Research articles for the 2021-07-14

A General Approach for Parisian Stopping Times under Markov Processes
Gongqiu Zhang,Lingfei Li

We propose a method based on continuous time Markov chain approximation to compute the distribution of Parisian stopping times and price Parisian options under general one-dimensional Markov processes. We prove the convergence of the method under a general setting and obtain sharp estimate of the convergence rate for diffusion models. Our theoretical analysis reveals how to design the grid of the CTMC to achieve faster convergence. Numerical experiments are conducted to demonstrate the accuracy and efficiency of our method for both diffusion and jump models. To show the versality of our approach, we develop extensions for multi-sided Parisian stopping times, the joint distribution of Parisian stopping times and first passage times, Parisian bonds and for more sophisticated models like regime-switching and stochastic volatility models.

A Theory of Debt Accumulation and Deficit Cycles
Mele, Antonio
This paper introduces a tractable model of sovereign debt where governments cannot default strategically, but face intertemporal tradeoffs between (i) preferring more primary deficits to less and (ii) avoiding costly defaults. Governments run deficits when debt and, then, the marginal costs of increasing debt are low. However, after an extended period of debt accumulation, default probabilities begin to rise quickly, and so do the marginal costs of running debt. Eventually, debt reaches a critical level relative to the size of the economy, a fiscal tipping point, after which debt accumulation stops, with governments cycling between deficits and surpluses, until perhaps a time of default. The main conclusions are that (i) fiscal tipping points typically occur when distance-to-default is between 10% and 20%; (ii) tipping points are pushed back in a stable macroeconomic environment, such that default premiums are higher in countries that implement austerity earlier and remain positive even when exogenous risk is very small (two "volatility paradoxes"); (iii) liquidity conditions and fiscal reforms may affect default probabilities in an ambiguous way; (iv) fiscal austerity may arrive too late: "debt intolerance" arises around the fiscal tipping point.

A Unified Formula of the Optimal Portfolio for Piecewise HARA Utilities
Zongxia Liang,Yang Liu,Ming Ma

We propose a general family of piecewise hyperbolic absolute risk aversion (PHARA) utility, including many non-standard utilities as examples. A typical application is the composition of an HARA preference and a piecewise linear payoff in hedge fund management. We derive a unified closed-form formula of the optimal portfolio, which is a four-term division. The formula has clear economic meanings, reflecting the behavior of risk aversion, risk seeking, loss aversion and first-order risk aversion. One main finding is that risk-taking behaviors are greatly increased by non-concavity and reduced by non-differentiability.

A decision support tool for ship biofouling management in the Baltic Sea
Emilia Luoma,Mirka Laurila-Pant,Elias Altarriba,Inari Helle,Lena Granhag,Maiju Lehtiniemi,Greta Srėbalienė,Sergej Olenin,Annukka Lehikoinen

Biofouling of ships causes major environmental and economic consequences all over the world. In addition, biofouling management of ship hulls causes both social, environmental and economic risks that should all be considered reaching well-balanced decisions. In addition, each case is unique and thus optimal management strategy must be considered case-specifically. We produced a novel decision support tool using Bayesian networks to promote the comprehensive understanding about the complex biofouling management issue in the Baltic Sea and to identify potential management options and their consequences. The tool compares the biofouling management strategies in relation to NIS (non-indigenous species) introduction risk, eco-toxicological risk due to biocidal coating, carbon dioxide emissions resulting from fuel consumption and costs related to fuel consumption, in-water cleaning and coating. According to the results, the optimal biofouling management strategy would consist of a biocidal-free coating with regular in-water cleaning and with devices collecting the material. However, the best biocidal-free coating type and the optimal in-water cleaning interval varies and depends e.g. on the operational profile of the ship. The decision support tool can increase the multi-perspective understanding about the issue and support the implementation of the optimal biofouling management strategies in the Baltic Sea.

Arbitrage-free pricing of CVA for cross-currency swap with wrong-way risk under stochastic correlation modeling framework
Ashish Kumar,Laszlo Markus,Norbert Hari

A positive correlation between exposure and counterparty credit risk gives rise to the so-called Wrong-Way Risk (WWR). Even after a decade of the financial crisis, addressing WWR in both sound and tractable ways remains challenging. Academicians have proposed arbitrage-free set-ups through copula methods but those are computationally expensive and hard to use in practice. Resampling methods are proposed by the industry but they lack mathematical foundations. The purpose of this article is to bridge this gap between the approaches used by academicians and industry. To this end, we propose a stochastic correlation approach to asses WWR. The methods based on constant correlation to model the dependency between exposure and counterparty credit risk assume a linear dependency, thus fail to capture the tail dependence. Using a stochastic correlation we move further away from the Gaussian copula and can capture the tail risk. This effect is reflected in the results where the impact of stochastic correlation on calculated CVA is substantial when compared to the case when a high constant correlation is assumed between exposure and credit. Given the uncertainty inherent to CVA, the proposed method is believed to provide a promising way to model WWR.

Are Stock Buybacks Crowding Out Real Investment? Empirical Evidence from U.S. Firms
Turco, Enrico Maria
We investigate the role of financialization in the decline of investment for U.S. non-financial firms from 1992 - 2017. We show that the tendency to maximize shareholder value, fuelled by stock-based manager compensation, has led U.S. firms to divert resources from real investment to share repurchases to increase stock prices. Using micro-data from U.S. firms balance sheets and manager compensation, we estimate two dynamic panel data models: (i) to analyze the effects of share repurchases on capital investment; (ii) to examine the interaction between stock-based CEO pay and the likelihood of share repurchases. We find that stock buybacks have a negative effect on capital investment with this effect being stronger among large firms, operating in non-competitive markets. Moreover, an increase in stock options make firms more likely to repurchase shares. Our findings suggest that stock-based compensation creates incentives for managers to focus on increasing shareholder value by repurchasing shares at the cost of declining real investment and long-run growth.

Bail-in and Bank Funding Costs
Cerasi, Vittoria,Paola, Galfrascoli
We empirically evaluate the impact of the new resolution policy, the so-called Bank Recovery and Resolution Directive (BRRD) enacted in 2016, on the cost of funding for EU banks. We first measure the change in the spreads of credit default swaps on subordinated and senior bonds issued by EU banks around the period when the policy became effective and provide evidence of a greater increase in the risk premia of more junior bail-in-able bonds than for senior bonds. We then investigate the reasons for the different intensities by which this policy has affected the banks in our sample. We uncover specific characteristics of banks and macroeconomic factors to explain this heterogeneity. Banks with more problematic loans, that are less capitalized, and that are headquartered in countries with a higher risk premium on sovereign debt have experienced a greater rise in the cost of their funds; conversely, larger banks with a greater proportion of domestic over total subsidiaries were less affected. Moreover, we show that the low-interest-rate environment has increased the riskiness of all the banks in our sample. Overall, our paper provides evidence that market discipline has been reinforced by the adoption of the BRRD.

Bank Compensation for Penalty-Free Loan Prepayment: Theory and Tests
Eckbo, B. Espen,Su, Xunhua,Thorburn, Karin S.
While institutional tranches in term loans typically include a cancellation fee, commercial banks allow penalty-free prepayment in 90% of their tranche-A loan facilities. We show that compensating banks for a penalty-free prepayment option by raising the initial loan rate increases the prepayment risk and may result in credit rationing. However, combining a lower loan rate with an upfront fee allows the bank to break even. Empirically, upfront fees increase in prepayment risk and are lower in credit lines and performance-sensitive debt, as predicted. Moreover, high industry merger intensity, which exogenously increases prepayment risk, further raises the upfront fee.

Bank Runs, Bank Competition and Opacity
Ahnert, Toni,Martinez-Miera, David
We model the opacity and deposit rate choices of banks that imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. We show how shocks that increase bank competition or bank transparency increase deposit rates, costly withdrawals, and thus bank fragility. Therefore, perfect competition is not socially optimal. We also propose a theory of bank opacity. The cost of opacity is more withdrawals from a solvent bank, lowering bank profits. The benefit of opacity is to deter the entry of a competitor, increasing future bank profits. The excessive opacity of incumbent banks rationalizes transparency regulation.

Best Short
Della Corte, Pasquale ,Kosowski, Robert,Rapanos, Nikolaos
based on aggregate short interest. Its profitability, moreover, cannot be explained by transaction costs, stock characteristics, frictions in the securities lending market, leverage constraints, and measures of price inefficiency.

Butterfly Implied Returns
Wu, Di
For each S&P 500 stock, I calculate the rolling correlation between the VIX and the premium of butterfly at different strikes. The butterfly that co-moves most positively with VIX reveals the expectation of the stock’s return in the future market crash. I call this return the Butterfly Implied Return (BIR). I construct a new strategy by shorting the vulnerable stocks with low BIR and longing the resilient stocks with high BIR. Over the sample period from 1996 to 2019, this strategy earns a statistically significant alpha, ranging from 0.26% to 0.35% per month relative to various factor models. Building on BIR, I construct a value weighted average called the Butterfly Implied Return of the Market (BIRM) which measures the severity of the future market crash. I show that BIRM is an important determinant of the time varying equity risk premium.

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.

Care-Dependent Tontines
Chen, An,Chen, Yusha,Xu, Xian
With the gradual deepening of aging, the medical and pension problems of the half-disabled and disabled elderly will become increasingly prominent. Policymakers, academics, and the public at large shed extensive concerns about the cost of aging societies. Although long-term care (LTC) insurance comes up as one of the solutions, private LTC does not perform well in the market. The combination of tontines with long-term care contingency stands out as an alternative to attract participants. In this article, we propose two ways of designing the care-dependent tontines: (i) all the insured members are considered to be in one pool; (ii) at each time t, we allocate them into two groups: the healthy and the severely sick. We find out the optimal payment structures of the care-dependent tontine as well as the care-dependent annuity that maximize the policyholder’s expected lifetime utility. Based on data from China Health and Retirement Longitudinal Study (CHARLS), we theoretically and numerically compare the different care-dependent products in consideration with an actuarially fair premium. Results imply that the care-dependent annuity is the most attractive one. However, when we take account of the risk charges to further compare the products, we find that both care-dependent tontines present as better choices of policyholders in comparison with care-dependent annuities. Moreover, two-pool care-dependent tontines draw attractions to the policyholder with a smaller risk aversion coefficient, while one-pool care-dependent tontines are more appealing to the more risk-averse policyholders.

Central Bank Policy and the Concentration of Risk: Empirical Estimates
Coimbra, Nuno,Kim, Daisoon,Rey, Hélène
Before the 2008 crisis, the cross-sectional skewness of banks' leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks' risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.

Change in Systemic Risk in Indian Financial Market due to COVID-19 Pandemic
Jha, Chandramani,Goel, Utkarsh
This paper used an economic model of systemic risk given by Acharya (2016) to measure the state of systemic risk in Indian financial market during COVID-19 Pandemic. It is based on marginal expected shortfall (MES), the likelihoods of a financial firm to be undercapitalized when the financial system as a whole is undercapitalized. The paper empirically measures the MES of financial firms of NIFTY 50 for pre-COVID year 2019-20 and COVID year2020-21 and found that the undercapitalization of Indian financial firm has increased 3 fold during COVID-19 Pandemic ensuing systemic risk has been increased during COVID-19 year to pre-COVID year. The result is also supported by daily stock return correlations of financial firms which is a simple and robust indicator of systemic risk. It has been found that the correlations of financial firm stock returns among themselves and market index as well is increased during COVID-19 pandemic that led to rise in systemic risk. Higher correlations among financial firms are a prerequisite for systemic failure.

Clustering and attention model based for Intelligent Trading
Mimansa Rana,Nanxiang Mao,Ming Ao,Xiaohui Wu,Poning Liang,Matloob Khushi

The foreign exchange market has taken an important role in the global financial market. While foreign exchange trading brings high-yield opportunities to investors, it also brings certain risks. Since the establishment of the foreign exchange market in the 20th century, foreign exchange rate forecasting has become a hot issue studied by scholars from all over the world. Due to the complexity and number of factors affecting the foreign exchange market, technical analysis cannot respond to administrative intervention or unexpected events. Our team chose several pairs of foreign currency historical data and derived technical indicators from 2005 to 2021 as the dataset and established different machine learning models for event-driven price prediction for oversold scenario.

Comparing Intellectual property policy in the Global North and South -- A one-size-fits-all policy for economic prosperity?
Madhumitha Raghuraman,Malavika Ranjan,S Sidhartha Narayan

This paper attempts to analyse policymaking in the field of Intellectual Property (IP) as an instrument of economic growth across the Global North and South. It begins by studying the links between economic growth and IP, followed by an understanding of Intellectual Property Rights (IPR) development in the US, a leading proponent of robust IPR protection internationally. The next section compares the IPR in the Global North and South and undertakes an analysis of the diverse factors that result in these differences. The paper uses the case study of the Indian Pharmaceutical Industry to understand how IPR may differentially affect economies and conclude that there may not yet be a one size fits all policy for the adoption of Intellectual Property Rights.

Contract Length and Severance Pay
Vladimirov, Vladimir
Renewable fixed-term contracts are widespread in executive compensation. This paper studies why these contracts are optimal, what determines their length, and how that length affects managerial behavior. The model relates a contract's length to the period during which dismissing a manager triggers severance pay. Though longer contracts are more costly to terminate, their severance protection can discourage managers from trying to avoid replacement through window dressing or concealing soft information. Thus, the board's choice of contract length balances higher replacement costs with a higher likelihood of window dressing. The predicted determinants of contract length and severance pay are supported empirically.

Correlation scenarios and correlation stress testing
N. Packham,F. Woebbeking

We develop a general approach for stress testing correlations of financial asset portfolios. The correlation matrix of asset returns is specified in a parametric form, where correlations are represented as a function of risk factors, such as country and industry factors. A sparse factor structure linking assets and risk factors is built using Bayesian variable selection methods. Regular calibration yields a joint distribution of economically meaningful stress scenarios of the factors. As such, the method also lends itself as a reverse stress testing framework: using the Mahalanobis distance or highest density regions (HDR) on the joint risk factor distribution allows to infer worst-case correlation scenarios. We give examples of stress tests on a large portfolio of European and North American stocks.

Creating Controversy in Proxy Voting Advice
Malenko, Andrey,Malenko, Nadya,Spatt, Chester S.
The quality of proxy advisors' voting recommendations is important for policymakers and industry participants. We analyze the design of recommendations (available to all market participants) and research reports (available only to subscribers) by a proxy advisor, whose objective is to maximize its profits from selling information to shareholders. We show that even if all shareholders' interests are aligned and aim at maximizing firm value, the proxy advisor benefits from biasing its recommendations against the a priori more likely alternative. Such recommendations "create controversy" about the vote, increasing the probability that the outcome is close and raising each shareholder's willingness to pay for advice. In contrast, it serves the interest of the proxy advisor to make private research reports unbiased and precise. Our results help reinterpret empirical patterns of shareholders' voting behavior.

Credit Risk and the Life Cycle of Callable Bonds: Implications for Corporate Financing and Investing
Becker, Bo,Campello, Murillo,Thell, Viktor,Yan, Dong
Call provisions allow bond issuers to redeem their bonds early. While commonly observed, existing research offers limited insight into the purpose of this contract feature. We show that bond callability is designed to mitigate agency problems, with call features and execution being determined by credit spreads and issuer quality. Callable bonds have significantly higher yields and lower secondary market prices than non-callable bonds ("cost of callability"). Issuers call bonds when their credit quality improves. We provide novel evidence that callability reduces debt overhang affecting decisions ranging from capital investment to takeovers. Our results help explain the prevalence of call features and suggest that callability improves economic efficiency.

Currency Hedging: Managing Cash Flow Exposure
Alfaro, Laura,Calani, Mauricio,Varela, Liliana
Foreign currency derivative markets are among the largest in the world, yet their role in emerging markets is relatively understudied. We study firms' currency risk exposure and their hedging choices by employing a unique dataset covering the universe of FX derivatives transactions in Chile since 2005, together with firm-level information on sales, international trade, trade credits and foreign currency debt. We uncover four novel facts: (i) natural hedging of currency risk is limited, (ii) financial hedging is more likely to be used by larger firms and for larger amounts, (iii) firms in international trade are more likely to use FX derivatives to hedge their gross -not net- cash currency risk, and (iv) firms are more likely to pay higher premiums for longer maturity contracts. We then show that financial intermediaries can affect the forward exchange rate market through a liquidity channel, by leveraging a regulatory negative supply shock that reduced firms' use of FX derivatives and increased the forward premiums.

Deep Hedging: Learning Risk-Neutral Implied Volatility Dynamics
Hans Buehler,Phillip Murray,Mikko S. Pakkanen,Ben Wood

We present a numerically efficient approach for learning a risk-neutral measure for paths of simulated spot and option prices up to a finite horizon under convex transaction costs and convex trading constraints. This approach can then be used to implement a stochastic implied volatility model in the following two steps: 1. Train a market simulator for option prices, as discussed for example in our recent; 2. Find a risk-neutral density, specifically the minimal entropy martingale measure. The resulting model can be used for risk-neutral pricing, or for Deep Hedging in the case of transaction costs or trading constraints. To motivate the proposed approach, we also show that market dynamics are free from "statistical arbitrage" in the absence of transaction costs if and only if they follow a risk-neutral measure. We additionally provide a more general characterization in the presence of convex transaction costs and trading constraints. These results can be seen as an analogue of the fundamental theorem of asset pricing for statistical arbitrage under trading frictions and are of independent interest.

Dissecting Green Returns
Pastor, Lubos,Stambaugh, Robert F.,Taylor, Lucian A.
Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed their higher-yielding non-green twins as the ``greenium'' widened, and U.S. green stocks outperformed brown as climate concerns strengthened. To show the latter, we construct a theoretically motivated green factor---a return spread between environmentally friendly and unfriendly stocks---and find that its positive performance disappears without climate-concern shocks. The factor lags those shocks, curiously, by about a month. A theory-driven two-factor model featuring the green factor explains much of the recent underperformance of value stocks.

Do Data Breaches Damage Reputation? Evidence from 45 Companies Between 2002 and 2018
Makridis, Christos
While data breaches have become more common, there is little evidence that companies that incur them experience a persistent decline in financial performance or security prices. Using new firm-level data between 2002 and 2018, this paper finds that firms experience a 26-29% increase in intangible capital following an average data breach. However, the largest and most salient breaches are associated with a 5-9% decline in intangible capital following a data breach. These effects are concentrated among firms in consumer-facing industries: smaller (larger) data breaches are associated with more positive (negative) effects on intangible capital. These results suggest that current regulatory guidance may not provide complete incentives for firms to invest in cybersecurity capabilities, particularly for small to medium size breaches.

Do Managers Voluntarily Disclose to Guide Themselves Through Policy Uncertainty? A Managerial Learning Perspective
Fox, Zackery D.,Kim, Jaewoo,Schonberger, Bryce
We examine whether economic policy uncertainty (EPU) encourages managers to issue voluntary disclosures to facilitate learning from stock prices regarding investment decisions. We find that EPU is positively associated with subsequent capital expenditure (capex) forecast issuance. Consistent with a learning channel, we find that this relation is pronounced when potential investments are irreversible, when managers are less informed regarding potential policy changes, and in the presence of politically-connected institutional ownership in the firm’s equity. We also find our results are robust to addressing omitted variable bias when using the 2016 presidential election and the 2018-19 U.S.â€"China trade dispute as shocks to specific sources of policy uncertainty. Further consistent with managers learning from price reactions, we find that realized capital expenditures are significantly adjusted in the direction of market reactions to capex forecasts, particularly during periods of elevated EPU, and that these market-related capital expenditure adjustments are positively associated with future firm performance. Finally, we provide evidence that the effect of EPU on capex forecasts appears distinct from an information asymmetry channel through which prior studies link voluntary disclosures to policy uncertainty. Overall, we document managerial learning as a novel voluntary disclosure incentive in response to policy uncertainty.

Do the Effects of Individual Behavioral Biases Cancel Out?
Bhamra, Harjoat Singh,Uppal , Raman
A major criticism of behavioral economics is that it has not shown that the idiosyncratic biases of individual investors lead to aggregate effects. We construct a model of a general-equilibrium production economy with a large number of firms and investors. Investors' beliefs about stock returns are determined endogenously based on their psychological distances from firms; consequently, investors are optimistic about some stocks and pessimistic about others. We consider two examples: one where portfolio errors cancel out and the other in which the behavioral biases cancel out when aggregated across investors. We show asset prices and macroeconomic aggregates are still distorted.

Dollar and Exports
Bruno, Valentina,Shin, Hyun Song
The strength of the US dollar has attributes of a barometer of dollar credit conditions, whereby a stronger dollar is associated with tighter dollar credit conditions. Using finely disaggregated data on export shipments, we examine how dollar strength impacts exports through the availability of dollar financing for working capital - an issue of importance due to the greater working capital needs for exports arising from longer supply chains and greater delay in receiving payments. We find that exporters who are reliant on dollar-funded bank credit suffer a decline in exports, and that this decline is larger than any decline in domestic sales. Our findings shed light on the broad dollar index as a global financial factor with real effects on the economy.

Epidemic Exposure, Fintech Adoption, and the Digital Divide
Aksoy, Cevat,Eichengreen, Barry,Saka, Orkun
We ask whether epidemic exposure leads to a shift in financial technology usage within and across countries and if so who participates in this shift. We exploit a dataset combining Gallup World Polls and Global Findex surveys for some 250,000 individuals in 140 countries, merging them with information on the incidence of epidemics and local 3G internet infrastructure. Epidemic exposure is associated with an increase in remote-access (online/mobile) banking and substitution from bank branch-based to ATM-based activity. Using a machine-learning algorithm, we show that heterogeneity in this response centers on the age, income and employment of respondents. Young, high-income earners in full-time employment have the greatest propensity to shift to online/mobile transactions in response to epidemics. These effects are larger for individuals in subnational regions with better ex ante 3G signal coverage, highlighting the role of the digital divide in adaption to new technologies necessitated by adverse external shocks.

Equity Premium Predictability Over the Business Cycle
Moench, Emanuel,Stein, Tobias
strengthens, outperforming other recently proposed benchmark predictors.

Financial Architecture and Financial Stability
Allen, Franklin,Walther, Ansgar
This paper studies the links between financial stability and the architecture of financial systems. We review the existing literature and provide organizing frameworks for analyzing three empirically important aspects of financial architecture: The rise of non-bank financial intermediaries, the regulatory response to these structural changes, and the emergence of complex interbank networks. One of our main new results is a necessary and sufficient condition for whether non-bank intermediaries are immune to runs in an extended version of the Diamond-Dybvig model.

Financial Return Distributions: Past, Present, and COVID-19
Marcin Wątorek,Jarosław Kwapień,Stanisław Drożdż

We analyze the price return distributions of currency exchange rates, cryptocurrencies, and contracts for differences (CFDs) representing stock indices, stock shares, and commodities. Based on recent data from the years 2017--2020, we model tails of the return distributions at different time scales by using power-law, stretched exponential, and $q$-Gaussian functions. We focus on the fitted function parameters and how they change over the years by comparing our results with those from earlier studies and find that, on the time horizons of up to a few minutes, the so-called "inverse-cubic power-law" still constitutes an appropriate global reference. However, we no longer observe the hypothesized universal constant acceleration of the market time flow that was manifested before in an ever faster convergence of empirical return distributions towards the normal distribution. Our results do not exclude such a scenario but, rather, suggest that some other short-term processes related to a current market situation alter market dynamics and may mask this scenario. Real market dynamics is associated with a continuous alternation of different regimes with different statistical properties. An example is the COVID-19 pandemic outburst, which had an enormous yet short-time impact on financial markets. We also point out that two factors -- speed of the market time flow and the asset cross-correlation magnitude -- while related (the larger the speed, the larger the cross-correlations on a given time scale), act in opposite directions with regard to the return distribution tails, which can affect the expected distribution convergence to the normal distribution.

From Carbon-transition Premium to Carbon-transition Risk
Suryadeepto Nag,Siddhartha P. Chakrabarty,Sankarshan Basu

Investor awareness about impending regulations requiring firms to reduce their carbon footprint has introduced a carbon transition risk premium in the stocks of firms. On performing a cross-section analysis, a significant premium was estimated among large caps in the US markets. The existence of a risk premium indicates investor awareness about future exposure to low-carbon transition. A new measure, the Single Event Transition Risk (SETR), was developed to model the maximum exposure of a firm to carbon transition risk, and a functional form for the same was determined, in terms of risk premia. Different classes of distributions for arrival processes of transition events were considered and the respective SETRs were determined and studied. The trade-off between higher premia and higher risks was studied for the different processes, and it was observed that, based on the distributions of arrival times, investors could have a lower, equal or higher probability of positive returns (from the premium-risk trade-off), and that despite a fair pricing of the carbon premium, decisions by investors to take long or short positions on a stock could still be biased.

In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis
Gabaix, Xavier,Koijen, Ralph S. J.
Our framework allows us to give a dynamic economic structure to old and recent datasets comprising holdings and flows in various segments of the market. The mystery of apparently random movements of the stock market, hard to link to fundamentals, is replaced by the more manageable problem of understanding the determinants of flows in inelastic markets. We delineate a research agenda that can explore a number of questions raised by this analysis, and might lead to a more concrete understanding of the origins of financial fluctuations across markets.

Information Frictions and Firm Take Up of Government Support: A Randomised Controlled Experiment
Custodio, Claudia,Hansman, Chris,Mendes, Diogo
This paper studies whether informational frictions prevent firms from accessing government support measures using an encouragement based randomized controlled trial. We focus on two COVID-19 relief programs for firms in Portugal. These programs provide (i) wage support for workers who are kept on payroll and (ii) lines of credit backed by government guarantees. We randomly assign firms to a treatment providing either simplified information regarding the program or a combination of information and step-by-step application support. We find a significant treatment effect of simple information provision to firms on take up for the wage support program, but not for lines of credit. Our results constitute direct evidence that information frictions can act as a meaningful barrier to comprehensive distribution of firm-level support measures.

Information Technology and Bank Competition
Vives, Xavier,Ye, Zhiqiang
We consider a spatial model of bank competition to study how the development and diffusion of information technology affect competition in the lending market, stability of the banking sector, and social welfare. We find that the effects of an overall improvement in information technology depend on whether or not it weakens the influence of bankâ??borrower distance on monitoring/screening costs. If so, then competition intensifies and banks are less stable; otherwise, competition intensity does not vary and banks are more stable. In line with recent empirical evidence, we find that a technologically more advanced bank always commands greater market power and is more stable. The welfare effect of progress in information technology is ambiguous when such progress increases the intensity of competition. However, if banks have local monopolies then technological progress always improves social welfare.

Insurance Companies and the Propagation of Liquidity Shocks to the Real Economy
Liu, Yubo,Rossi, Stefano,Yun, Hayong
We study the role of insurance companies in propagating liquidity shocks to the real economy. We use natural disasters as our instrument to identify exogenous shifts in capital-market liquidity, and study whether capital-market liquidity affects regional-level fiscal conditions and output. Aggregate disaster-driven bonds sales of disaster-unaffected municipal bonds by exposed insurers cause low GDP growth and high unemployment. In micro data, natural disasters trigger large, unexpected redemptions of property-insurance contracts, causing: fire sales of municipal bonds; increased borrowing costs in primary markets; decreased muni issuance; lower investment in muni-reliant sectors. Therefore, insurance companies do propagate liquidity shocks to the real economy.

Interest Rate Skewness and Biased Beliefs
Bauer, Michael,Chernov, Mikhail
Conditional yield skewness is an important summary statistic of the state of the economy. It exhibits pronounced variation over the business cycle and with the stance of monetary policy, and a tight relationship with the slope of the yield curve. Most importantly, variation in yield skewness has substantial forecasting power for future bond excess returns, high-frequency interest rate changes around FOMC announcements, and consensus survey forecast errors for the ten-year Treasury yield. The COVID pandemic did not disrupt these relations: historically high skewness correctly anticipated the run-up in long-term Treasury yields starting in late 2020. The connection between skewness, survey forecast errors, excess returns, and departures of yields from normality is consistent with a theoretical framework where one of the agents has biased beliefs.

Intraday Timing of General Collateral Repo Markets
Clark, Kevin,Copeland, Adam,Kahn, Robert Jay,Martin, Antoine,Paddrik, Mark,Taylor, Benjamin
Market participants have often noted that general collateral (GC) repo trades happen very early in the morning, with most activity being completed soon after markets open at 7 a.m. Data on intraday repo volumes timing are not publicly available however, obscuring those dynamics to outside observers. In this post, we use confidential data collected by the Office of Financial Research (OFR) to describe the intraday timing dynamics of GC repo in the interdealer market. We demonstrate that a significant majority of interdealer overnight Treasury repo is completed prior to 8:30 a.m. (all times Eastern time), and explore the various factors that are driving repo traders to secure funding in the early morning.

Is There Too Much Benchmarking in Asset Management?
Kashyap, Anil K.,Kovrijnykh, Natalia,Li, Jian,Pavlova, Anna
Fund managers' portfolios are unobservable and they incur private costs in running them. Conditioning managers' compensation on a benchmark portfolio's performance partially protects them from risk, and thus boosts their incentives to invest in risky assets. In general equilibrium, these compensation contracts create an externality through their effect on asset prices. Benchmarking inflates asset prices and gives rise to crowded trades, thereby reducing the effectiveness of incentive contracts for others. Contracts chosen by fund investors diverge from socially optimal ones. A social planner, recognizing the crowding, opts for less benchmarking and less incentive provision. We also show that asset management costs are lower with socially optimal contracts, and the planner's benchmark-portfolio weights differ from the privately optimal ones. Finally, we consider an application of our model to ESG (environmental, social, and governance) investing and show that optimal incentive provision for fund managers should include ESG-tilted benchmarks.

Law-invariant functionals that collapse to the mean: Beyond convexity
Felix-Benedikt Liebrich,Cosimo Munari

We establish general "collapse to the mean" principles that provide conditions under which a law-invariant functional reduces to an expectation. In the convex setting, we retrieve and sharpen known results from the literature. However, our results also apply beyond the convex setting. We illustrate this by providing a complete account of the "collapse to the mean" for quasiconvex functionals. In the special cases of consistent risk measures and Choquet integrals, we can even dispense with quasiconvexity. In addition, we relate the "collapse to the mean" to the study of solutions of a broad class of optimisation problems with law-invariant objectives that appear in mathematical finance, insurance, and economics. We show that the corresponding quantile formulations studied in the literature are sometimes illegitimate and require further analysis.

Life-Cycle Risk-Taking with Personal Disaster Risk
Bagliano, Fabio C.,Fugazza, Carolina,Nicodano, Giovanna
This paper examines households' self-insurance in financial markets when a rare personal disaster, such as disability or long-term unemployment, may occur during working years. Personal disaster risk alters lifetime ex-ante investment choices, even if most workers will not experience a disaster. Uncertainty about the size of human capital losses, which characterizes rare disasters, results in lower risk-taking at the beginning of working life, and is crucial in order to match the observed age profiles of US investors from 1992 to 2016.

Manufacturing Risk-Free Government Debt
Jiang, Zhengyang,Lustig, ,Van Nieuwerburgh, Stijn,Xiaolan, Mindy Z.
Governments face a trade-off between insuring bondholders and insuring taxpayers against output shocks. If they insure bondholders by manufacturing risk-free zero-beta debt, then they can only provide limited insurance to taxpayers. Taxpayers will pay more taxes in bad times regardless of whether output shocks are permanent or temporary. Permanent shocks impute long-run output risk to the debt while transitory shocks impute interest rate risk, all of which must be offset through taxation to keep the debt safe. Conversely, if governments insure taxpayers against adverse macro shocks, then the debt becomes risky. Convenience yields on government debt temporarily alleviate the trade-off.

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

Marxism, Logic and the Rate of Profit
Robin Hirsch

It is argued that Marxism, being based on contradictions, is an illogical method. More specifically, we present a rejection of Marx's thesis that the rate of profit has a long-term tendency to fall.

Master Limited Partnership Research in Accounting, Economics, and Finance
Mandell, Aaron
I review the research on master limited partnerships (“MLPs”) in the accounting, economics, and finance literature. I begin by outlining the scope of the review and providing a brief background on the structure, taxation, and governance of master limited partnerships. Next, I describe the various sources from which MLP data is derived. I then review the research, aggregating it into four broad categories: (1) taxes and organizational form; (2) taxes, capital structure, and payout policy; (3) valuation; and (4) governance research. Within each section, I present possible avenues for future research in accounting, economics, and finance.

Mussa Puzzle Redux
Itskhoki, Oleg,Mukhin, Dmitry
The Mussa (1986) puzzle is the observation of a sharp and simultaneous increase in the volatility of both nominal and real exchange rates following the end of the Bretton Woods System of pegged exchange rates in 1973. It is commonly viewed as a central piece of evidence in favor of monetary non-neutrality because it is an instance in which a change in the monetary regime caused a dramatic change in the equilibrium behavior of a real variable (the real exchange rate) and is often further interpreted as direct evidence in favor of models with nominal rigidities in price setting. This paper shows that the data do not support this latter conclusion because there was no simultaneous change in the properties of the other macro variables, nominal or real. We show that an extended set of Mussa facts equally falsifies both conventional flexible-price RBC models and sticky-price New Keynesian models as explanations for the Mussa puzzle. We present a resolution to the broader Mussa puzzle based on a model of segmented financial market - a particular type of financial friction by which the bulk of the nominal exchange rate risk is held by financial intermediaries and is not shared smoothly throughout the economy. We argue that rather than discriminating between models with sticky versus flexible prices, or monetary versus productivity shocks, the Mussa puzzle provides sharp evidence in favor of models with monetary non-neutrality arising in the financial market, suggesting the importance of monetary transmission via the risk premium channel.

Numerical approximation of hybrid Poisson-jump Ait-Sahalia-type interest rate model with delay
Emmanuel Coffie

While the original Ait-Sahalia interest rate model has been found considerable use as a model for describing time series evolution of interest rates, it may not possess adequate specifications to explain responses of interest rates to empirical phenomena such as volatility 'skews' and 'smiles', jump behaviour, market regulatory lapses, economic crisis, financial clashes, political instability, among others collectively. The aim of this paper is to propose a modified version of this model by incorporating additional features to collectively describe these empirical phenomena adequately. Moreover, due to lack of a closed-form solution to the proposed model, we employ several new truncated EM techniques to numerically study this model and justify the scheme within Monte Carlo framework to compute some financial quantities such as a bond and a barrier option.

On the short term stability of financial ARCH price processes
Gilles Zumbach

For many financial applications, it is important to have reliable and tractable models for the behavior of assets and indexes, for example in risk evaluation. A successful approach is based on ARCH processes, which strike the right balance between statistical properties and ease of computation. This study focuses on quadratic ARCH processes and the theoretical conditions to have a stable long-term behavior. In particular, the weights for the variance estimators should sum to 1, and the variance of the innovations should be 1. Using historical data, the realized empirical innovations can be computed, and their statistical properties assessed. Using samples of 3 to 5 decades, the variance of the empirical innovations are always significantly above 1, for a sample of stock indexes, commodity indexes and FX rates. This departure points to a short term instability, or to a fast adaptability due to changing conditions. Another theoretical condition on the innovations is to have a zero mean. This condition is also investigated empirically, with some time series showing significant departure from zero.

Out with the New, in with the Old? Bank Supervision and the Composition of Firm Investment
Ampudia, Miguel,Beck, Thorsten,Popov, Alexander A.
increase tangible assets and cash holdings. These effects do not pre-date the supervisory reform, do not obtain in non-SSM jurisdictions, and coincide with reductions in long-term debt and labor productivity. The reallocation of investment away from intangible assets is stronger in innovation-intensive sectors, suggesting that centralized bank supervision can slow down the shift from the capital-based to the knowledge-based economy.

Peso Problems in the Estimation of the C-Capm
Parra-Alvarez, Juan Carlos,Posch, Olaf,Schrimpf, Andreas
analytically how the problem of biased estimates can be avoided in empirical research by resolving the misspecification in moment conditions.

Quick or Broad Patents? Evidence from U.S. Startups
Hegde, Deepak,Ljungqvist, Alexander,Raj, Manav
We study the effects of patent scope and review times on startups and externalities on their rivals. We leverage the quasi-random assignment of U.S. patent applications to examiners and find that grant delays reduce a startup's employment and sales growth, chances of survival, access to external capital, and future innovation. Delays also harm the growth, access to external capital, and follow-on innovation of the patentee's rivals, suggesting that quick patents enhance both inventor rewards and generate positive externalities. Broader scope increases a startup's future growth (conditional on survival) and innovation but imposes negative externalities on its rivals' growth.

Risk Classification in Insurance Markets with Risk and Preference Heterogeneity
Farinha Luz, Vitor,Gottardi, Piero,Moreira, Humberto
This paper studies a competitive model of insurance markets in which consumers are privately informed about their risk and risk preferences. We provide a tractable characterization of equilibria, which depend non-trivially on consumers' type distribution, a desirable feature for policy analysis. The use of consumer characteristics for risk classification is modeled as the disclosure of a public informative signal. A novel monotonicity property of signals is shown to be necessary and sufficient for their release to be welfare improving for almost all consumer types. We also study the effect of changes to the risk distribution in the population as the result of demographic changes or policy interventions. When considering the monotone likelihood ratio ordering of distributions, an increase in the risk distribution leads to lower utility for almost all consumer types. In contrast, the effect is ambiguous when considering the first order stochastic dominance ordering.

Shareholder Liability and Bank Failure
Aldunate, Felipe,Jenter, Dirk,Korteweg, Arthur G.,Koudijs, Peter
Does enhanced shareholder liability reduce bank failure? We compare the performance of around 4,200 state-regulated banks of similar size in neighboring U.S. states with different liability regimes during the Great Depression. The distress rate of limited liability banks was 29% higher than that of banks with enhanced liability. Results are robust to a diff-in-diff analysis incorporating nationally-regulated banks (which faced the same regulations everywhere) and are not driven by other differences in state regulations, Fed membership, local characteristics, or differential selection into state-regulated banks. Our results suggest that exposing shareholders to more downside risk can successfully reduce bank failure.

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 and No-Dividend Stocks
Atmaz, Adem,Basak, Suleyman
significant. We also find that no-dividend stocks command lower mean returns but have higher return volatilities and higher market betas than comparable dividend-paying stocks, consistently with empirical evidence. We provide straightforward intuition for all these results and the underlying economic mechanisms at play.

Systemic Risk and Monetary Policy: The Haircut Gap Channel of the Lender of Last Resort
Jasova, Martina,Laeven, Luc,Mendicino, Caterina,Peydró, José-Luis,Supera, Dominik
without LOLR access, to increase bank bond holdings. Finally, LOLR revives bank bond issuance associated with higher haircut gaps.

The Anatomy of Cyber Risk
Jamilov, Rustam,Rey, Hélène,Tahoun, Ahmed
firms and show that our indices can predict future cyberattacks. Cyber risk exposure has significant direct and contagion effects on stock returns. Finally, there is a factor structure in our firm-level measures and shocks to the common factor are priced.

The Benefits of Access: Evidence from Private Meetings with Portfolio Firms
Becht, Marco,Franks, Julian R.,Wagner, Hannes F.
We analyze the monitoring efforts of a large active asset manager that involve high-level private meetings with portfolio firms that are unobservable to outsiders. Our analysis reveals the inner workings of the asset management organization based on detailed records of contacts with executives and board members of portfolio firms, internal analyst recommendations, voting decisions, and daily fund-level stock holdings. Private meetings generate pronounced trading patterns, with fund managers trading on and around meeting days and votes. Our results show that engagement with target firms generates insights and information advantages, increases trading and is associated with significant abnormal returns.

The Best Way to Select Features? Comparing MDA, LIME, and SHAP
Man, Xin,Chan, Ernest
Feature selection in machine learning is subject to the intrinsic randomness of the feature selection algorithms (e.g., random permutations during MDA). The stability of selected features with respect to such randomness is essential to the human interpretability of a machine learning algorithm. The authors propose a rank-based stability metric called the instability index to compare the stabilities of three feature selection algorithmsâ€"MDA, LIME, and SHAPâ€"as applied to random forests. Typically, features are selected by averaging many random iterations of a selection algorithm. Although the variability of the selected features does decrease as the number of iterations increases, it does not go to zero, and the features selected by the three algorithms do not necessarily converge to the same set. LIME and SHAP are found to be more stable than MDA, and LIME is at least as stable as SHAP for the top-ranked features. Hence, overall, LIME is best suited for human interpretability. However, the selected set of features from all three algorithms significantly improves various predictive metrics out of sample, and their predictive performance does not differ significantly. Experiments were conducted on synthetic datasets, two public benchmark datasets, an S&P 500 dataset, and on proprietary data from an active investment strategy.

The Infinite Horizon Investment-Consumption Problem for Epstein-Zin Stochastic Differential Utility
David Hobson,Martin Herdegen,Joseph Jerome

In this article we consider the optimal investment-consumption problem for an agent with preferences governed by Epstein-Zin stochastic differential utility who invests in a constant-parameter Black-Scholes-Merton market.

The paper has three main goals: first, to provide a detailed introduction to infinite-horizon Epstein-Zin stochastic differential utility, including a discussion of which parameter combinations lead to a well-formulated problem; second, to prove existence and uniqueness of infinite horizon Epstein-Zin stochastic differential utility under a restriction on the parameters governing the agent's risk aversion and temporal variance aversion; and third, to provide a verification argument for the candidate optimal solution to the investment-consumption problem among all admissible consumption streams.

To achieve these goals, we introduce a slightly different formulation of Epstein-Zin stochastic differential utility to that which is traditionally used in the literature. This formulation highlights the necessity and appropriateness of certain restrictions on the parameters governing the stochastic differential utility function.

The Information Quality of Complex Financial Reports: Evidence from Filing Returns and Insider Trades
Chang, Hyun Woong,Duellman, Scott,Klaus, J. Philipp,Marquardt, Blair B.
Standard setters have expressed concern over the impact of complex accounting standards on the information gap between firm insiders and financial statement users. We address this issue by examining the relationship between accounting reporting complexity (ARC) and the market response to earnings surprises at the financial report filing. We document a weaker earnings response coefficient for increasing ARC, consistent with less market reliance on complex financial reports. We then examine whether ARC is associated with executives’ ability to trade based on their residual information advantage. Consistent with this expectation, we document higher returns to executives on trades executed in the sixty days following the report filing. The higher returns are concentrated in the trades of the CEO and CFO, who likely have a more profound knowledge of U.S. GAAP. Finally, we identify decreasing earnings persistence for increasing ARC as an underlying mechanism for these effects.

The Market for CEOS
Cziraki, Peter,Jenter, Dirk
We study the market for CEOs of large publicly-traded US firms, analyze new CEOs' prior connections to the hiring firm, and explore how hiring choices are determined. Firms are hiring from a surprisingly small pool of candidates. More than 80% of new CEOs are insiders, defined as current or former employees or board members. Boards are already familiar with more than 90% of new CEOs, as they are either insiders or executives who directors have previously worked with. There are few reallocations of CEOs across firms - firms raid CEOs of other firms in only 3% of cases. Pay differences appear too small to explain these hiring choices. The evidence suggests that firm-specific human capital, asymmetric information, and other frictions have first-order effects on the assignment of CEOs to firms.

The Salience of ESG Ratings for Stock Pricing: Evidence from (Potentially) Confused Investors
Pelizzon, Loriana,Rzeznik, Aleksandra,Hanley , Kathleen Weiss
We exploit the a modification to Sustainanlytics' environmental, social, and governance (ESG) rating methodology, which is subsequently adopted by Morningstar, to study whether ESG ratings are salient for stock pricing. We show that the inversion of the rating scale but not new information leads some investors to make incorrect assessments about the meaning of the change in ESG ratings. They buy (sell) stocks they misconceive as ESG upgraded (downgraded) even when the opposite is true. This trading behavior exerts transitory price pressure on affected stocks. Our paper highlights the importance of ESG ratings for investors and consequently for asset prices.

The threshold strategy for spectrally negative Levy processes and a terminal value at creeping ruin in the objective function
Chongrui Zhu

In this paper, a dividend optimization problem with a terminal value at creeping ruin for Levy risk models has been investigated. We consider an insurance company whose surplus process evolves as a spectrally negative Levy process with a Gaussian part and its objective function is given by cumulative discounted dividend payments and a terminal value at creeping ruin. In views of identities from fluctuation theory, under the restriction on the negative terminal value, we show that the threshold strategy turns out to be the optimal one with threshold level at zero over an admissible class with restricted dividend rates. Furthermore, some sufficient conditions for the positive one also have been given.

Time series copula models using d-vines and v-transforms
Martin Bladt,Alexander J. McNeil

An approach to modelling volatile financial return series using stationary d-vine copula processes combined with Lebesgue-measure-preserving transformations known as v-transforms is proposed. By developing a method of stochastically inverting v-transforms, models are constructed that can describe both stochastic volatility in the magnitude of price movements and serial correlation in their directions. In combination with parametric marginal distributions it is shown that these models can rival and sometimes outperform well-known models in the extended GARCH family.

Using Eurodollar Pack Spreads to Trade Treasury Curves
De Vere, Hugo
This paper aims to find if the market-based measure of monetary policy expectations such as the Eurodollar future rates has predictive power in anticipating trend changes in Treasury curves. The report examines the empirical relationship between Eurodollar pack spreads and Treasury curves and develops multiple trading strategies using data from the previous eight years. The backtesting results of strategies implemented in this paper provide evidence that the inverted spread between the Eurodollar "Blue" pack and the "Green" pack has predictive power in anticipating long-term fluctuations across Tsy curves, significantly flattening fluctuations. Furthermore, the backtesting results of the constructed optimal portfolio provide evidence that the combination of technical trading signals in Eurodollar spreads and Tsy curves has a better trading performance than using only the Tsy curve technical trading signals.

Voting in Shareholders Meetings
Bouton, Laurent,Llorente-Saguer, Aniol,Macé, Antonin,Xefteris, Dimitrios
This paper studies voting in shareholders meetings. We focus on the informational efficiency of different voting mechanisms, taking into account that they affect both management's incentives before the meeting and shareholders' decisions at the meeting. We first focus on the case in which the management does not affect the proposal being voted on. We prove that, for any distribution of shareholdings, the one-share-one-vote mechanism (1S1V) dominates the one-person-one-vote mechanism (1P1V), independently of whether or how shareholdings correlate with information accuracy. We also show that 1S1V becomes efficient only if votes are fully divisible. Second, we consider the case in which the management decides whether to put the proposal to a vote. The properties of a voting mechanism then depend both on its voting efficiency and on how it affects managers' incentives to select good proposals. We uncover a trade-off between selection and voting efficiency underlying the comparison of 1S1V and 1P1V: the higher voting efficiency of 1S1V implies worse selection incentives. In some cases, the negative effect of worse selection incentives on shareholders' welfare can be large enough to wash out the higher voting efficiency of 1S1V.

Winners and losers of immigration
Davide Fiaschi,Cristina Tealdi

We aim to identify winners and losers of a sudden inflow of low-skilled immigrants using a general equilibrium search and matching model in which employees, either native or non-native, are heterogeneous with respect to their skill level and produce different types of goods and Government expenditure in public goods is financed by a progressive taxation on wages and profits. We estimate the short-term impact of this shock for Italy in each year in the period 2008-2017 to be sizeable and highly asymmetric. In 2017, the real wages of low-skilled and high-skilled employees were 4% lower and 8% higher, respectively, compared to a counter-factual scenario with no non-natives. Similarly, employers working in the low-skilled market experienced a drop in profits of comparable magnitude, while the opposite happened to employers operating in the high-skilled market. Finally, the presence of non-natives led to a 14% increase in GDP and to an increment of approximately 70 billion euros in government revenues and 18 billion euros in social security contributions.