random disturbance representing unpredictable news: MEMs have proved to parsimoniously achieve their task of producing good performing forecasts. In this paper we discuss various aspects of model specification and inference both for the univariate and the multivariate case. The applications are illustrative examples of how the presence of a slow moving low-frequency component can improve the properties of the estimated models.

Ownership Structure, Corporate Governance Reform and Firm Performance in Kuwait
Alajmi, Abdullah,Worthington, Andrew C.
This paper examines the link between ownership structure and firm performance in Kuwaiti firms in the context of recent corporate governance reform. Panel data robust regressions of firm performance against ownership structure specify variously the former using the returns on assets and equity, the debt to equity ratio, leverage, and Tobin’s Q and the latter as family, government and local and foreign institutional ownership. We find family ownership has the most influence on firm performance followed by government ownership, but disproportionately to their actual shares of ownership. Importantly, corporate governance reform appears to have had little effect in moving to a first voluntary then compulsory corporate governance code and guidelines, suggesting many firms had either adopted good governance principles under market pressure or exited the industry in anticipation of the more stringent regulatory controls.

Qualitative insights into corporate governance reform, management decision-making, and accounting performance Semi-structured interview evidence
Alajmi, Abdullah,Worthington, Andrew C.
Purpose â€" To enhance our understanding of the relations between corporate governance reform, management decision-making, and firm accounting performance in Kuwait by focusing on the role of important but difficult to quantitatively measure factors, including culture, religion, tribal, and political circumstances.Design/methodology/approach â€" The analysis of data collected using semi-structured interviews using coding and quoting approaches. The coding approach categorises the responses into themes and sub-themes and the quoting approach adds depth to this categorisation. We interpret the results in the context of related studies concerning the factors affecting the corporate governanceâ€"firm performance relationship.Findings â€" A range of external cultural factors, including religion, politics, and Kuwait’s tribal system, along with economic and financial circumstances and accounting standards, influence the corporate governanceâ€"firm performance relationship in Kuwait. The in-depth semi-structured interviews reveal the incentives for shareholders and managers to achieve high firm performance through good corporate governance, but especially for better-performing firms. Suggestion of broad support by firm managers and directors for recent reforms concerning Kuwait’s corporate governance code and guidelines.Research limitations/implications â€" Qualitative research provides additional insights into the traditionally quantitative analysis of the corporate governanceâ€"firm performance relationship. It is particularly useful into developing market contexts where data is limited and regulatory frameworks are undergoing rapid change.Practical implications â€" The findings are of value to domestic and international investors gauging investment risk, firm managers operating within a growing and developing but still traditional market, and regulators seeking ongoing improvements in corporate governance, including disclosure, openness, and transparency.Originality/value â€" This is the first study to apply qualitative methods to the analysis of the corporate governanceâ€"firm performance relationship in Kuwait, particularly in light of recent and extensive corporate governance reform.

Quantitative Easing and Credit Rating Agencies
Abidi, Nordine,Falagiarda, Matteo,Miquel-Flores, Ixart
This paper investigates the behaviour of credit rating agencies using a natural experiment in monetary policy. We exploit the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. We show that after the launch of the policy, rating activity was concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Our findings contribute to better assessing the consequences of the explicit reliance on CRAs ratings by central banks when designing monetary policy. They also support the Covid-19 monetary stimulus, and in particular the waiver of private credit rating eligibility requirements applied to recently downgraded issuers.

Sissy That Walk: Transportation to Work by Sexual Orientation
Sonia Oreffice,Dario Sansone

We analyze differences in mode of transportation to work by sexual orientation, using the American Community Survey 2008-2019. Individuals in same-sex couples are significantly less likely to drive to work than men and women in different-sex couples. This gap is particularly stark among men: on average, almost 12 percentage point (or 13%) lower likelihood of driving to work for men in same-sex couples. Individuals in same-sex couples are also more likely to use public transport, walk, or bike to work: on average, men and women are 7 and 3 percentage points more likely, respectively, to take public transportation to work than those in different-sex couples. These differences persist after controlling for demographic characteristics, partner's characteristics, location, fertility, and marital status. Additional evidence from the General Social Survey 2008-2018 suggests that these disparities by sexual orientation may be due to lesbian, gay, and bisexual individuals caring more for the environment than straight individuals.

Systematic Risk, Creditor Protection and Leverage â€" A Cross-Country Analysis
Heinze, Marcel,Hertel, Tobias,Lange, Marc
The influence of systematic risk exposure on corporate financing decisions is receiving increasing attention in the empirical capital structure research. While most recent studies of the US-market show, that systematic risk (measured with asset beta) affects corporate capital structure decisions, little is known about cross-country differences regarding this relationship. In this paper we use institutional factors that represent the protection of creditors to explore the interaction effects between country-specific factors and asset beta on financing decisions. Our findings indicate, that (i) on average, firms with higher asset beta use less debt, (ii) the protection of creditor rights mitigate the negative impact of asset beta on leverage, (iii) the negative effect of asset beta on leverage is more pronounced for firms with higher levels of leverage and (iv) that especially in countries with weak protection of creditor rights, firms with high asset beta choose less leverage in economic downturns.

Target Leverage and Leverage Deviation in Corporate Spin-Offs
Heinze, Marcel
This paper examines the role of target leverage and deviation from target leverage in corporate spin-offs. Using the setting of corporate spin-offs as large disinvestment projects, I examine if managers of firms follow target capital structures. I show that the changes in target leverage of spin-off parents triggered by the spin-off are not addressed by corresponding changes in actual leverage. In contrast, firms that are spun off (subsidiaries) address changes in target leverage in the years after completion through corresponding capital structure adjustments. Furthermore, I investigate which firm-specific determinants explain the leverage deviation of parents and subsidiaries at the first fiscal year end (FYE) after completion, extending the pre-vious literature by distinguishing between overleveraged and underleveraged firms. For par-ents, profitability has a positive impact on the leverage deviation. For subsidiaries, growth opportunities have a negative impact on the (absolute) leverage deviation. I also examine the impact of the parent's (subsidiaries') leverage deviation immediately before the spin-off announcement (immediately after spin-off completion) and find that firms with high (absolute) leverage deviation reduce their leverage deviation in the following years. This effect is most pronounced for overleveraged subsidiaries. Finally, I investigate the impact of the leverage deviation on announcement returns. The announcement of overleveraged parents conducting an unrelated spin-off leads to negative capital market reactions. In contrast, positive reactions are observed for parents with a high (absolute) leverage deviation when they announce the spin-off of a subsidiary which operates in an industry with high growth opportunities.

The climate in climate economics
Doris Folini,Felix Kübler,Aleksandra Malova,Simon Scheidegger

We develop a generic calibration strategy for climate models used in economics. The key idea is to choose the free model parameters to match the output of large-scale Earth System Models, which are run on pre-defined future emissions scenarios and collected in the Coupled Model Intercomparison Project (CMIP5). We propose to use four test cases that are considered pivotal in the climate science literature. Two of these tests are highly idealized to allow for the separate examination of the carbon cycle and the temperature response. Another two tests incorporate gradual changes in CO2 emissions, exogenous forcing, and the temperature response. We re-calibrate the free parameters of the climate part of the seminal DICE-2016 model for three different CMIP5 model responses: the multi-model mean as well as two other CMIP5 models that exhibit extreme equilibrium climate sensitivities. As an additional novelty, our calibrations of DICE-2016 allow for an arbitrary time step in the model explicitly. We show that i) both the temperature equations and the carbon cycle in DICE-2016 are miscalibrated and that ii) by re-calibrating its coefficients, we can match all three CMIP5 targets. We apply the economic model from DICE-2016 in combination with the newly calibrated climate model to compute the social cost of carbon and the optimal warming. We find that in our updated model, the social cost of carbon is very similar to DICE-2016, however, the optimal long-run temperature lies almost one degree below that obtained by DICE-2016. This difference in climate behavior is reflected in the over-sensitivity of the social cost of carbon to the discount rate. Under the optimal mitigation scenario, the temperature predictions of DICE-2016 (in contrast to our proposed calibration) fall outside of the CMIP5 scenarios, suggesting that one might want to be skeptical about policy predictions derived from DICE-2016.

The hedging-based utility risk measure
Dong, Linjia,Yang, Zhaojun
FinTech makes numerous financial products accessible to common investors but up to now, there is no risk measure method specially customized for common investors instead of financial institutions which are generally too big to fail. This paper develops a hedging-based utility risk measure (HBU) theory. We show that HBU is a convex risk measure and if the utility has a constant relative risk aversion coefficient, HBU is also coherent. Roughly speaking, HBU is the opposite of a generalized utility indifference price. HBU depends on claimants' utility and the hedging instruments accessible to them and thus it is a personal (subjective) risk measure especially suitable for common investors who need to have a comprehensive risk evaluation of a financial product.

The impact of COVID-19 on corporate fragility in the United Kingdom: Insights from a new calibrated firm-level Corporate Sector Agent-Based (CAB) Model
Barnes, Sebastian,Hillman, Robert,Wharf, George,MacDonald, Duncan
Covid-19 and the associated restrictions on interaction have led to an unprecedented shock to activity and firms' balance sheets. To assess the impact, this paper applies a new large-scale firm-level simulation model calibrated to the United Kingdom (UK). The paper specifically examines the Coronavirus Job Retention Scheme (CJRS) furlough program and a credit guarantee.The Corporate Sector Agent-Based (CAB) Model (Hillman, Barnes, Wharf and MacDonald, 2021) takes into account: heterogeneity across firms; interactions between firms across a realistic customer-supplier network; and rule-of-thumb behaviour by firms and bankruptcy constraints. The model amplifies the effect of shocks and generates substantial persistence and overshooting, as well as displaying a number of non-linearities. The CAB uses a data-rich approach based on ORBIS firm-level data and the OECD Input-Output tables. Simulations in this paper are calibrated to the observed path of UK output in 2020.

Transnational Migration of Laws and Norms in Corporate Governance: Fiduciary Duties and Corporate Codes
Hill, Jennifer G.
This paper explores the intersection of transnational law with contemporary corporate governance laws and principles. Transnational law, it must be said, is a far from settled concept. There is uncertainty as to what the term actually means, and how it differs from other concepts, such as national legal ordering or global law. For early theorists, the essence of transnational law was whether it regulated conduct or events that crossed national boundaries. More recent scholarship, however, has focused not on what is being regulated, but rather on how laws and norms are transmitted between supranational and local levels.Corporate governance, with its complex array of public and private actors, fits naturally within the modern conception of transnational law as a species of law that “can no longer be viewed through a purely national lens”. Financial markets today are global and interconnected and events, such as the 2007-2009 global financial crisis and the current COVID-19 crisis, exemplify the risk of contagion across those markets.Not only can corporate governance problems transcend national boundaries, so too can their solutions, which often involve regulatory efforts that operate at a transnational level. In this environment, the corporation has taken on a greater societal role. Indeed, according to The British Academy’s influential Future of the Corporation project, the main purpose of business today is “to solve the problems of people and planet profitably”.This paper explores, from a transnational perspective, the transmission of laws and norms that are designed to constrain directors’ conduct and enhance corporate accountability. It focuses on two key examples of such accountability mechanisms â€"fiduciary duties and corporate codes.The paper begins with a comparative and historical examination of directors’ fiduciary duties in the United States, the United Kingdom and Australia, analyzing the extent to which the transfer of fiduciary law to these common law jurisdictions has resulted in a unified approach to directors’ duties, as is often assumed by studies such as the law matters hypothesis. The paper then moves on to discuss the modern phenomenon of codes, such as corporate governance codes and shareholder stewardship codes. Corporate codes originated in the United Kingdom in the early 1990s, but have subsequently spread throughout the world. The paper explores the global transmission of these codes, which constitute powerful “norm creators”. The rise of corporate codes epitomizes the fact that transnational legal ordering occurs “multi-directionally and recursively up from and down to the national and local levels”. It also demonstrates the importance of “who writes the rules”, because this can affect the substance of those rules and result in significant divergence between national codes.The paper assesses these various developments against the backdrop of convergence and path dependence theories in corporate governance.

US Inflation and Global Asset Returns
Dai, Wei,Medhat, Mamdouh
We study the relation between US inflation and the performance of global asset classes (including bonds, stocks, industry portfolios, factor premiums, commodities, and REITs), both over a long sample period (1927â€"2020) and over the most recent 30 years (1991â€"2020). We find that most assets had positive average real returns in both low- and high-inflation years. While average real returns were lower in years with higher inflation for most assets, many of the differences are not statistically reliable, especially among non-bond assets and in more recent times. We also find mostly weak correlations over time between nominal returns and inflation, including contemporaneous, lagged, expected, and unexpected inflation. The notable exceptions are energy stocks and commodities, where there are reliably positive correlations with both expected and unexpected inflation, but our results also suggest both assets are too volatile to be an effective inflation hedge. Our results confirm the potential of most asset classes to outpace inflation over the long term and suggest that, for investors prioritizing the preservation of purchasing power, inflation-indexed securities may be a more appropriate inflation hedge than commonly suggested alternatives.

What Can Volatility Smiles Tell Us About the Too Big to Fail Problem?
Ngo, Phong T. H.,Puente-Moncayo, Diego
We exploit the information content of option prices to construct a novel measure of bank tail-risk. We document a persistent increase in tail-risk for the U.S. banking industry following the global financial crisis, except for banks designated as systemically important by the Dodd-Frank Act. We show that this post-crisis difference in tail-risk for large and small banks is consistent with the too-big-to-fail (TBTF) status of large banks being reinforced by the Dodd-Frank designation: Naming the banks whose failure could threaten the financial stability of the U.S. gave investors a list of banks the government deemed as TBTF.