Research articles for the 2021-08-10

A Mean-Field Game Approach to Equilibrium Pricing in Solar Renewable Energy Certificate Markets
Arvind Shrivats,Dena Firoozi,Sebastian Jaimungal

Solar Renewable Energy Certificate (SREC) markets are a market-based system that incentivizes solar energy generation. A regulatory body imposes a lower bound on the amount of energy each regulated firm must generate via solar means, providing them with a tradeable certificate for each MWh generated. Firms seek to navigate the market optimally by modulating their SREC generation and trading rates. As such, the SREC market can be viewed as a stochastic game, where agents interact through the SREC price. We study this stochastic game by solving the mean-field game (MFG) limit with sub-populations of heterogeneous agents. Market participants optimize costs accounting for trading frictions, cost of generation, non-linear non-compliance costs, and generation uncertainty. Moreover, we endogenize SREC price through market clearing. We characterize firms' optimal controls as the solution of McKean-Vlasov (MV) FBSDEs and determine the equilibrium SREC price. We establish the existence and uniqueness of a solution to this MV-FBSDE, and prove that the MFG strategies form an $\epsilon$-Nash equilibrium for the finite player game. Finally, we develop a numerical scheme for solving the MV-FBSDEs and conduct a simulation study.

A New Look at the Effects of the Interest Rate Ceiling in Arkansas
Elliehausen, Gregory,Hannon, Simona,Miller, Jr., Thomas W.
Arkansas has been a popular place to study the effects of rate ceilings because of its exceptionally low interest rate ceiling. This paper examines the effects of the Arkansas rate ceiling on credit use by risky nonprime Arkansas consumers, which are especially vulnerable to credit rationing because of the low ceiling. We compare the level and composition of consumer debt of nonprime consumers in Arkansas with that of prime Arkansas consumers and also nonprime consumers in the neighboring states. We find that nonprime Arkansas consumers are less likely to have consumer debt and, conditional on having debt, have lower, but not much lower, levels of consumer debt than prime Arkansas consumers and nonprime consumers in neighboring states. Types of credit used by nonprime Arkansas consumers tend to differ from those of our comparison groups. Notable is much lower use of consumer finance loans, traditionally an important source of credit for higher risk consumers. This finding suggests rate-based rationing of risky consumers. Also notable is lower use of bank credit despite federal preemption of the rate ceiling for banks. This result is consistent with banks’ traditional avoidance of risky lending.

A Probit Estimation of Urban Bases of Environmental Awareness: Evidence from Sylhet City, Bangladesh
Mohammad Masud Alam

This paper evaluates the significant factors contributing to environmental awareness among individuals living in the urban area of Sylhet, Bangladesh. Ordered Probit(OPM) estimation is applied on the value of ten measures of individual environmental concern. The estimated results of OPM reveal the dominance of higher education, higher income, and full-employment status on environmental concern and environmentally responsible behavior. Younger and more educated respondents tended to be more knowledgeable and concerned than older and less educated respondents. The marginal effect of household size, middle-income level income, and part-time employment status of the survey respondents played a less significant role in the degree of environmental awareness. Findings also validate the "age hypothesis" proposed by Van Liere and Dunlap (1980), and the gender effect reveals an insignificant role in determining the degree of environmental concern. Environmental awareness among urban individuals with higher income increased linearly with environmental awareness programs which may have significant policy importance, such as environmental awareness programs for old-aged and less-educated individuals, and may lead to increased taxation on higher income groups to mitigate city areas' pollution problems.

About inevitability of budgetary code receiving for fiscal politics
George Abuselidze

Since the end of 90s till today when all the elements confirming Georgian State System have practically been established, budget system and policy remains as the most difficult Georgian macroeconomics challenge and even still half-and-half unsolved problem. One side of the fiscal policy is quite crucially formulated and administrative Tax Code, and the other side is the weak, unmanaged and incomplete law on Budget System. According to the above-mentioned the elaboration and adoption of the Budget Code having equal force as Tax Code is necessary by which the following are to be determined: excellence of government responsibility when it will not perform the budget obligations specified by the law permanently; the rights and responsibilities of the state, the optimal distribution of the funds mobilized by the tax towards each member of the society. For optimization of the budget system effective correlation between the state, regional and local budgets revenues and expenditures is particularly important as the social-economic development of the regions and territorial units of the country is impossible without the financial relations. For it the just differentiation of tax base in the section of state, regional and local budgets and transfers system for support of the budgets of the territorial units from the central budget are necessary. Solving the most part of these problems is possible by the adoption of the budget code which, in our opinion, is to be considered as the closest decisive task for the current legislative and executive authority.

Are Managers Listening to Twitter? Evidence from Mergers & Acquisitions
Schiller, Christoph
This paper studies the feedback effects of social media on corporate investment decisions. Using a comprehensive sample of millions of tweets from a popular social media network, I show that negative social media feedback around the announcement of a corporate acquisition increases the likelihood that the M&A deal is subsequently withdrawn, especially when the relevant tweets have a higher prominence and visibility, and when the acquiring firm’s stock has low price informativeness. This effect is not subsumed by the announcement returns of the acquiring and target firm or the reaction to the M&A announcement in traditional news media. Managers use feedback from social media as a substitute for other sources of information to help guide their investment decisions.

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

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.

Did the Paycheck Protection Program Have Negative Side Effects on Small-business Activity?
Kapinos, Pavel S.
This note uses the U.S. county-level data to study the potential negative side-effects of the Paycheck Protection Program (PPP) participation on small business activity. The program actively targeted small businesses' maintaining their payroll and salary levels through the early phases of the recession triggered by the COVID-19 pandemic. Building on the extensive recent literature that generally finds positive effects of the PPP on economic activity that range from mild to substantial, it uses the Opportunity Insight Economic Tracker data on percentages of open small businesses and changes in small business revenue to show that counties with relatively large exposures to the PPP experienced significant albeit short-lived declines in these two variables. One percentage point of exposure to PPP loan to total assets ratio reduced the percentage of small businesses by about 4 percentage points and small business revenue by 7 percentage points relative to their January 2020 levels.

Distributionally robust goal-reaching optimization in the presence of background risk
Yichun Chi,Zuo Quan Xu,Sheng Chao Zhuang

In this paper, we examine the effect of background risk on portfolio selection and optimal reinsurance design under the criterion of maximizing the probability of reaching a goal. Following the literature, we adopt dependence uncertainty to model the dependence ambiguity between financial risk (or insurable risk) and background risk. Because the goal-reaching objective function is non-concave, these two problems bring highly unconventional and challenging issues for which classical optimization techniques often fail. Using quantile formulation method, we derive the optimal solutions explicitly. The results show that the presence of background risk does not alter the shape of the solution but instead changes the parameter value of the solution. Finally, numerical examples are given to illustrate the results and verify the robustness of our solutions.

Does National Culture Impact Pay-for-Performance and Gender Pay-Gap in Executive Compensation?
Abdallah, Wissam,Zhao, Yang
The paper examines the impact of culture on executive compensation. Using a sample of 8025 firms from 17 countries and employing GLOBE cultural dimensions, we find that culture has a significant explanatory power in cross-country executive compensation practices. We contribute to the existing literature by demonstrating how culture affects the relationship between performance and compensation as well as compensation disparity in the boardroom. In particular, we find that in assertive and individualistic societies, compensation is closely related to performance and that compensation disparity is lower among the top management team. Our results reveal more insights on the relationship between culture and compensation practices.

Does Private Equity Systematically Over-Lever Portfolio Companies?
Haque, Sharjil
Detractors of Private Equity (PE) warn that PE fund managers tend to over-leverage portfolio companies due to their option-like payoff, potentially generating systemic risk by creating a large set of fragile firms. This paper argues PE-ownership results in higher levels of optimal leverage by reducing the expected cost of debt, consistent with traditional trade-off theory. I develop a model that embeds key features of PEownership in a standard framework of firm value and endogenous default. Using a large sample of PE-sponsored leveraged buyouts, the estimated model fully explains the large difference in leverage ratios in the data between PE-backed and comparable non-PE companies; higher optimal leverage is driven primarily by lower asset risk, followed by higher expected future return and lower deadweight costs of bankruptcy. Counterfactual analysis reveals substantial loss in firm value if PE chose capital structures similar to non-PE owned companies. Aggregated Distance-to-Default estimates uncover little evidence that PE increases corporate distress or risk of a systemic failure in the financial system. Finally, a set of matched difference-in-differences show PEowned firms generate higher Return on Assets, Return on Capital and receive greater equity injections if they fall into financial distress relative to similar non-PE companies, corroborating my main findings.

Evaluation of Information Leadership Share as Price Discovery Measure
Shrestha, Keshab,Lee, Lianne M. Q.
Traditionally the price discovery is measured by information share (IS) and component share (CS) measures. Recently, Putnins (2013) proposed another measure called information leadership share (ILS) measure based on IS and CS measures. This paper performs an evaluation of ILS and finds some issues with it. Therefore, we suggest that researchers continue using the IS and CS related measures instead of the ILS measure.

Financial Markets and the Phase Transition between Water and Steam
Christof Schmidhuber

Motivated by empirical observations on the interplay of trends and reversion, a lattice gas model of financial markets is presented. The shares of an asset are modeled by gas molecules that are distributed across a hidden social network of investors. The model is equivalent to the Ising model on this network, whose magnetization represents the deviation of the asset price from its value. It is argued that the system is driven to its critical temperature in efficient markets. There, it is characterized by universal critical exponents, in analogy with the second-order phase transition between water and steam. These critical exponents imply predictions for the auto-correlations of financial market returns. For a simple network topology, consistency with the observed long-term auto-correlations implies a fractal network dimension of 3.3, and a correlation time of 10 years. To also explain the observed short-term auto-correlations, the model should be extended beyond the critical domain, to other network topologies, and to other models of critical dynamics.

Grade Inflation and Stunted Effort in a Curved Economics Course
Alex Garivaltis

To protect his teaching evaluations, an economics professor uses the following exam curve: if the class average falls below a known target, $m$, then all students will receive an equal number of free points so as to bring the mean up to $m$. If the average is above $m$ then there is no curve; curved grades above $100\%$ will never be truncated to $100\%$ in the gradebook. The $n$ students in the course all have Cobb-Douglas preferences over the grade-leisure plane; effort corresponds exactly to earned (uncurved) grades in a $1:1$ fashion. The elasticity of each student's utility with respect to his grade is his ability parameter, or relative preference for a high score. I find, classify, and give complete formulas for all the pure Nash equilibria of my own game, which my students have been playing for some eight semesters. The game is supermodular, featuring strategic complementarities, negative spillovers, and nonsmooth payoffs that generate non-convexities in the reaction correspondence. The $n+2$ types of equilibria are totally ordered with respect to effort and Pareto preference, and the lowest $n+1$ of these types are totally ordered in grade-leisure space. In addition to the no-curve ("try-hard") and curved interior equilibria, we have the "$k$-don't care" equilibria, whereby the $k$ lowest-ability students are no-shows. As the class size becomes infinite in the curved interior equilibrium, all students increase their leisure time by a fixed percentage, i.e., $14\%$, in response to the disincentive, which amplifies any pre-existing ability differences. All students' grades inflate by this same (endogenous) factor, say, $1.14$ times what they would have been under the correct standard.

Hedging with Bitcoin Futures: The Effect of Liquidation Loss Aversion and Aggressive Trading
Carol Alexander,Jun Deng,Bin Zou

We consider the hedging problem where a futures position can be automatically liquidated by the exchange without notice. We derive a semi-closed form for an optimal hedging strategy with dual objectives - to minimise both the variance of the hedged portfolio and the probability of liquidations due to insufficient collateral. The optimal solution depends on the statistical characteristics of the spot and futures extreme returns and parameters that characterise the hedger by loss aversion, choice of leverage and collateral management. An empirical analysis of bitcoin shows that the optimal strategy combines superior hedge effectiveness with a reduction in the probability of liquidation. We compare the performance of seven major direct and inverse hedging instruments traded on five different exchanges, based on minute-level data. We also link this performance to novel speculative trading metrics, which differ markedly between venues.

How COVID-19 Changed Our Saving Habits?
Avetisyan, Sergey
English Abstract: Recent pandemic, there have been numerous impact on our behavior. The paper has two conceptual lines, one descriptive information about pandemic data, and the second or main line is a about our saving interests.French Abstract: La récente pandémie a de nombreux impacts sur notre comportement. Le article a deux lignes conceptuelles, une information descriptive sur les données de pandémie, et la deuxième ligne principale concerne nos intérêts d'épargne.

How Resilient is Mortgage Credit Supply? Evidence from the Covid-19 Pandemic
Fuster, Andreas,Hizmo, Aurel,Lambie-Hanson, Lauren,Vickery, James I.,Willen, Paul
We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

Is Cardano a Serious Rival to Ethereum?
Johnson, Jackie
Cardano was launched in October 2017 and by May 2021 has been operational for 44 months. Comparison with its closest rival, Ethereum, reveals that their prices are highly correlated but the change in daily closing prices do not always move in unison. Cardano is also more volatile than Ethereum and In terms of growth Cardano is lagging behind. Cardano’s only saving grace is its transaction fees, which are considerably lower than Ethereum. However, care must be taken in understanding the structure of any data source. In this case three data sources are used and results vary depending on the precision of the price data, particularly Cardano which for a number of years did not trade above one dollar.

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, short selling intensity, margin trading intensity and formal environmental regulation intensity will affect the role of policy in promoting green technology innovation of pilot enterprises.

Monetizing Customer Load Data for an Energy Retailer: A Cooperative Game Approach
Liyang Han,Jalal Kazempour,Pierre Pinson

When energy customers schedule loads ahead of time, this information, if acquired by their energy retailer, can improve the retailer's load forecasts. Better forecasts lead to wholesale purchase decisions that are likely to result in lower energy imbalance costs, and thus higher profits for the retailer. Therefore, this paper monetizes the value of the customer schedulable load data by quantifying the retailer's profit gain from adjusting the wholesale purchase based on such data. Using a cooperative game theoretic approach, the retailer translates their increased profit in expectation into the value of cooperation, and redistributes a portion of it among the customers as monetary incentives for them to continue providing their load data. Through case studies, this paper demonstrates the significance of the additional profit for the retailer from using the proposed framework, and evaluates the long-term monetary benefits to the customers based on different payoff allocation methods.

Observing Enforcement: Evidence from Banking
Kleymenova, Anya,Tomy, Rimmy E.
This paper finds that the disclosure of supervisory actions is associated with changes in regulators’ enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and the setting of the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which required the public disclosure of EDOs, we find that U.S. bank regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals after the disclosure regime change. The content of EDOs also changes, with documents becoming more complex and boilerplate. Our results are stronger in counties with higher news circulation, indicating that disclosure plays an incremental role in regulators’ changing behavior. We evaluate the main potentially confounding changes around FIRREA, including the S&L crisis and competition from thrifts, and find robust results. We also study changes in bank outcomes following the regime change and find that uninsured deposits decline at EDO banks, especially for banks with EDOs covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality.

Optimal Consumption with Loss Aversion and Reference to Past Spending Maximum
Xun Li,Xiang Yu,Qinyi Zhang

This paper studies an optimal consumption problem for a loss-averse agent with reference to past consumption maximum. To account for loss aversion on relative consumption, an S-shaped utility is adopted that measures the difference between the non-negative consumption rate and a fraction of the historical spending peak. We consider the concave envelope of the realization utility with respect to consumption, allowing us to focus on an auxiliary HJB variational inequality on the strength of concavification principle and dynamic programming arguments. By applying the dual transform and smooth-fit conditions, the auxiliary HJB variational inequality is solved in closed-form piecewisely and some thresholds of the wealth variable are obtained. The optimal consumption and investment control of the original problem can be derived analytically in the piecewise feedback form. The rigorous verification proofs on optimality and concavification principle are provided.

Pricing Extreme Mortality Risk amid the COVID-19 Pandemic
Li, Han,Liu , Haibo,Tang, Qihe,Yuan, Zhongyi
In pricing extreme mortality risk, it is commonly assumed that the interest rate and mortality rate are independent. However, the recent COVID-19 outbreak calls this assumption into question. We propose a bivariate affine jump-diffusion structure to jointly model the interest rate and excess mortality, allowing for both correlated diffusions and joint jumps. Utilizing the latest US mortality and interest rate data, we find a strong negative correlation between the jump sizes of interest rate and excess mortality, and a much higher jump intensity when the pandemic data is included. Moreover, we construct a risk-neutral pricing measure that accounts for both a diffusion risk premium and a jump risk premium. We then solve for the market prices of risk based on mortality bond prices. Our results show that the pandemic experience can drastically change investors’ risk perception and will likely reshape the post-pandemic mortality risk market.

Report 2021 on Trends and Risks of the Italian Financial System in a Comparative Perspective (Rapporto 2021 sulla congiuntura e i rischi del sistema finanziario italiano in una prospettiva comparata)
Linciano, Nadia,Caivano, Valeria,costa, daniela,Fancello, Francesco,Gentile, Monica
English Abstract: The report analyses the dynamics of financial markets in the first half of 2021, highlighting the main vulnerabilities in the context of the crisis triggered by the pandemic in Europe and the development of sustainable finance and crypto assets at a global level. The Report includes eight sections. Section 1 shows the impact of the crisis on economic activity. Section 2 analyses the monetary and fiscal policy measures adopted by national and European authorities to tackle the negative effects of the crisis. Sections 3 and 4 examine equity and bond market trends, respectively. The next three sections analyse the impact of the crisis on non-financial corporations, banks and households. The last Section reports the main trends in the mutual fund industry.During the first half of 2021, in developed countries progress in Covid-19 vaccination campaigns, the loosening of anti-pandemic restrictions, and economic policies adopted to counter the crisis helped restore confidence in the improvement of economic situation. In June, however, the spread of the Delta variant fuelled renewed uncertainty, also in view of the developments relative to the completion of the vaccination cycle (in Italy al the end of July, about 60% of the population was immunized). Economic activity is expected to recover over the year, albeit to different degrees across areas and countries. In the Eurozone, whose growth is estimated to be lower than global growth, Italian GDP is expected to return to its pre-crisis levels only in 2022, after Germany and France. Meanwhile, the pandemic triggered risk factors that add to pre-existing vulnerabilities. In particular, the level of both public and private debt increased. Domestic fiscal policies to support the economy led to a significant deterioration in public finances. In addition, household and corporate debt rose. In Italy, the ratio of public debt to GDP is expected to reach a level significantly higher compared to the Eurozone average at the end of 2021 (159% and 102%, respectively), while the ratio of private debt to GDP, although on the rise, at the end of 2020 remains well below the average values observed in other countries. Financial markets are easing recovery. As for equities markets, in the euro area, along with the positive trends there are signs of a possible misalignment between market valuations and the fundamental values of listed companies, less marked in the banking sector compared to the non-financial sector as well as less pronounced in Italy compared to that estimated for the Eurozone. As for non-equity markets, both primary and secondary markets of sovereign bonds keep experiencing tranquil conditions. With regard to corporate debt securities, in 2020 net issuance of bank bonds fell to zero, reaching the lowest level of the decade, while those of non-financial companies remained at positive levels. On the secondary market yields remain low, although on the rise with respect to the end of 2020. Due to pandemic, over 2020 large non-financial listed companies recorded a sharp drop in revenues and, overall, a worsening in income and financial conditions. Therefore, vulnerabilities of major listed firms heightened compared to the previous year. The share of companies with income and financial indicators worsening compared to their ten-year average has in fact increased. Overall, the most resilient large companies in terms of income, leverage and liquidity represent less than 4% of the total in Italy and less than 5% in Europe. During 2020, banks in major European countries experienced a decline in income margins and, on the other hand, an improvement of capital adequacy. In Italy, major listed banks recorded an increase in the core tier 1 ratio of around two percentage points compared to 2019. Credit quality also improved. For major Italian banks the ratio of non-performing loans to the total fell from 7% to 4%, as a consequence of significant loan sales. However, banks remain exposed to the risk of a deterioration in asset quality, due to the weak economic environment, especially with respect to exposures to sectors hit hard by the crisis. Between 2019 and 2020, the gross savings rate of Italian households, while remaining below the Eurozone average, experienced a sharp increase (from 10% to 18%) that should only be partially reabsorbed in the current year. Thanks also to the dynamics of stock and bond prices recorded in the financial markets in the second and third quarters of 2020, the net wealth of Italian households grew, although remaining below figures for Germany and France. As for the composition of financial assets, the weight of liquidity increased, which at the end of 2020 recorded a YoY change at its highest level since 2015 (+7%), in line with the dynamics observed in the euro area. At the end of 2020, liquid assets in portfolio of Italian households amounted to more than €1,500 billion, equivalent to about 91% of GDP and 2.5 times the total capitalisation of the MTA and AIM Italy (€600 billion and €6 billion respectively). Trading activity on financial instruments by Italian retail investors has intensified from 2020 onwards, particularly in equities and mutual funds. In March 2020 alone, while equity markets were experiencing severe turbulence due to the health emergency, the amount of net stock purchases hit about €3 billion, compared to the 2019 monthly average of net sales amounting to €470 million. In recent years, interest in crypto assets has grown significantly, especially among the youngest, as shown by available data on the number and age distribution of users globally. In particular, in 2021, the prices of cryptocurrencies rose significantly, including Bitcoin, which has the largest market share in terms of total capitalisation. Similarly to all cryptocurrencies, Bitcoin is characterised by a very high marked volatility, which is significantly higher than that of traditional investment options. A further critical issue is related to the way cryptocurrencies are traded and the underlying technologies. Transition to a sustainable development model is a top priority in the agenda of policy makers. One of the pillars of the Recovery and Resilience Facility (RRF), the main instrument of the Next Generation EU (NGEU) programme, is green transition, as at least 37% of expenditure has to be related to climate and other environmental objectives. In addition, as part of the announced diversified financing strategy on the capital market of NGEU, the European Commission announced that at least 30% of the total bond issues will be green bonds. This measure will help boost the market of green bonds, whose issuance in the first half of 2021 more than doubled compared to the same period last year, thanks to sovereign issuers. Within such framework, Europe has long played a leading role, with new bond issues accounting for around 60% of the global aggregate as of June 2021. Italy, whose contribution remains lower than that of the major European countries, nevertheless shows a considerable increase. Europe is also a major contributor to the development of the ESG fund sector: as of March 2021, there were some 3,500 European funds, with total assets amounting to more than €1,600 billion (over 80% of the global figure). A similar trend can be observed in Italy, where at the end of the first quarter of 2021 the number of ESG funds stood at 1,210 (517 at the end of 2020), while the assets promoted reached €276 million (81 at the end of 2020). The issue is of great importance for the banking system too, which, in response to pressure from regulators and supervisory authorities, is called upon to assess its exposure to sectors vulnerable to physical and transition risk, linked respectively to climate changes and to possible corrections in market values of assets triggered, for example, by restrictive regulation hitting sectors with higher levels of CO2 emissions.Italian Abstract: Il Rapporto esamina le dinamiche dei mercati finanziari nel primo semestre del 2021, evidenziando le vulnerabilità manifestatesi nel contesto della crisi innescata dalla pandemia, e approfondisce alcuni profili relativi allo sviluppo della finanza sostenibile e alle cripto attività. Il documento si articola in otto sezioni. La Sezione 1 illustra l’impatto della crisi sull’attività economica. La Sezione 2 analizza le risposte di politica monetaria e fiscale predisposte dalla Autorità e dai Governi nazionali ed europei per contrastare gli effetti negativi della crisi. Le Sezioni 3 e 4 esaminano rispettivamente l’andamento dei mercati azionari e obbligazionari. Le successive tre Sezioni analizzano le ripercussioni della crisi rispettivamente su società non finanziarie, banche e famiglie. La Sezione 8 riporta, infine, le evoluzioni in atto nel settore dei fondi comuni di investimento.Nel primo semestre 2021, nei paesi avanzati i progressi registrati nelle campagne di vaccinazione contro il Covid-19, l’allentamento delle misure di contenimento del contagio e le politiche economiche adottate per contrastare la crisi hanno contribuito a ripristinare un clima di fiducia nel miglioramento della congiuntura economica. Nel mese di giugno la diffusione di una nuova variante del virus, denominata Delta, ha alimentato una rinnovata incertezza, anche a fronte degli sviluppi relativi al completamento del ciclo vaccinale (in Italia, a fine luglio risulta immunizzato circa il 60% della popolazione). L’attività economica è prevista in ripresa nel corso dell’anno, sebbene in misura eterogenea tra aree e paesi. Nell’Eurozona, la cui crescita si stima inferiore a quella globale, il PIL italiano dovrebbe ritornare ai livelli pre-crisi solo nel 2022, dopo Germania e Francia. Nel frattempo, la pandemia ha innescato fattori di rischio che si aggiungono alle vulnerabilità preesistenti. È aumentato il livello di indebitamento sia pubblico sia privato. Le politiche di bilancio domestiche a sostegno dell’economia hanno determinato un significativo peggioramento delle finanze pubbliche. È cresciuto il debito di famiglie e imprese. In Italia, il rapporto tra debito pubblico e PIL dovrebbe portarsi a fine 2021 su un livello significativamente maggiore alla media dell’Eurozona (rispettivamente, 159% e 102%), mentre l’incidenza del debito privato sul PIL, sebbene in crescita, a fine 2020 rimane ampiamente al di sotto della media degli altri paesi. A fronte della ripresa dei corsi azionari, nell’area euro emergono segnali di un possibile disallineamento tra le valutazioni di mercato e i valori fondamentali delle società quotate, meno pronunciato nel settore bancario; in Italia tale tendenza sembra più contenuta rispetto a quella stimata per l’Eurozona. Nei mercati dei titoli del debito sovrano continuano a prevalere condizioni distese sia sul primario sia sul secondario. Nel 2020 le emissioni nette di obbligazioni bancarie si sono azzerate, toccando il minimo del decennio, mentre quelle delle società non finanziarie sono rimaste su livelli positivi; sul mercato secondario i rendimenti si mantengono bassi ma in crescita. Per effetto della pandemia, nel 2020 le maggiori società non finanziarie quotate nei principali paesi europei hanno registrato una forte contrazione dei ricavi e, nel complesso, un deterioramento delle condizioni reddituali e finanziarie. Le vulnerabilità delle grandi imprese quotate risultano accentuate; la quota di società con indicatori reddituali e finanziari in peggioramento rispetto alla propria media decennale è cresciuta. Le grandi imprese più resilienti in termini di redditività, leverage e liquidità rappresentano meno del 4% del totale in Italia e meno del 5% in Europa. Nel corso del 2020 le banche dei maggiori paesi europei hanno visto un calo dei margini reddituali; si è invece rafforzata l’adeguatezza patrimoniale degli istituti europei e, in particolare, delle banche italiane (+2% del core tier 1 ratio rispetto al 2019). È migliorata la qualità del credito. Per le maggiori banche italiane l’incidenza dei crediti non-performing sul totale è passata dal 7% al 4%, principalmente grazie alle significative operazioni di cessione dei crediti. Gli istituti bancari restano esposti al rischio di un deterioramento della qualità degli attivi, connesso alla difficile congiuntura economica e tanto più marcato quanto maggiore è l’esposizione verso i settori più colpiti dalla crisi. Tra il 2019 e il 2020 il tasso di risparmio lordo delle famiglie italiane, pur continuando a rimanere al di sotto della media dell’Eurozona, ha sperimentato un forte incremento (dal 10% al 18%). Grazie anche alla dinamica dei mercati finanziari nel secondo e nel terzo trimestre del 2020, la ricchezza netta delle famiglie italiane è cresciuta. È aumentato il peso della liquidità sulle attività finanziarie, che alla fine dello scorso anno ha registrato un tasso di variazione tendenziale al massimo storico dal 2015 (+7%), in linea con le dinamiche osservate nell’area euro. A fine 2020, le disponibilità liquide nel portafoglio delle famiglie italiane ammontavano a oltre 1.500 miliardi di euro, pari al 91% circa del PIL e a 2,5 volte la capitalizzazione complessiva di MTA e AIM Italia (rispettivamente 600 e 6 miliardi di euro). Le negoziazioni degli investitori retail italiani su strumenti finanziari hanno registrato a partire dai primi mesi del 2020 un’attività più intensa, in particolare su azioni e fondi comuni; nel mese di marzo 2020, mentre i mercati azionari sperimentavano forti turbolenze per effetto dell’emergenza sanitaria, gli acquisti netti di azioni si sono attestati a circa 3 miliardi di euro, a fronte di una media mensile di vendite nette pari, per il 2019, a circa 470 milioni di euro. Negli ultimi anni, è cresciuto in maniera significativa l’interesse verso le cripto attività, soprattutto tra i più giovani, come mostrano i dati disponibili a livello globale. Nel 2021 hanno registrato un rialzo rilevante le quotazioni delle cripto valute e, tra queste, del Bitcoin, al quale è riferibile la maggiore quota di mercato in termini di capitalizzazione complessiva. Al pari di tutte le cripto valute, il Bitcoin si caratterizza per una marcata volatilità delle quotazioni, significativamente più elevata rispetto a quella delle opzioni di investimento tradizionali. Un’ulteriore criticità è legata alla modalità di scambio delle cripto valute e alle tecnologie sottostanti. La transizione verso un modello di sviluppo sostenibile è un tema prioritario nell’agenda dei policy makers. Uno dei pilastri del Recovery and Resilience Facility (RRF), strumento principale del programma Next Generation EU (NGEU), è la transizione ecologica, a cui deve essere allocata una quota minima delle spese pari al 37% del totale. Inoltre, nell’ambito dell’annunciata strategia di finanziamento diversificata sul mercato dei capitali di NGEU, la Commissione europea ha indicato l’emissione di titoli green nella misura pari almeno al 30% del totale. Le emissioni di green bonds nel primo semestre 2021 sono più che raddoppiate rispetto allo stesso periodo dell’anno precedente, grazie all’ingresso nel mercato degli emittenti sovrani; l’Europa svolge un ruolo trainante, con emissioni pari al 60% circa dell’aggregato globale; l’Italia, il cui contributo rimane inferiore a quello dei maggiori paesi europei, registra una crescita molto elevata. A marzo 2021 si contano circa 3.500 fondi ESG europei, con un patrimonio complessivo superiore a 1.600 miliardi di euro (80% del dato globale); in Italia il numero di fondi ESG è pari a 1.210, con un patrimonio di 276 milioni di euro. Il tema è anche all’attenzione del sistema bancario, che deve valutare la propria esposizione ai settori vulnerabili al rischio fisico e al rischio di transizione, legati ai cambiamenti climatici e alle emissioni di CO2.

Ross Recovery and the Contemporaneous Pricing Kernel
Gagnon, Marie-Hélène,Power, Gabriel,Toupin, Dominique
This chapter investigates the contemporaneous pricing kernel obtained by applying the recovery theorem to options on the S&P500 index. Similarly to the literature on the pricing kernel puzzle, I find evidence that the recovered pricing kernels are U-shape, but only some of the time. The different shapes observed for the recovered kernels appear to be clustered in time, indicating that they are a genuine feature of risk preferences and not just an artifact created by noisy pricing kernel estimates. Although the recovered contemporaneous kernels cannot significantly predict future realized returns over the whole distribution, they are successful for the first 3 quartiles. A practitioner needing an instantaneous measure of downside risk could therefore obtain such information by applying the recovery theorem to options data.

Shock Amplification in an Interconnected Financial System of Banks and Investment Funds
Sydow, Matthias,Schilte, Aurore,Covi, Giovanni,Deipenbrock, Marija,Del Vecchio, Leonardo,Fiedor, Pawel,Fukker, Gábor,Gehrend, Max,Gourdel, Régis,Grassi, Alberto,Hilberg, Björn,Kaijser, Michiel,Kaoudis, Georgios,Mingarelli, Luca,Montagna, Mattia,Piquard, Thibaut,Salakhova, Dilyara,Tente, Natalia
This paper shows how the combined endogenous reaction of banks and investment funds to an exogenous shock can amplify or dampen losses to the financial system compared to results from single-sector stress testing models. We build a new model of contagion propagation using a very large and granular data set for the euro area. Based on the economic shock caused by the Covid-19 outbreak, we model three sources of exogenous shocks: a default shock, a market shock and a redemption shock. Our contagion mechanism operates through a dual channel of liquidity and solvency risk. The joint modelling of banks and funds provides new insights for the assessment of financial stability risks. Our analysis reveals that adding the fund sector to our model for banks leads to additional losses through fire sales and a further depletion of banks’ capital ratios by around one percentage point.

The Illusion of Success: A Critique of Engine No. 1’s Proxy Fight at ExxonMobil
Sharfman, Bernard S.
With less than $40 million worth of ExxonMobil common stock in hand, but with $30 million to spend, Engine No. 1 executed a proxy fight that succeeded in getting three of its four nominated directors elected to the board of ExxonMobil. This victory was viewed as a success by environmentalists and Environmental, Social and Governance (“ESG”) investors. To defend itself in the proxy fight, ExxonMobil was estimated to have spent $35 million. However, besides the money, it not hard to believe that thousands of hours of ExxonMobil management time (board members, executive management, and other managers down the line) were also spent on the effort. Unfortunately, even after all these resources expended, this Article finds that nothing was really accomplished. The hedge fund activism of Engine No. 1 did not provide “a roadmap for Exxon[Mobil] to improve its performance or address the difficult questions impeding meaningful progress toward climate objectives.” In regard to the latter, Engine No. 1 did not provide the company with specific recommendations on how it could transition from a global leader in oil and gas production to a global leader in the production of clean energy. Also, there is no evidence that Engine No. 1 has served as a corrective mechanism (mitigating managerial inefficiencies) at ExxonMobil consistent with this Article’s theory of hedge fund activism. Moreover, and perhaps most importantly, Engine No. 1 may have created a deadly distraction in our global fight against climate change, a fight that should be taken on by governments all over the world, not hedge fund activists. The only apparent positive result of this activism, at least from the perspective of Engine No. 1, is that the entity got a huge marketing boost in its efforts to raise funds for its exchanged traded funds.

The Impact of Strategic Competitive Innovation on the Financial Performance of SMEs during COVID-19 Pandemic Period
El-Chaarani, Hani
Purpose: The purpose of this paper is to reveal the impact of strategic competitive innovation types on the financial performance of SMEs during a very critical period: the COVID-19 pandemic. Four strategic competitive innovation types are considered in this study: marketing innovation, organizational innovation, product innovation and processes innovation.Design/methodology/approach: To examine empirically the relationship between strategic competitiveness and financial performance, data were collected from a sample of 426 Lebanese SMEs belonging to seven different sectors.Findings: The empirical findings of principle component analysis model (PCA) and multiple regression model (MR) reveal that the ability to innovate is essential to an SME’s survival during a crisis. The results of this study confirm the existence of a positive impact of marketing innovation and processes innovation on the financial performance of SMEs during the COVID-19 pandemic.Practical implications: Moreover, results suggest that, in Lebanese SMEs, product innovation and organizational innovation do not have any impact on the financial performance during the pandemic period.Originality/value: This research focused on strategic competitive innovation as a broadly considered essential condition for the survival of SMEs during the COVID-19 crises.

The Time Importance for Prospect Theory
José Cláudio do Nascimento

This paper highlights that dynamic gambles can affect perceptions and reveal behaviors that Kahneman and Tversky's Prospect Theory does not describe. The model discussed here relates the Tsallis entropy to the Kelly's rate to evaluate whether individuals prospect risk situations through nonadditive dynamics or not. Then, psychology students answer a questionnaire where additive prospects have null contrast, but other dynamics can present very high contrast. Thus, we can note that a simple approximation between the losses and the reference point leads individuals to risk aversion. This behavior contradicts the risk seeking predicted by Prospect Theory. In addition, the experiments show that two of the behaviors in the fourfold pattern of risk attitudes also are violated. In essence, this work reveals that individuals can prospect nonadditive dynamics in their gambles when the results are close (or beyond) to the reference point. This dynamic aspect violates any additive prospect models.

What Drives Acquisition Premiums and Why do Targets Reject Offers? Evidence from Failed Acquisition Offers
Aboody, David,Even-Tov, Omri,Zeng, Jean
Using a hand-collected sample of 1,246 failed acquisition offers from 1979 to 2016, we investigate whether acquisition premiums are driven by the market’s revaluation of the target (the information hypothesis) or potential synergies (the synergy hypothesis). Partitioning the sample into acquisition offers that fail due to the target’s rejection (rejection group) and those that fail due to other reasons (non-rejection group), we find that the information hypothesis applies to both groups, reversing the interpretation of prior studies. Overall, our paper shows that identifying the failure reason is of prominent importance for research in mergers and acquisitions.

What if we knew what the future brings?
Peter Bank,Yan Dolinsky,Miklós Rásonyi

In this paper we study optimal investment when the investor can peek some time unites into the future, but cannot fully take advantage of this knowledge because of quadratic transaction costs. In the Bachelier setting with exponential utility, we give an explicit solution to this control problem with intrinsically infinite-dimensional memory. This is made possible by solving the dual problem where we make use of the theory of Gaussian Volterra integral equations.

What's Wrong with Annuity Markets?
Verani, Stephane,Yu, Pei Cheng
We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight percentage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.