Research articles for the 2021-08-02

(When) should you adjust inferences for multiple hypothesis testing?
Davide Viviano,Kaspar Wuthrich,Paul Niehaus

The use of multiple hypothesis testing adjustments varies widely in applied economic research, without consensus on when and how it should be done. We provide a game-theoretic foundation for this practice. Adjustments are often - but not always - appropriate in our framework when research influences multiple policy decisions. These adjustments depend on the nature of scale economies in the research production function and on economic interactions between policy decisions, with control of classical notions of compound error rates emerging in some but not all cases. When research examines multiple outcomes, on the other hand, this motivates either very conservative testing procedures or aggregating outcomes into sufficient statistics for policy-making.

A generative model for age and income distribution
Fatih Ozhamaratli,Oleg Kitov,Paolo Barucca

Each individual in society experiences an evolution of their income during their lifetime. Macroscopically, this dynamics creates a statistical relationship between age and income for each society. In this study, we investigate income distribution and its relationship with age and identify a stable joint distribution function for age and income within the United Kingdom and the United States. We demonstrate a flexible calibration methodology using panel and population surveys and capture the characteristic differences between the UK and the US populations. The model here presented can be utilised for forecasting income and planning pensions.

A self-organized criticality participative pricing mechanism for selling zero-marginal cost products
Daniel Fraiman

In today's economy, selling a new zero-marginal cost product is a real challenge, as it is difficult to determine a product's "correct" sales price based on its profit and dissemination. As an example, think of the price of a new app or video game. New sales mechanisms for selling this type of product need to be designed, in particular ones that consider consumer preferences and reality. Current auction mechanisms establish a time deadline for the auction to take place. This deadline is set to increase the number of bidders and thus the final offering price. Consumers want to obtain the product as quickly as possible from the moment they become interested in it, and this time does not always coincide with the seller's deadline. Naturally, consumers also want to pay a price they consider "fair". Here we introduce an auction model where buyers continuously place bids and the challenge is to decide quickly whether or not to accept them. The model does not include a deadline for placing bids, and exhibits self-organized criticality; it presents a critical price from which a bid is accepted with probability one, and avalanches of sales above this value are observed. This model is of particular interest for startup companies interested in profit as well as making the product known on the market.

Accelerators as a Tool for Encouraging Female Entrepreneurship
Avnimelech, Gil,Rechter, Eyal
This study was driven by an initial finding that female founders’ participation rates in Israeli accelerators are significantly higher (15.3%) than their participation rate in the Israeli startup sector (7.4%). Linking accelerators’ design to the known barriers for female entrepreneurship, we examined how accelerators may enhance female entrepreneurship by addressing their specific needs. Based on a dataset (N = 779) of structured interviews with startup founders who participated in accelerator programs in Israel during 2011â€"2019, we present evidence that female founders seek and gain more entrepreneurial training during their participation in accelerators than do male founders; place more emphasis on and succeed more in strengthening their networks and entrepreneurial self-confidence; and increase their entrepreneurial self-efficacy more than men. Female founders also seek to increase their legitimacy more than do men, but did not report making more progress in this aspect. Finally, both the goal of and progress in obtaining access to capital received lower ratings from female founders than from male founders. We discuss the implications of our findings for the use of accelerators and other support programs as means of increasing women’s participation rates in innovative entrepreneurship.

Ambiguity, Investor Disagreement, and Expected Stock Returns
Hsiao, Lawrence
I set up a model in which two types of ambiguity-averse traders disagree on how to interpret a public signal. When traders first observe contradicting interpretations of the signal, they don't know whether to attribute the clash of opinions to different information processing or to information asymmetry, and thus treat the other type's interpretation as an ambiguous signal. This ambiguity decreases over time as traders gradually learn or form beliefs about the other type's interpretation. The model predicts a positive relation between investor disagreement (ID) and expected stock return, given that the public signal is very imprecise. Also, ID can be measured using the negative correlation coefficient between trading volume and absolute price change. I find that stocks in the highest ID decile outperform stocks in the lowest ID decile by 8.7 percent annually, adjusted for exposures to the market return as well as size, value, momentum, and liquidity factors. In addition, stocks with high ID prior to the earnings announcement experience significantly higher returns around the earnings announcement compared to stocks with low ID.

An Anatomy of Characteristics in Dynamic Trading
Huang, Tao,Spiegel, Matthew I.,Zhang, Hong
We propose testing the joint and marginal power of characteristics in predicting returns via a dynamic trading strategy (e.g., Kyle, 1985). The analysis finds that most characteristics (88%) fail to supply independent information. Indeed, removing these subsumed characteristics significantly enhances the optimal portfolio returns. Our analysis further reveals a leading role played by Fama-French-Carhart factors as informative characteristics.

An Equilibrium-Based Measure of Systemic Risk
Tian, Weidong
This paper develops and implements an equilibrium model of systemic risk. The model derives a systemic risk measure, loss beta, in characterizing all too-big-to-fail banks using a capital insurance equilibrium. By constructing each bank's loss portfolio with a recent accounting approach, we perform a comprehensive empirical study of this loss beta measure and document all TBTF banks from 2002 to 2019. Our empirical findings suggest a significant number of too-big-to-fail banks in 2018-2019.

Assessing Developing Countries' Sovereign Creditworthiness: A Female Agency Framework
Henide, Karim
Developing countries present investors with compelling opportunities to influence the most substantial improvement in social and economic sustainability per unit of investment. We present a novel framework that seeks to enrich the assessment of sovereign creditworthiness, encourage investment in developing countries and support the pursuit of United Nations Sustainable Development Goals (UN SDGs) 3, 4, 5 and 8, as well as a host of United Nations Beijing Platform for Action (UN BPA) strategic objectives. The framework is built around the ethos of UN SDG target 10.2, women’s inclusion, equality and empowerment in politics, economics and society, as a tool for transforming regional ecosystems. We explore the framework as a scope for assessing sustainable development, additive to the modern investor's holistic toolbox. The framework, by inherent design, seeks to also promote disclosure around key gender issues and the equality of wealth distribution.

Asset Pricing Based on Micro Consumption
Ju, Gaosheng
This paper proposes an estimable asset pricing model that builds upon micro consumption and flexibly specified reference-dependent preference. The model quantitatively accounts for both low risk-free rates and high equity premiums. Central to the model is an S-shaped consumption utility function that is convex below the reference point. The S-shaped utility works by rationalizing Ju and Li's (2021a, 2021b) finding that, for many people, consumption growth correlates negatively with asset returns. When global concavity is maintained, the estimated degree of relative risk aversion given a high consumption-reference ratio is absurdly large.

Concept Links and Return Momentum
Du, Qianqian,Liang, Dawei,Chen, Zilin,Tu, Jun
Unlike traditional asset categories (e.g., industry classifications) that aregenerally defined clearly, some groups of stocks are tied to a certain loosely defined“concept” (e.g., e-commerce). When investors find it difficult to analyze ambiguousconcept-oriented information, information diffuses slowly, leading to “conceptmomentum”. Based on unique Chinese stock concept data, this study constructs a conceptmomentum strategy that involves buying stocks from past winning concepts and sellingstocks from past losing concepts, which can generate pronounced abnormal returns.Neither risk factors, firm-level momentum, nor industry-level momentum can explainconcept momentum. Furthermore, we find that both the underreaction and cross-stock leadlageffect channels can cause slow information diffusion and drive concept momentum.Moreover, the concept momentum effect is stronger for more ambiguous concepts, forconcepts that attract less investor attention, and following high-sentiment periods.

Constructing the Yellow Brick Road: Preventing Discrimination in Financial Services Against the Lgbtq+ Community.
Mostaghim, Cyrus
The Lesbian, Gay, Bisexual, Transgender, Queer, and Questioning (“LGBTQ+”) community lacks explicit statutory protections from discrimination in financial services. After the Supreme Court held in Bostock that employment discrimination based on sexual orientation or gender identity was illegal, the Consumer Financial Protection Bureau (CFPB) issued an informal interpretive rule for the Equal Credit Opportunity Act (ECOA) and Regulation B that made discrimination in the access to credit based on sexual orientation or gender identity illegal. However, this article argues that an informal interpretive rule is easily rescinded and does not provide sufficient protection. Thus, alternative action is needed to create more durable protection from discrimination against the LGBTQ+ community in the provision of financial services. Additionally, the increased use of AI in the financial industry magnifies the need for more durable protections to prevent the accidental usage of biased data to build and train the industry’s AI algorithms. This article examines the potential and limitations of existing consumer protection laws, possible pathways to create more permanent protection, and potential impacts from regulatory changes. This article also considers additional regulatory changes to other consumer protection statutes that may be needed to enable the identification of discriminatory acts. These changes may require financial institutions to collect sexual orientation and gender identity data â€" something that must be done with sensitivity because of a data privacy issue unique to the community: accidental outing.

Corporate Loans, Banks’ Internal Risk Estimates and Central Bank Collateral: Evidence from the Euro Area
Calza, Alessandro,Hey, Julius-Benjamin,Parrini, Alessandro,Sauer, Stephan
We use a unique dataset of ratings for euro area corporate loans from commercial banks’ internal rating-based (IRBs) systems and central banks’ in-house credit assessment systems (ICASs) to investigate whether banks’ IRB ratings underestimate the credit risk of their corporate loan portfolios when the latter are used as collateral in the Eurosystem’s monetary policy operations. We are able to identify systematic risk underestimation by comparing the IRB ratings with those produced for the same borrowers by the ICASs. Our results show that while they are on average more conservative than ICASs for the entire population of rated corporate loans, IRBs are significantly less conservative than ICASs for those loans that are actually used as Eurosystem collateral, particularly for large loans. The less conservative estimates of risk by IRBs relative to ICASs can be partly explained by banks’ liquidity constraints, but not by their degree of capitalisation. Overall, our findings suggest the existence of a collateral-related channel through which the use of IRB ratings may influence the internal estimation of risk by banks.

Corporate governance and generalist CEOs: Evidence from board size
Chatjuthamard, Pattanaporn,Ongsakul, Viput,Jiraporn, Pornsit,Uyar, Ali
PurposeWe contribute to the debate in the literature about generalist CEOs by exploring the effect of board governance on CEO general managerial ability, focusing on one of the most crucial aspects of the board of directors, board size. Prior research shows that smaller boards constitute a more effective governance mechanism and therefore are expected to reduce agency costs. Design/Methodology/ApproachWe estimate the effect of board size on CEO general managerial ability, using a fixed-effects regression analysis, propensity score matching, as well as an instrumental-variable analysis. These techniques mitigate endogeneity greatly and make our results much more likely to show causality.FindingsOur results show that firms with smaller board size are more likely to hire generalist CEOs. Specifically, a decline in board size by one standard deviation raises CEO general managerial ability by 15.62%. A lack of diverse experiences in a small board with fewer directors makes it more necessary to hire a CEO with a broad range of professional experiences. Furthermore, the agency costs associated with generalist CEOs are greatly diminished in firms with a smaller board. Hence, firms with a smaller board are more inclined to hire generalist CEOs. Originality Although prior research has explored the effects of board size on various corporate outcomes, strategies, and policies, our study is the first to investigate the effect of board size on CEO general managerial ability. Our study contributes to the literature both in corporate governance and on CEO general managerial ability.

Critical Analysis of Translation Tests in 18 Specialized Translation Courses for Undergraduate Students
Al-Jarf, Reima
The present study aimed to describe and evaluate the current assessment practices prevalent in the different translation courses offered at the College of Languages and Translation (COLT). A sample of specialized translation final exams in 18 translation subject areas was collected. Each final exam was analyzed in terms of the following: (1) # of English and Arabic source texts included on each final exam for each course (2) readability and difficulty level of texts included in the translation exams, (3) # of exams with a terminology subtest, (4) English and Arabic text length in words, (5) reliability, validity and discriminating power of final exams. Data analysis showed that 50% of the exams included one English text, 32% included 2 texts and 18% included 3 texts. Arabic texts were included in 73% of the exams. However, 59% of the exams included one Arabic text, 9% included two texts and 5% included 3 texts. In Addition to English and Arabic texts, 56% of the exams included a vocabulary subtest. 41% do not have any Arabic texts. The English text length ranged between 66-430 words with a median length of 181 words. The Arabic text length ranged between 26-180 with a median length of 97. The typical Flesch Reading Ease of English texts was 40 and the typical Flesch-Kincaid Grade level score was 11. There were no significant differences among the different college levels nor different subject areas in text length or text difficulty level. Translation exams currently used at COLT lack validity, reliability, and discriminating power. Some reasons for lack of reliability and validity are given. Students’ views on translation exams are also reported. A model for more valid, reliable, and discriminating translation exams is given with students views of it as well.

Crypto Literacy in Peer-to-Peer Lending
Gonzalez, Laura
The 2008 and 2020 crises reinvigorated discussions on the democratization of finance. Peer-to-peer (P2P) lending is a valuable option worldwide, but credit risk is high. To encourage investors, P2P platforms use blockchain and the option of crypto as collateral. This study examines lender views on crypto and options to effectively support financial literacy and inclusion. It considers 663 pro-social lending decisions by finance students on a mock P2P site where testimonials conditioned participants towards pro-social decision making. After making three lending decisions, participants were asked about changes in the case of different collaterals. Overall, pro-social P2P lenders find crypto riskier than traditional collateral. More specifically, loan applications can be funded more quickly with a pledge of 20% in traditional collateral but not in crypto assets or crypto currency. Furthermore, loan popularity among other lenders also persuades investors, and lender projections of financial literacy influence decision confidence, unlike traditional collateral. Thus, crypto collateral options in P2P platforms do not seem to support financial inclusion. However, upcoming more stable digital currencies backed by central banks are arguably more likely to be considered reliable collateral. This would effectively democratize P2P lending provided there is behavioral financial literacy as well.

Data Analytics, Pressure, and Self-Determination: Experimental Evidence from Internal Auditors
Cardinaels, Eddy,Eulerich, Marc,S. Sofla, Amin
Internal auditors are increasingly expected to review significant amounts of information whileworking under pressure. Leading figures in the organization may put pressure on the internal auditprocesses, reducing the auditor’s autonomy. Recent insights suggest that internal auditors whoscore higher on the trait self-determination perform better in complex tasks but their performancecan be impaired when they experience significant pressure from leading figures in theorganization. One way to reduce the amount of cognitive resources needed to perform a task isthrough the use of decision aids such as audit analytics. The present study examines the impact ofthe availability of audit analytics, pressure by the CFO, and the internal auditor’s level of the self determination trait. Our results suggest that the level of self-determination is positively related toperformance. However, the CFO’s performance pressure undermines the relationship betweenself-determination and performance for individuals with high self-determination. Interestingly, theintroduction of audit analytics appears to remove the detrimental effect of pressure on theperformance of highly self-determined auditors. Thus, while our results suggest that performance relevant traits such as self-determination might not improve performance in certain contexts, auditanalytics might protect performance against these challenges.

Debt Market Responses to Longevity Shocks
Chen, Zhanhui,Goyal, Vidhan K.,Lou, Pingyi,Zhu, Wenjun
Unexpected increases in life expectancy induce life insurers to extend the duration of their assets, which results in significant purchases of long-term corporate bonds. We show that this variation in life insurer demand for bonds of specific maturities has real-economy consequences for corporate sector financing and investment policies. As longevity increases, long-term bond yields fall and the corporate sector absorbs such shocks by issuing more long-term bonds, while simultaneously increasing investments in long-term assets. The effects are particularly marked where life insurers are the primary holders of a firm’s debt. The response is also more pronounced for firms that rely on long-term financing, and financially unconstrained firms.

Do salient climatic risks affect shareholder voting?
Fich, Eliezer M.,Xu, Guosong
Shareholders in locations recently hit by hurricanes significantly increase their support for environmental proposals even if they never previously voted for similar initiatives. Our results show that changed beliefs about salient climate risks rather than firms’ fundamentals drive the increased support. More favorable voting following a hurricane strike has real consequences: Climate-related proposals are more likely to pass, and when they do, firm performance weakens. These findings highlight the role of investor psychology in altering shareholders’ perceptions about climate risks and, consequently, their support for corporate environmental policies.

Do we need dealers in OTC markets?
Hendershott, Terrence,Livdan, Dmitry,Schürhoff, Norman
We examine technology enabling dispersed investors to directly trade with each other in over-the-counter markets via the largest electronic trading platform in corporate bonds starting Open Trading (OT) to allow investor-to-investor trading. Over our six-year sample, OT steadily grew to win 12% of trades on the platform, with 2% being investor-to-investor trading, 3% being dealers trading with new clients, and 7% being new liquidity providers acting like dealers. This suggests that investors in corporate bonds prefer intermediation to direct trade. However, OT can enable new dealers to compete in liquidity provision. OT's steady growth facilitates measuring its effect on investors, dealers, and competition to provide liquidity using an auction model.

Dollar Dominance in FX Trading
Somogyi, Fabricius
More than 85% of all foreign exchange (FX) transactions have the US dollar on one side. I show that the US dollar dominates FX trading volume because of strategic avoidance of price impact. To demonstrate this, I exploit that non-dollar currency pairs can be traded indirectly by using the US dollar as an intermediate 'vehicle' currency. I present a model of FX trading that embraces this idea and derive a set of sufficient conditions for dollar dominance. I then empirically test these conditions using a granular FX trade data set and provide evidence that is consistent with my model. To establish causality, I show that dollar dominance increases by 7% after quasi-exogenous spikes in the liquidity of dollar currency pairs occurring on days with scheduled US monetary policy announcements.

Enhancing User' s Income Estimation with Super-App Alternative Data
Gabriel Suarez,Juan Raful,Maria A. Luque,Carlos F. Valencia,Alejandro Correa-Bahnsen

This paper presents the advantages of alternative data from Super-Apps to enhance user' s income estimation models. It compares the performance of these alternative data sources with the performance of industry-accepted bureau income estimators that takes into account only financial system information; successfully showing that the alternative data manage to capture information that bureau income estimators do not. By implementing the TreeSHAP method for Stochastic Gradient Boosting Interpretation, this paper highlights which of the customer' s behavioral and transactional patterns within a Super-App have a stronger predictive power when estimating user' s income. Ultimately, this paper shows the incentive for financial institutions to seek to incorporate alternative data into constructing their risk profiles.

Equity Sector Rotation via Credit Relative Value
Klein, David
NAAIM 2013 Wagner Award-winning paper. Describes a straightforward sector rotation + tactical asset allocation strategy that uses a high yield credit index to judge equity relative value.

Exchange rate co-movements and corporate foreign exchange exposures: a study on RMB
He, Qing,Wang, Wenqing,Yu, Jishuang
We estimate the time-varying co-movements of a large set of bilateral exchange rates/the RMB and explore their relationship with the firm-level exchange rate exposure in China. We find that firms’ exchange rate exposure increases in periods of high exchange rate co-movements. The co-movements of emerging market (EME) currencies have a weaker effect on exposure than the co-movements of developed market (DM) currencies. This effect is more pronounced after the launch of the One Belt One Road initiative, RMB inclusion in the SDR basket and in highly multinational firms, providing evidence that the RMB’s internationalization (i.e., its anchoring effect) has generally helped to reduce Chinese firms’ exposure to exchange rate fluctuations of EME currencies.

Financial Cooperatives and Commercial Banks´ differences before and after the 2014-2016 Brazilian economic crisis
Lima, Ederaldo,Beiruth, Aziz,Martinez, Antonio Lopo
The present research aims to evaluate the performance of cooperatives and commercial banks, emphasizing the before and after the Brazilian economic crisis of 2015 and 2016. The worsening of the fiscal and monetary situation led to the impeachment of the Brazilian President of the Republic on May 12, 2016, which generated even more uncertainty and instability in the financial market, creating an effect like a 2008 global financial crisis. In this context, the objective of this work is to evaluate changes in the performance of cooperatives and commercial banks and presenting the consequence of the Brazilian crisis to these financial institutions. The main scope of the study was how cooperatives and banks fared in the face of the situation, especially on the indicators of net loans and derivatives. The methodology will identify the difference between this type of institution using panel data methods with fixed and random effect models, tested using the Hausmann test to see which one best fits the data scenario. The results point out the worse performance of cooperatives than commercial banks in the crisis period of 2015/2016 and over 2011-2020. The cooperatives usually established to provide financial support to small businesses and farmers have suffered significantly more than commercial banks; nevertheless, all suffer.

For Whom (and For When) is the Firm Governed? The Effect of Changes in Corporate Fiduciary Duties on Tax Strategies and Earnings Management
Cumming, Douglas J.,Tingle, QC, Bryce,Zhan, Feng
The proper object of the fiduciary duties of corporate directors and officers is frequently described as the central question in all corporate law. We use the adoption of constituency statutes, which shift the loci of corporate managers’ duties from shareholders to a wide range of stakeholders, as a quasi-natural experiment to determine the actual impact of fiduciary duties. We find that while the adoption of constituency statutes has no significant effect on measures of earnings management, it has a robust effect on firms’ effective tax rate, which increases in a range between 0.570% and 1.903%. These results are robust in terms of various measures of the firm’s effective tax rate. We provide explanations for why fiduciary duties apparently do not influence manager behaviors in relation to shareholders, but do affect their behaviors in relation to the taxing authority. We argue that a change to fiduciary duties doesn’t appear to alter the motivation of managers to maximize shareholder welfare outcomes, but rather it allows them to eschew short-term strategies that often impair long-term outcomes.

Foreign Political Interference in the Governance of Listed Companies: A Market and Behavioral Analysis
Chen, Christopher C.,Lin, Lauren Yu-Hsin
This Article examines how regulators and a company’s stakeholders can and should respond to external political interference from a foreign government. This Article argues that the interactions created by different stakeholders influence the market’s response to such interference. This Article uses the “Party building” political movement in China to illustrate how Chinese businesses listed in Hong Kong reacted to interference from the Chinese Communist Party (CCP). The Party building is the CCP’s attempt to strengthen its control of listed companies by: having CCP organization’s in a company (organizational interference), controlling management decisions (management interference), and human resources (human resources interference). The political campaign offers a rare chance to observe how corporate stakeholders respond to external political interference from another country. This Article shows that fewer than a third of the companies examined were early adopters of Party building provisions. This suggests that managers have not been willing to accept political interference, especially when their companies’ are registered outside of China. However, companies that have adopted “Party building” provisions in their corporate charters have generally accepted some organizational interference or managerial interference. Still, they have been less accommodating to more direct control over personnel or human resources decisions. Consequently, this Article argues that securities regulators, in an open market, should adopt a market-driven approach to counter foreign political interference that empowers shareholders by increasing transparency, instead of implementing drastic interventions, such as mandatory delisting.

How to Communicate the Nudge: A Real-World Policy Experiment
Bar-Gill, Oren,Cohen, Alma
Disclosure-based Nudges are being increasingly utilized by governments around the world to achieve policy goals related to health, safety, employment, environmental protection, retirement savings, credit, debt and more. And, yet, a critical aspect of these Nudge-type policy interventionsâ€"the mode of communicationâ€"remains unexplored. What is the best way to communicate information to individualsâ€"by letter, by phone call (or voice message), by email, by text message or video message? We begin to answer this basic question using a real-world policy experiment on debt collection procedures. Debtors often lack adequate information about the debt, the judgment, and the enforcement and collection procedures. As a result, the process of debt collection is often harmful to the debtor and ineffective in securing repayment. We conducted a study (N = 36,362), in cooperation with the Israeli Ministry of Justice, to improve communication with debtors and to evaluate the effect of such improved communication strategies on collection procedures and outcomes. A novelty of this study is our focus on the choice of mediumâ€"telephone, regular mail, text message and video messageâ€"holding fixed the content of the communication. We found that digital communication strategies, specifically communicating via text message, were the most cost-effective, significantly improving outcomes for both debtors and creditors. Our results should inform the choice of communication mediums in the many settings in which disclosure-based Nudge policies are employed.

Human behavior toward risky decision making: a review of experimental studies on risk preferences
Meier, Harald
Since business activities are generally subject to uncertainties, dealing with risk is essential. Principals are generally assumed to maximize their expected value and therefore act in a risk-neutral manner by diversifying their portfolio. Agents, however, often deviate from maximizing their expected value due to personality traits and contextual factors. Therefore, this review focuses on experimental research that investigates how personality traits and contextual factors affect human behavior toward risky decision making. The review first defines risk-taking behavior and distinguishes between different types of risk preferences. Further, the review discusses common methods to measure different types of risk preferences in experimental studies. By proposing a model of risk preferences, this review considers how personality-related traits and contextual factors affect risk preferences. As such, this review suggests that individual risky decisions vary from risky decisions made for others and from risky decisions in competitive environments.

Indices on Cryptocurrencies: an Evaluation
Häusler, Konstantin,Xia, Hongyu
Several cryptocurrency (CC) indices track the dynamics of the risingCC sector, and soon ETFs will be issued on them. We conduct a qualitativeand quantitative evaluation of the currently existing CC indices. As the CCsector is not yet consolidated, index issuers face the challenge of tracking thedynamics of a fast-growing sector that is under continuous transformation. Wepropose several criteria and various measures to compare the indices under review.Major di erences between the indices lie in their weighting schemes, theircoverage of CCs and the number of constituents, the level of transparency, andthus their accuracy in mapping the dynamics of the CC sector. Our analysisreveals that indices that adapt dynamically to this rising sector outperformtheir competitors. Interestingly, increasing the number of constituents doesnot automatically lead to a better  t of the CC sector. All codes are availableon

Insurance-Finance Arbitrage
Philippe Artzner,Karl-Theodor Eisele,Thorsten Schmidt

This paper provides a fundamental study of the consistency of insurance contracts. We start from the observation that most insurance contracts are inherently linked to financial markets.. However insurance markets differ from those of finance since there is no trade for once purchased contracts; buying and selling simultaneously at different prices is not possible and the definition of finance arbitrage is not applicable. In addition, the fact that the insurer's information is much larger than the publicly available one used on financial markets gives rise to two different filtrations.

By defining strategies on an insurance portfolio and combining them with financial trading strategies, we arrive at the notion of insurance-finance arbitrage (IFA). In analogy to the classical fundamental theorem of asset pricing, we give a fundamental theorem on the absence of IFA, leading to the existence of an insurance-finance-consistent probability. Hereby we include the case where the insurers' filtration allows financial arbitrage.

In its generality, the insurance-finance consistent probability is of little use for insurance companies, since it has no relation whatsoever to statistical data. Instead, for coping at least with market- (or finance-) consistency, a simple valuation rule is used, constructed as a superposition of the statistical measure $P$ and a finance-consistent measure $Q$ defined on the restricted market filtration. For this rule, our main theorem provides two sufficient conditions for presence or absence of IFA, respectively.

The generality of the approach allows to incorporate many important aspects, like mortality risk or dependence of mortality and stock markets. Utilizing the theory of enlargements of filtrations, we construct a tractable framework for insurance-finance consistent valuation.

Inverse Options in a Black-Scholes World
Carol Alexander,Arben Imeraj

Most trading in cryptocurrency options is on inverse products, so called because the contract size is denominated in US dollars and they are margined and settled in crypto, typically bitcoin or ether. Their popularity stems from allowing professional traders in bitcoin or ether options to avoid transferring fiat currency to and from the exchanges. We derive new analytic pricing and hedging formulae for inverse options under the assumption that the underlying follows a geometric Brownian motion. The boundary conditions and hedge ratios exhibit relatively complex but very important new features which warrant further analysis and explanation. We also illustrate some inconsistencies, exhibited in time series of Deribit bitcoin option implied volatilities, which indicate that traders may be applying direct option hedging and valuation methods erroneously. This could be because they are unaware of the correct, inverse option characteristics which are derived in this paper.

It takes two to tango: Interlockings and Partial Equity Ownership
Battaggion, Maria Rosa,Cerasi, Vittoria
We study the relationship between the acquisition of partial equity ownership and interlocking directorates among rival companies. Partial equity ownership between rivals in the product market is convenient, even in the case of passive participation, since, internalizing competition, raises the profits of both companies. The price of the acquisition, however, is affected by the marginal cost of the target company. When this cost is private information, the bidder has to elicit the true value of the equity stake from the target through a proper design of the offer in the context of asymmetric information. One possible alternative is for the bidder to propose an interlocking directorate to observe the private cost: to achieve this goal, the bidder has to convince the target to host one of his executives on the board. We build a novel framework to analyze the choice to interlock together with the acquisition of a minority equity stake and study when the two events are observed at equilibrium. We suggest that interlocking directorates may be ancillary to a minority acquisition when the value of the target is private information.

Italian Banks, the Legacy of the Global Financial Crisis and the COVID-19 Pandemic: So Far so Good
Negro, Simone,Macchiati, Alfredo,Onado, Marco,Stammati, Luigi
We discuss whether and to what extent Italian banks will be able to support the recovery after the COVID-19 pandemic. The answer crucially depends on how the legacy of the Great Financial Crisis is evaluated. Moving from the hypothesis that the problems must be examined in the context of the entire euro area and with a medium-term perspective, we show that Italian banks are on a path of gradual recovery and that during the first year of the COVID-19 pandemic, they have also met the corporate demand for credit (with the support of public loan guarantee programs). We conclude that, so far, not only have banks not been part of the problem but, instead, they have played a crucial role in sustaining the Italian economy during the latest recession. Early evidence suggests that the pandemic crisis has also incentivized businesses in some sectors to adopt innovations that were largely under-utilized prior to the crisis, offering hope for a new phase of economic dynamism once economies reopen. However, the ability of national economies to capture these improvements depends on country specific factors, in particular, on the banks’ ability to shift the allocation of credit to the emerging and most productive companies. In this connection, we conclude that the ability of Italian banks to achieve an efficient allocation of credit is, to say the least, controversial.

Knowing When to Splurge: Precautionary Saving and Chinese-Canadians
Mark S. Manger,J. Scott Matthews

Why do household saving rates differ so much across countries? This micro-level question has global implications: countries that systematically "oversave" export capital by running current account surpluses. In the recipient countries, interest rates are thus too low and financial stability is put at risk. Existing theories argue that saving is precautionary, but tests are limited to cross-country comparisons and are not always supportive. We report the findings of an original survey experiment. Using a simulated financial saving task implemented online, we compare the saving preferences of a large and diverse sample of Chinese-Canadians with other Canadians. This comparison is instructive given that Chinese-Canadians migrated from, or descend from those who migrated from, a high-saving environment to a low-savings, high-debt environment. We also compare behavior in the presence and absence of a simulated "welfare state," which we represent in the form of mandatory insurance. Our respondents exhibit behavior in the saving task that corresponds to standard economic assumptions about lifecycle savings and risk aversion. We find strong evidence that precautionary saving is reduced when a mandatory insurance is present, but no sign that Chinese cultural influences - represented in linguistic or ethnic terms - have any effect on saving behavior.

Learning who is in the market from time series: market participant discovery through adversarial calibration of multi-agent simulators
Victor Storchan,Svitlana Vyetrenko,Tucker Balch

In electronic trading markets often only the price or volume time series, that result from interaction of multiple market participants, are directly observable. In order to test trading strategies before deploying them to real-time trading, multi-agent market environments calibrated so that the time series that result from interaction of simulated agents resemble historical are often used. To ensure adequate testing, one must test trading strategies in a variety of market scenarios -- which includes both scenarios that represent ordinary market days as well as stressed markets (most recently observed due to the beginning of COVID pandemic). In this paper, we address the problem of multi-agent simulator parameter calibration to allow simulator capture characteristics of different market regimes. We propose a novel two-step method to train a discriminator that is able to distinguish between "real" and "fake" price and volume time series as a part of GAN with self-attention, and then utilize it within an optimization framework to tune parameters of a simulator model with known agent archetypes to represent a market scenario. We conclude with experimental results that demonstrate effectiveness of our method.

Low volatility and ESG investing combined: Invesco’s holistic approach
von Ditfurth, Manuela,Paarmann, Thorsten,Radatz, Erhard
The low volatility factor in conjunction with the style factors Quality, Value and Momentum, has empirically proven to be able to moderate market risks and improve a portfolio’s overall risk-return profile. By integrating ESG into such a factor portfolio, future risks may be mitigated. We present a proprietary approach to managing ESG risks that can maximize sensitivities to the desired multi-factor characteristics, and we calculate Climate VaR under different global warming scenarios.

Macroeconomic Fundamentals and the Pricing of Anomaly Portfolios
Tharyan, Rajesh
The consensus is that asset pricing models with macroeconomic factors perform poorly, relative to firm-characteristic-based factor models, in explaining the cross-section of stock and bond returns. This is a disconcerting result if the “central task of asset pricing” is to demonstrate the link between macro risk factors and asset returns. I propose a model with a set of factors that mimic underlying fundamental sources of risk in the economy. These factors are extracted using a novel stock-level sort that preserves the relation between stocks and a large set of macroeconomic variables. This model performs at least as well as standard characteristic-based factor models in explaining the cross-section of common benchmark and anomaly portfolio spreads. Taken together, the evidence shows that macroeconomic factors are useful in explaining the cross-section of stock and bond returns.

Margin trading, short selling and corporate green innovation
Ge-zhi Wu,Da-ming You

This paper uses the panel data of Chinese listed companies from 2007 to 2019, uses the relaxation of China's margin trading and short selling restrictions as the basis of quasi experimental research, and then constructs a double difference model to analyze whether the margin trading and short selling will encourage enterprises to engage in green technology innovation activities. Firstly, our research results show that after the implementation of the margin trading and short selling, the green technology innovation behavior of pilot companies will increase significantly. We believe that the short selling threat and pressure brought by short selling to enterprises are the main reasons for pilot enterprises to engage in green technology innovation. Secondly, the empirical results show that the implementation of margin trading and short selling will significantly promote the quantity of green technology innovation of pilot enterprises, but will not significantly promote the quality of green technology innovation of pilot enterprises. Furthermore, we analyze the difference of the impact of margin trading and short selling on the quantity of green technology innovation of pilot enterprises in different periods. Finally, we find that the performance decline, yield gap between financial assets and operating assets, the risk of stock price crash, management shareholding, institutional shareholding ratio, product market competition, bull market and formal environmental regulation intensity will affect the role of policy in promoting green technology innovation of pilot enterprises.

Mean Field Game of Optimal Relative Investment with Contagious Risk
Lijun Bo,Shihua Wang,Xiang Yu

This paper studies a mean field game (MFG) problem in a market with a large population of heterogeneous agents. Each agent aims to maximize the terminal wealth under a CRRA type relative performance, in which the interaction occurs by the competition with peers. We start from the model with n agents, in which the underlying risky assets subject to a common noise and contagious jump risk modelled by a multi-dimensional Hawkes process. With a continuum of agents, we formulate the MFG problem and characterize a deterministic mean field equilibrium in an analytical form, allowing us to investigate some impacts of model parameters in the limiting model and discuss the financial implications. More importantly, it is shown that this mean field equilibrium can serve as an approximate Nash equilibrium for the n-player game problem when n is sufficiently large. The explicit order of the approximation error is also derived.

Measuring non-exchangeable tail dependence using tail copulas
Takaaki Koike,Shogo Kato,Marius Hofert

Quantifying tail dependence is an important issue in insurance and risk management. The prevalent tail dependence coefficient (TDC), however, is known to underestimate the degree of tail dependence and it fails to capture non-exchangeable tail dependence since the TDC evaluates the limiting tail probability only along the main diagonal. To overcome these issues, two novel tail dependence measures called the maximal tail concordance measure (MTCM) and the average tail concordance measure (ATCM) are proposed. Both measures are constructed based on tail copulas and possess clear probabilistic interpretations in that the MTCM evaluates the largest limiting probability among all comparable rectangles in the tail, and the ATCM is a normalized average of these limiting probabilities. In contrast to the TDC, the MTCM and the ATCM can capture non-exchangeable tail dependence. Moreover, they often admit analytical forms, and satisfy axiomatic properties naturally required to quantify tail dependence. Estimators of the two measures are also constructed. A real data analysis reveals striking tail dependence and tail non-exchangeability of the return series of stock indices, particularly in periods of financial distress.

Monetary policy and the cross-section of stock returns in a market with distortions
Li, Xiaoyang,Zhou, Xuan,GONG, XIAOLIN
We study the effects of monetary policy in an economy with distortions. Between 2006 and 2019, China’s central bank frequently adjusted required reserve ratios (RR) and interest rates (IR) to implement monetary policy. We examine how stock prices react to these adjustments and distinguish between state-owned-enterprises (SOEs) and private-owned-enterprises (POEs). We find that SOEs benefit disproportionately more from expansionary monetary policy than POEs especially via interest rate cuts. In contrast, contractionary monetary policy via interest rate hikes benefits POEs. These findings shed light on the monetary transmission in a market with interest rate control and credit rationing.

Narrative Asset Pricing: Interpretable Systematic Risk Factors from News Text
Bybee, Leland,Kelly, Bryan T.,Su, Yinan
We seek fundamental risks from news text. Conceptually, news is closely related to the idea of systematic risk, in particular the "state variables" in the ICAPM. News captures investors' concerns about future investment opportunities, and hence drives the current pricing kernel. This paper demonstrates a way to extract a parsimonious set of risk factors and eventually a univariate pricing kernel from news text. The state variables are reduced and selected from the variations in attention allocated to different news narratives. As a result, the risk factors attain clear text-based interpretability as well as top-of-the-line asset pricing performance. The empirical method integrates topic modeling (LDA), latent factor analysis (IPCA), and variable selection (group lasso).

Networks and performance of index-benchmarked mutual funds
Wong, Dan Xia,Yen, Chia-Yi
This paper establishes empirical evidence that network among mutual funds that share a similar benchmark plays an important role in changes in fund net asset value (NAV) and total net assets (TNA). Using a matrix that indicates the level of overlapped security holdings of funds, we obtain eigenvector centrality, which measures the `influence' of each fund. A fund that has high eigenvector centrality is one that has high fund holdings overlap with other peers, who themselves have high overlap with others. A panel VAR analysis shows significant positive relation of changes in lagged eigenvector centrality with changes in fund NAV and TNA. Changes in eigenvector centrality `Granger causes' changes in fund's NAV and TNA and vice versa. A shock in centrality leads to an increase in fund NAV and TNA. These results make eigenvector centrality a feasible indicator to measure the benchmark-induced herding of individual funds. High centrality funds that have the highest herding tendencies among their peers have the largest average total assets under management. In general, high centrality funds have the lowest tracking error, fund beta, expense and turnover ratios and management fees compared to their peers. To achieve these criteria, high centrality funds have larger exposure to the `low-beta' stock market segment compared to their peers, as well as small but nimble positions in the `high-beta' stock market segment.

Nighttime Light Intensity and Child Health Outcomes in Bangladesh
Mohammad Rafiqul Islam,Masud Alam,Munshi Naser İbne Afzal

This study examines the impact of nighttime light intensity on child health outcomes in Bangladesh. We use nighttime light intensity as a proxy measure of urbanization and argue that the higher intensity of nighttime light, the higher is the degree of urbanization, which positively affects child health outcomes. In econometric estimation, we employ a methodology that combines parametric and non-parametric approaches using the Gradient Boosting Machine (GBM), K-Nearest Neighbors (KNN), and Bootstrap Aggregating that originate from machine learning algorithms. Based on our benchmark estimates, findings show that one standard deviation increase of nighttime light intensity is associated with a 1.515 rise of Z-score of weight for age after controlling for several control variables. The maximum increase of weight for height and height for age score range from 5.35 to 7.18 units. To further understand our benchmark estimates, generalized additive models also provide a robust positive relationship between nighttime light intensity and children's health outcomes. Finally, we develop an economic model that supports the empirical findings of this study that the marginal effect of urbanization on children's nutritional outcomes is strictly positive.

Option-Implied Skewness and the Value of Financial Intermediaries
Bressan, Silvia,Weissensteiner, Alex
For a sample of financial intermediaries from the US, we show that corporate value is strongly related to (risk-neutral) option-implied skewness. In contrast, historical (return-based) skewness does not play a role for valuation. We illustrate that the option-implied skewess predicts better observed (ex-post) stock returns than the historical skewness. As under rational expectations observed (ex-post) returns should on average reflect ex-ante expected return, options are helpful to get insights about company valuation. These results are confirmed also as we analyze separately ``Globally Systemic Important Financial Institutions'' (GSIFIs). Our findings for the financial sector are in line with the previous literature that shows the importance of skewness pricing inside non-financial corporations. The data reveal that the correlation between corporate value and option-implied skewness is tighter for the segment of financial technology firms, which is an interesting finding for the most recent research on fin-tech valuation.

Overview of the global semiconductor industry market
Clóves Gonçalves Rodrigues

Mastering semiconductor technology is essential to insert any country into the trends of the future, such as smart cities, internet of things, space exploration, etc. In this paper we present the growing annual revenue of the semiconductor industry in the last 20 years and comment on the importance of mastering semiconductor production technology and its implications for the development of a nation.

Physician Effects in Antibiotic Prescribing: Evidence from Physician Exits
Huang, Shan,Ullrich, Hannes
Human antibiotic consumption is considered the main driver of antibiotic resistance. Reducing human antibiotic consumption without compromising health care quality poses one of the most important global health policy challenges. A crucial condition for designing effective policies is to identify who drives antibiotic treatment decisions, physicians or patient demand. We measure the causal effect of physician practice style on antibiotic intake and health outcomes exploiting variation in patient-physician relations due to physician exits in general practice in Denmark. We estimate that physician practice style accounts for 53 to 56 percent of between-clinic differences in all antibiotic consumption, and for 74 to 81 percent in the consumption of second-line antibiotic drugs. We find little evidence that low prescribing styles adversely affect health outcomes measured as preventable hospitalizations due to infections. Our findings suggest that policies to curb antibiotic resistance are most effective when aimed at improving physician decision-making, in particular when they target high prescribers. High prescribing practice styles are positively associated with physician age and negatively with staff size and the availability of diagnostic tools, suggesting that improvements in the quality of diagnostic information is an important path to improved decisions.

Politically Polarized Depositors
Jeung, Jinoug
Exploiting a shock drawing public attention to banks’ financial relationships with the firearms industry â€" Antigun activism following the 2018 Parkland shooting â€" this paper demonstrates that political values shape depositor behavior. I find that, following the 2018 Parkland shooting, banks that financed firearms manufacturers experienced significant decreases in deposit growth. These antigun depositor movements were stronger in counties with higher Democrat shares and for more Republican-leaning banks. Banks that implemented antigun policies also experienced substantial reductions in deposit growth, but these pro-gun depositor movements were stronger in counties with higher Republican shares. These divergent depositor movements suggest that conflicting political values between banks and depositors lead to depositor movements. Furthermore, this paper presents the implications of antigun depositor movements for the deposit market and the firearms industry. I find that antigun depositor movements deteriorated the market competitiveness of targeted banks, thus leading them to decrease deposit spreads in favor of depositors. The targeted banks’ increased costs of funding by the sluggish deposit growth and the decreased deposit spreads imposed higher financial constraints on the firearms industry, thus contracting their business.

Proof of non-convergence of the short-maturity expansion for the SABR model
Alan L. Lewis,Dan Pirjol

We study the convergence properties of the short maturity expansion of option prices in the uncorrelated log-normal ($\beta=1$) SABR model. In this model the option time-value can be represented as an integral of the form $V(T) = \int_{0}^\infty e^{-\frac{u^2}{2T}} g(u) du$ with $g(u)$ a "payoff function" which is given by an integral over the McKean kernel $G(s,t)$. We study the analyticity properties of the function $g(u)$ in the complex $u$-plane and show that it is holomorphic in the strip $|\Im(u) |< \pi$. Using this result we show that the $T$-series expansion of $V(T)$ and implied volatility are asymptotic (non-convergent for any $T>0$). In a certain limit which can be defined either as the large volatility limit $\sigma_0\to \infty$ at fixed $\omega=1$, or the small vol-of-vol limit $\omega\to 0$ limit at fixed $\omega\sigma_0$, the short maturity $T$-expansion for the implied volatility has a finite convergence radius $T_c = \frac{1.32}{\omega\sigma_0}$.

Realised Volatility Forecasting: Machine Learning via Financial Word Embedding
Eghbal Rahimikia,Stefan Zohren,Ser-Huang Poon

We develop FinText, a novel, state-of-the-art, financial word embedding from Dow Jones Newswires Text News Feed Database. Incorporating this word embedding in a machine learning model produces a substantial increase in volatility forecasting performance on days with volatility jumps for 23 NASDAQ stocks from 27 July 2007 to 18 November 2016. A simple ensemble model, combining our word embedding and another machine learning model that uses limit order book data, provides the best forecasting performance for both normal and jump volatility days. Finally, we use Integrated Gradients and SHAP (SHapley Additive exPlanations) to make the results more 'explainable' and the model comparisons more transparent.

Related Banks and Investment Efficiency within Business Groups
Brown, Craig,Yavuz, M. Deniz
This paper examines the role of a related bank in the investment efficiency of business-group firms. We show that a bank is associated with less investment sensitivity to investment opportunities for family group firms, especially in financially dependent industries. There is evidence of inefficient related lending in that the weakened investment sensitivity for family firms is linked to related-bank net-charge-offs. Alternatively, a bank is associated with greater investment sensitivity for family group firms in well-developed banking systems, and for non-family group firms in financially dependent industries. Ownership type and financial development seem pivotal for the role of a related bank.

Response of Stock Market Volatility to COVID-19 Announcements and Stringency Measures: A Comparison of Developed and Emerging Markets
Bakry, Walid,Kavalmthara, Peter John,Saverimuttu, Vivienne,Liu, Yiyang,Cyril, Sajan
We investigate the relationship between the daily release of COVID-19 related announcements, defensive government interventions, and stock market volatility, drawing upon an extended time period of one year, to independently test, confirm and iteratively improve on previous research findings. We categorize stock markets into emerging and developed markets and consider differences and similarities utilizing an asymmetric measure of volatility. We find that there are major differences between these markets with respect to investors’ interpretation of risk in response to daily new confirmed cases, death rates, recovery rates, and different defensive government interventions. We suggest explanations for these differences, in terms of national culture, and the quality of governance. Moreover, the development of Pfizer-BioNTech's vaccine is of immense importance to both markets. The findings have implications for tailoring government responses to crises in country-specific contexts.The paper is freely available for the next 50 days@

Road to Stock Market Participation
Agarwal, Sumit,Ayyagari, Meghana,Cheng, Yuxi,Ghosh, Pulak
We study the impact of a national road construction program that brought access to previouslyunconnected pincodes in India, on stock market participation. Using a unique dataset on thetrading behavior of over 13 million individuals, we find that construction of new feeder roads to apincode increases the number of new investors by 6.8% and the number of trades by 7.9% and the effects are larger for rural vs. urban areas and for pincodes at intermediate levels of development. The stock market participation effects are largely driven by new bank branch openings within three years of the road construction suggesting a financial inclusion channel. We also see greater effects for pincodes more distant from the nearest big city, greater portfolio diversification, and increased trading in companies located farther away, all suggesting an information channel.

Sequential Learning, Asset Allocation, and Bitcoin Returns
Yae, James,Tian, George Zhe
A new class of asset often comes with unprecedented uncertainty. For optimal asset allocation, rational investors must learn about the joint dynamics of new and existing assets. Bitcoin's digital gold narrative provides a unique laboratory to test such a hypothesis. We find that an increase in investors' estimate on correlation between Bitcoin and the US stock markets strongly predicts lower Bitcoin returns next day. The same empirical pattern appears in out-of-sample predictions, global equity markets, and other cryptocurrencies. Our stylized static model quantitatively explains the return predictability pattern in light of asset allocation practices and investors' learning on time-varying correlations.

Strengthening IPR Protection and Innovation
Chen, Jun,Jin, Zhao
Though much of the theoretical economics literature have assumed a positive relationship between intellectual property rights (IPR) protection and innovation, there has been no empirical evidence that clearly supports such a relationship. In particular, this relationship may also depend on the measures of innovation. Exploiting the establishment of Chinese specialized IP courts across regions over time as a shock to the IPR protection, we empirically investigate how IPR protection impacts innovation. Measuring innovation by both input and output, we find that establishing an IP court reduces the number of patents filed by public firms located in the IP court's jurisdictional area by about 10%, while increasing those firms' R&D spending (scaled by firm assets) by 6%. These seemingly contradictory findings suggest that the relationship between strengthening IPR protection and firm innovation is a subtle one: it increases firms' incentives to innovate on one hand, while reducing their incentives to rely on the patent system to protect their innovation on the other hand. The finding that stronger IPR protection leads to a lower number of patents also points to a litigation cost channel in which firms reduce their patent filings concerning of the litigation risks brought by those patents. Overall, our findings suggest that IPR protection changes firms' innovation incentives and their interaction with the patent system.

Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality
Foltyn, Richard,Olsson, Jonna
This paper explores how heterogeneity in life expectancy, objective (statistical) as well as subjective, affects savings behavior between healthy and unhealthy people. Using data from the Health and Retirement Study, we show that people in poor health not only have shorter actual lifespan, but are also more pessimistic about their remaining time of life. Using a standard overlapping-generations model, we show that differences in life expectancy can explain one third of the differences in accumulated wealth with an important part driven by pessimism among unhealthy people.

Tail Risk and Investors' Concerns: Evidence from Brazil
Freire, Gustavo
I estimate tail risk for Brazil from January 2001 to July 2020 and investigate the origins of tail risk variation. The tail risk measure peaks at stock market crashes, financial crises, political shocks and disaster events such as the coronavirus pandemic. Moreover, I find that tail risk is countercyclical, has strong predictive power for market returns and negatively predicts real economic activity. In order to identify the investors' concerns associated with tail risk, I extract daily news from the largest financial newspaper in Brazil. The co-movement between news and tail risk indicates that tail risk variation is mainly driven by disaster concerns, followed by economic and government uncertainty. While economic uncertainty explains the countercyclical property of tail risk, investors only require compensation for bearing tail risk implied by disaster concerns. Similarly, tail risk negatively impacts real outcomes because of the disaster concerns that it identifies. These findings support recent models explaining asset pricing puzzles with time-varying disaster risk.

Testing the differentiated impact of the COVID-19 pandemic on air travel demand considering social inclusion
Luca J. Santos,Alessandro V. M. Oliveira,Dante Mendes Aldrighi

The economic downturn and the air travel crisis triggered by the recent coronavirus pandemic pose a substantial threat to the new consumer class of many emerging economies. In Brazil, considerable improvements in social inclusion have fostered the emergence of hundreds of thousands of first-time fliers over the past decades. We apply a two-step regression methodology in which the first step consists of identifying air transport markets characterized by greater social inclusion, using indicators of the local economies' income distribution, credit availability, and access to the Internet. In the second step, we inspect the drivers of the plunge in air travel demand since the pandemic began, differentiating markets by their predicted social inclusion intensity. After controlling for potential endogeneity stemming from the spread of COVID-19 through air travel, our results suggest that short and low-density routes are among the most impacted airline markets and that business-oriented routes are more impacted than leisure ones. Finally, we estimate that a market with 1 per cent higher social inclusion is associated with a 0.153 per cent to 0.166 per cent more pronounced decline in demand during the pandemic. Therefore, markets that have benefited from greater social inclusion in the country may be the most vulnerable to the current crisis.

The Epps effect under alternative sampling schemes
Patrick Chang,Etienne Pienaar,Tim Gebbie

Time and the choice of measurement time scales is fundamental to how we choose to represent information and data in finance. This choice implies both the units and the aggregation scales for the resulting statistical measurables used to describe a financial system. It also defines how we measure the relationship between different traded instruments. As we move from high-frequency time scales, when individual trade and quote events occur, to the mesoscales when correlations emerge in ways that can conform to various latent models; it remains unclear what choice of time and sampling rates are appropriate to faithfully capture system dynamics and asset correlations for decision making. The Epps effect is the key phenomenology that couples the emergence of correlations to the choice of sampling time scales. Here we consider and compare the Epps effect under different sampling schemes in order to contrast three choices of time: calendar time, volume time and trade time. Using a toy model based on a Hawkes process, we are able to achieve simulation results that conform well with empirical dynamics. Concretely, we find that the Epps effect is present under all three definitions of time and that correlations emerge faster under trade time compared to calendar time, whereas correlations emerge linearly under volume time.

The Impact of foreign banks entry on financial development in Lebanon for the period 1995-2014
Azmeh, Chadi
This study investigates the impact of foreign banks entry on financial development in Lebanon for the period between 1995 and 2014. We use the number of foreign banks to total banks as measure of foreign banks entry and liquid liabilities, private credit by deposit monetary institutions and domestic credit to private sector as measures of financial development. Liquid liabilities represent the size of the financial sector, while private credit by deposit monetary institutions and domestic credit to private sector represent the activity of the financial sector. We find positive real effect of the level of foreign banks entry on financial development. This result suggests that foreign banks entry play a crucial role in developing the financial sector in Lebanon for the period between 1995 and 2014 . By contrast, the results of the present study contradict with other studies that claim that foreign banks entry have negative effects on financial development in developing countries .

The Inelastic Market Hypothesis: A Microstructural Interpretation
Jean-Philippe Bouchaud

We attempt to reconcile Gabaix and Koijen's (GK) recent Inelastic Market Hypothesis with the order-driven view of markets that emerged within the microstructure literature in the past 20 years. We review the most salient empirical facts and arguments that give credence to the idea that market price fluctuations are mostly due to order flow, whether informed or non-informed. We show that the Latent Liquidity Theory of price impact makes a precise prediction for GK's multiplier $M$, which measures by how many dollars, on average, the market value of a company goes up if one buys one dollar worth of its stocks. Our central result is that $M$ increases with the volatility of the stock and decreases with the fraction of the market cap. that is traded daily. We discuss several empirical results suggesting that the lion's share of volatility is due to trading activity.

The Inelastic Market Hypothesis: A Microstructural Interpretation
Bouchaud , Jean-Philippe
We attempt to reconcile Gabaix and Koijen's (GK) recent Inelastic Market Hypothesis with the order-driven view of markets that emerged within the microstructure literature in the past 20 years. We review the most salient empirical facts and arguments that give credence to the idea that market price fluctuations are mostly due to order flow, whether informed or non-informed. We show that the Latent Liquidity Theory of price impact makes a precise prediction for GK's multiplier M, which measures by how many dollars, on average, the market value of a company goes up if one buys one dollar worth of its stocks. Our central result is that M increases with the volatility of the stock and decreases with the fraction of the market cap. that is traded daily. We discuss several empirical results suggesting that the lion's share of volatility is due to trading activity.

The Multifaceted Impact of US Trade Policy on Financial Markets
Boer, Lukas,Menkhoff, Lukas,Rieth, Malte
We study the multifaceted effects and persistence of trade policy shocks on financial markets in a structural vector autoregression. The model is identified via event day heteroskedasticity. We find that restrictive US trade policy shocks affect US and international stock prices heterogeneously, but generally negatively, increasing market uncertainty, lowering interest rates, and leading to an appreciation of the US-Dollar. The effects are significant for several weeks or quarters. Regarding shock types, we reveal a dominating trade policy uncertainty shock and a weaker level shock. Chinese trade policy shocks against the US further hurt US stocks.

The Pace of Change: Socially Responsible Investing in Private Markets
Gupta, Deeksha,Kopytov, Alexandr,Starmans, Jan
We study the pace at which socially responsible investors can induce firms to reduce negative externalities in private capital markets. Investors with broad preferences, who care about firm externalities independent of their ownership in the firm, value acquiring firms with high production externalities since they can reform these firms. The anticipation of trading gains for firms with high externalities decreases the incentive of current firm owners to reduce externalities, causing a potential delay in reform. Investment mandates through which investors can commit to paying a premium for firms with low production externalities can incentivize reform in a timely manner.

The Widow Tax Hit: Much Ado About Nothing?
McQuarrie, Edward F.
For most married couples, after the first death the survivor will have to pay tax according to the single tax brackets, which often begin at half the married filing joint amount. However, the survivor’s income may not fall by half, as when retirement distributions continue at the same rate, or a pension was elected with 100% joint and survivor benefits. The widow tax hit is the expected outcome: higher tax payments on a lower postmortem income. This paper quantifies the widow tax hit at moderate to affluent income levels and finds that widows may indeed pay more dollars in tax even though their income has declined with the loss of the decedent’s life-only income, such as social security. But the paper also finds that under most circumstances, the reduction in required dollar expenditure overcomes the increase in tax dollars paid, preserving the same share of after-tax disposable income the survivor enjoyed while both were alive. In cases where disposable income does drop enough to threaten lifestyle, the analysis finds that 100% or more of the reduction stems from the income lost, not the tax hit. With the widow tax hit debunked, the paper proceeds to offer behavioral finance explanations for why so many retirees fear it, and why it continues to function as a sales tool to motivate the purchase of financial services designed to avert it.

The ex-ante Effect of Law and Judicial Efficiency on Borrower Discouragement: An International Evidence
Khan, Safiullah,Khan, Naimat Ullah,Ullah, Asad
We investigate whether cross-country differences in the legal system influence demand-sidecredit constraints. We explore the notion of discouraged borrowers â€" firms that choose notto apply for bank credit because they anticipate rejection. Employing survey data from 46economies, we find that rapid and less costly court proceedings, lower procedural complexityin court processes, and higher recovery rates under bankruptcy lead to the lower likelihoodof borrower discouragement. These results are more pronounced in countries with strongcreditor protections in relation to company reorganization and liquidation. The results corroboratethe supply-side view that strong creditor rights and their efficient enforceability alleviatebanks’ participation constraints in the loan market, thereby encouraging small andmedium-sized enterprises to apply for credit in the first place. We also find that differencesin institutional settings, such as higher regulatory quality, better control of corruption, andthe rule of law, lead to lower rates of credit self-rationing in the loan market.

Trust in DeFi: An Empirical Study of the Decentralized Exchange
Han, Jianlei,Huang, Shiyang,Zhong, Zhuo
We provide empirical evidence that the decentralized cryptocurrency exchange can help reach the decentralized consensus of cryptocurrency value. We focus on Binance (the largest centralized cryptocurrency exchange) and Uniswap (the largest decentralized cryptocurrency exchange), and show that investors on Binance and Uniswap trade in response to prices on the two exchanges. More importantly, we find that the size of Uniswap user base exerts an asymmetric impact on investors’ trading. When its size increases, Uniswap user base exerts a larger impact on investors’ trading on Binance towards the Uniswap price, compared to the opposite direction. With a quasi-exogenous shock on Uniswap user base, we establish the causal impact of Uniswap user base on trading. Our results suggest that Uniswap as a decentralized exchange can reflect the consensus of cryptocurrency value that investors believe in because of blockchain’s transparency and trustworthiness. Our findings imply that the decentralized infrastructure built on blockchain and smart contracts can provide an alternative solution to cases where a consensus underwritten by a credible central party is not feasible or too costly to obtain.

Two Approaches for a Dividend Maximization Problem under an Ornstein-Uhlenbeck Interest Rate
Julia Eisenberg,Stefan Kremsner,Alexander Steinicke

We investigate a dividend maximization problem under stochastic interest rates with Ornstein-Uhlenbeck dynamics. This setup also takes negative rates into account. First a deterministic time is considered, where an explicit separating curve $\alpha(t)$ can be found to determine the optimal strategy at time $t$. In a second setting we introduce a strategy-independent stopping time. The properties and behavior of these optimal control problems in both settings are analyzed in an analytical HJB-driven approach as well as using backward stochastic differential equations.

US Spillovers of US Monetary Policy: Information effects & Financial Flows
Santiago Camara

This paper presents evidence of an informational effect in changes of the federal funds rate around FOMC announcements by exploiting exchange rate variations for a panel of emerging economies. For several FOMC announcements dates, emerging market economies' exchange rate strengthened relative to the US dollar, in contrast to what the standard theory predicts. These results are in line with the information effect, which denote the Federal Reserve's disclosure of information about the state of the economy. Using Jarocinski \& Karadi 2020's identification scheme relying on sign restrictions and high-frequency surprises of multiple financial instruments, I show how different US monetary policy shocks imply different spillovers on emerging markets financial flows and macroeconomic performance. I emphasize the contrast in dynamics of financial flows and equity indexes and how different exchange rate regimes shape aggregate fluctuations. Using a structural DSGE model and IRFs matching techniques I argue that ignoring information shocks bias the inference over key frictions for small open economy models.

Welfare implications of noise traders
Jin Hyuk Choi,Kim Weston

We prove the existence of incomplete Radner equilibria in two models with exponential investors and different types of noise traders: an exogenous noise trader and an endogenous noise tracker. In each model, we analyze a coupled system of ODEs and reduce it to a system of two coupled ODEs in order to establish equilibrium existence. As an application, we study the impact of the noise trader types on welfare. We show that the aggregate welfare comparison depends in a non-trivial manner on every equilibrium parameter, and there is no ordering in general. Our models suggest that care should be used when drawing conclusions about welfare effects when noise traders are used.

What do Firms Gain from Patenting? The Case of the Global ICT Industry
Dimitrios Exadaktylos,Mahdi Ghodsi,Armando Rungi

This study investigates the relationship between patenting activity, productivity, and market competition at the firm level. We focus on the Information and Communication Technology (ICT) industry as a particular case of an innovative sector whose contribution to modern economies is pivotal. For our purpose, we exploit financial accounts and patenting activity in 2009-2017 by 179,660 companies operating in 39 countries. Our identification strategy relies on the most recent approaches for a difference-in-difference setup in the presence of multiple periods and with variation in treatment time. We find that companies being granted patents increase on average market shares by 11%, firm size by 12%, and capital intensity by 10%. Notably, we do not register a significant impact of patenting on firms' productivity after challenging results for reverse causality and robustness checks. Findings are robust after we consider ownership structures separating patents owned by parent companies and their subsidiaries. We complement our investigation with an analysis of market allocation dynamics. Eventually, we argue that policymakers should reconsider the trade-off between IPR protection and market competition, especially when the benefits to firms' competitiveness are not immediately evident.