Research articles for the 2021-08-11

A systems framework for remedying dysfunction in U.S. democracy
Samuel S.-H. Wang,Jonathan Cervas,Bernard Grofman,Keena Lipsitz

Democracy often fails to meet its ideals, and these failures may be made worse by electoral institutions. Unwanted outcomes include polarized institutions, unresponsive representatives, and the ability of a faction of voters to gain power at the expense of the majority. Various reforms have been proposed to address these problems, but their effectiveness is difficult to predict against a backdrop of complex interactions. Here we outline a path for systems-level modeling to help understand and optimize repairs to U.S. democracy. Following the tradition of engineering and biology, models of systems include mechanisms with dynamical properties that include nonlinearities and amplification (voting rules), positive feedback mechanisms (single-party control, gerrymandering), negative feedback (checks and balances), integration over time (lifetime judicial appointments), and low dimensionality (polarization). To illustrate a systems-level approach we analyze three emergent phenomena: low dimensionality, elite polarization, and anti-majoritarianism in legislatures. In each case, long-standing rules now contribute to undesirable outcomes as a consequence of changes in the political environment. Theoretical understanding at a general level will also help evaluate whether a proposed reform's benefits will materialize and be lasting, especially as conditions change again. In this way, rigorous modeling may not only shape new lines of research, but aid in the design of effective and lasting reform.

Adequacy of time-series reduction for renewable energy systems
Leonard Göke,Mario Kendziorski

To reduce computational complexity, macro-energy system models commonly implement reduced time-series data. For renewable energy systems dependent on seasonal storage and characterized by intermittent renewables, like wind and solar, adequacy of time-series reduction is in question. Using a capacity expansion model, we evaluate different methods for creating and implementing reduced time-series regarding loss of load and system costs.

Results show that adequacy greatly depends on the length of the reduced time-series and how it is implemented into the model. Implementation as a chronological sequence with re-scaled time-steps prevents loss of load best but imposes a positive bias on seasonal storage resulting in an overestimation of system costs. Compared to chronological sequences, grouped periods require more time so solve for the same number of time-steps, because the approach requires additional variables and constraints. Overall, results suggest further efforts to improve time-series reduction and other methods for reducing computational complexity.

Arbitrage-Free Implied Volatility Surface Generation with Variational Autoencoders
Brian Ning,Sebastian Jaimungal,Xiaorong Zhang,Maxime Bergeron

We propose a hybrid method for generating arbitrage-free implied volatility (IV) surfaces consistent with historical data by combining model-free Variational Autoencoders (VAEs) with continuous time stochastic differential equation (SDE) driven models. We focus on two classes of SDE models: regime switching models and L\'evy additive processes. By projecting historical surfaces onto the space of SDE model parameters, we obtain a distribution on the parameter subspace faithful to the data on which we then train a VAE. Arbitrage-free IV surfaces are then generated by sampling from the posterior distribution on the latent space, decoding to obtain SDE model parameters, and finally mapping those parameters to IV surfaces.

Are investor reactions shaping SEC filings writing?
Aktas, Nihat,de Bodt, Eric,Dogan, Can
This study examines whether companies consider investor reactions when reporting information to the SEC. We rely on M&A decisions as a testbed for two main reasons: (i) these are associated with announcement dates allowing the isolation of investor reactions and (ii) they require filing well defined SEC forms after the deal announcement. Relying on a large sample of hand collected merger-related SEC filings, we perform textual analysis to measure their readability (i.e., the Fog index). We find evidence about the existence of a feedback effect from investor reactions to the readability of the SEC filings and to the timing of its reporting to the SEC, supporting the presence of strategic behaviors in SEC filings information disclosure. The results indicate that more negative investor reactions are associated with less readable SEC filings and faster reporting.

Asymmetric excitation of left- and right-tail extreme events probed using a Hawkes model: application to financial returns
Matthew F. Tomlinson,David Greenwood,Marcin Mucha-Kruczynski

We construct a two-tailed peak-over-threshold Hawkes model that captures asymmetric self- and cross-excitation in and between left- and right-tail extreme values within a time series. We demonstrate its applicability by investigating extreme gains and losses within the daily log-returns of the S&P 500 equity index. We find that the arrivals of extreme losses and gains are described by a common conditional intensity to which losses contribute twice as much as gains. However, the contribution of the former decays almost five times more quickly than that of the latter. We attribute these asymmetries to the different reactions of market traders to extreme upward and downward movements of asset prices: an example of negativity bias, wherein trauma is more salient than euphoria.

Auditor Legal Liability and Stock Price Crash Risk: Evidence from Organizational Transformation of Chinese Audit Firms
Chu, Jian,Weng, Chia-Hsiang
We utilize Chinese audit firms' organizational transformation to identify the increase in auditors’ legal liability and find that after auditors transform into limited liability partnerships (LLPs), their clients demonstrate lower future stock price crash risk. Using the path analysis, we find that accounting conservatism, optimism in management earnings forecasts, and optimism in management discussion and analysis (MD&A) disclosures explain the negative relationship between auditor legal liability and client crash risk. The results are less pronounced for auditors finishing the transformation in an early stage than for auditors subject to the mandatory transformation in 2013, as the former generally has a larger size and higher audit quality before the transformation. Overall, this study complements the existing literature on litigation risk and the auditor’s monitoring role in the client information environment.

Bear Factor and Hedge Fund Performance
Ho, Thang,Kagkadis, Anastasios,Wang, George Jiaguo
We show that a simple and intuitive variable, the return of a bear spread portfolio orthogonalized with respect to the market (H-Bear factor), can serve as a new benchmark for explaining the cross-section of hedge fund returns. Low H-Bear exposure funds (bear risk insurance sellers) outperform high H-Bear exposure funds (bear risk insurance buyers) by 0.58% per month on average, outperform even during market crashes, but underperform when bear market risk materializes. Overall, we identify a new risk dimension that affects hedge fund performance, and we show that this risk factor is distinct from the already popular realized tail risk.

Benchmark Backdating in Mutual Funds
Mullally, Kevin,Rossi, Andrea
We analyze mutual fund benchmark changes using hand-collect SEC prospectuses. Under existing rules, funds can change their self-designated benchmark indices and compare their historical returns to those of the new benchmarks, that is, funds can potentially ``backdate'' their relative performance. We find that funds take advantage of this loophole in order to retroactively embellish their performance along several dimensions. Funds with low past performance and flows and less sophisticated clientele are more likely to engage in this behavior. Benchmark changing is associated with other deceptive behavior like portfolio pumping.

Benefits of marriage as a search strategy
Davi B. Costa

We propose and investigate a model for dating and marriage in large societies based on a stochastic matching process and simple decision rules. Agents have preferences among themselves given by some probability distribution. They randomly search for better mates, forming new couples and breaking apart in the process. Marriage is implemented in the model by adding the decision of stopping searching for a better mate when an agent finds another one with an affinity higher than a certain fixed amount. We show that the average utility in the system with marriage can be higher than in the system without it. Part of our results can be summarized in what sounds like a piece of advice: don't marry the first person you like and don't search for the love of your life, but get married if you like your partner more than a sigma above average. We also compare the evolution of the fraction of married couples in our model with real data and obtain good agreement. In the last section, we formulate the model in the limit of an infinite number of agents and find an analytical expression for the evolution of the system.

Beta and Systematic Risk
Abad, Pharos
The risk dogma believes that asset price is determined by a certain risk, while equilibrium pricing believes that asset price is determined by the market equilibrium of supply and demand. The analytical solution to the CAPM (capital asset pricing model) market equilibrium shows that beta is endogenous and is not a characteristic of individual securities, and time series betas and market betas have been confused. The risk dogma deviates from the wholeness thinking of equilibrium pricing and treats the pricing of individual securities in isolation. By analyzing the impact of changes in an asset's payoff on beta, we reveal situations that contradict the risk dogma, such as the beta changes, but the expected return remains unchanged.

Business Strategy and Non-GAAP Earnings Disclosure
Cao, Zhangfan,Lee, Edward
This paper examines the influence of business strategy on firms’ discretionary disclosure of non-GAAP earnings. We find that innovation-oriented firms (i.e., prospectors) have a higher propensity of disclosing non-GAAP earnings, whereas efficiency-driven firms (i.e., defenders) are less likely to issue non-GAAP earnings. Subsequent tests reveal that the prospector managers are more likely to disclose non-GAAP earnings to “convert” GAAP losses into non-GAAP profit and “meet and beat” analyst forecast, consistent with managers’ opportunistic use of non-GAAP earnings as a strategic device to engage in impression management. To corroborate the managerial opportunism behind non-GAAP earnings disclosure, we test the predictability of non-GAAP exclusions and find that the managerial exclusions are of low quality in predicting future GAAP earnings and future cash flows. Cross-sectional analyses indicate that the positive relationship between business strategy and the likelihood of pro forma earnings disclosure is more pronounced amongst firms with higher levels of prior accruals management, firms facing higher agency costs, and firms with higher managerial ability. By exploiting the exogenous shocks that significantly reduce talent supply and fundamentally undermine prospectors’ viability of pursuing an innovation-oriented business strategy, our triple-differences (DiDiD) analysis shows that prospectors significantly restrain the use of non-GAAP earnings following the staggered adoptions of Inevitable Disclosure Doctrine. Our results are robust to a battery of robustness tests including propensity-score-matching (PSM) technique, entropy balancing approach, an instrumental variable (IV) approach, and the inclusion of individual business strategy components. Overall, our study sheds light on the role of business strategy as an intrinsic and longstanding firm characteristic, in shaping corporate decisions on the discretionary disclosure of non-GAAP earnings.

COVID-19 Epidemic: A New Arena of Financial Fraud?
Kizil, Cevdet,Akman, Vedat,Muzır, Erol
The COVID-19 epidemic is going on as a serious health problem and threat. Indeed, it is also a devastating financial and economic problem. Unfortunately, the COVID-19 epidemic is causing many firms to shut down and go out of business. This triggers unemployment and instability in countries all over the World. The developed countries armed with higher funds are able to better support their citizens and businesses compared to developing and underdeveloped countries. All countries implement different measures to eliminate the several negative effects of COVID-19 epidemic, which has undesired reflections on numerous sectors such as the health, education, tourism, food & beverages and manufacturing industries. This paper argues that, the COVID-19 epidemic in fact has deeper reflections and it may be a new arena of financial fraud. Based on this research, citizens and governments must be extra careful about the new types of financial fraud observed as a result of the COVID-19 epidemic. Also, additional and new measures are needed such as awareness and training on the subject. Especially, emerging financial fraud related to information technologies (IT) require special attention. This article suggests that, firms as well as governments must operate their internal controls and internal auditing mechanisms efficiently in order to prevent the negative consequences and financial fraud arising as a result of the COVID-19 epidemic. Emerging new types of financial fraud in the COVID-19 epidemic era and recommendations to minimize their negative effects are discussed.

Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy
Working Paper Series, FDIC,Soto, Paul E.,Fabiani, Andrea,Peydró, José-Luis
We study how capital controls and domestic macroprudential policy tame credit supply booms,respectively targeting foreign and domestic bank debt. For identification, we exploit thesimultaneous introduction of capital controls on foreign exchange (FX) debt inflows and anincrease of reserve requirements on domestic bank deposits in Colombia during a strong creditboom, as well as credit registry and bank balance sheet data. Our results suggest that first, anincrease in the local monetary policy rate, raising the interest rate spread with the United States,allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending,especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade.Second, the increase in reserve requirements on domestic deposits directly reduces credit supply,and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates oncredit supply. Importantly, different banks finance credit in the boom with either domestic orforeign (FX) financing. Hence, capital controls and domestic macroprudential policycomplementarily mitigate the boom and the associated risk-taking through two distinct channels.

Consumer Preference and Satisfaction towards Organic Personal Care Brands in Chennai
People nowadays are very health conscious and they started using environmentally friendly and natural products in their everyday lives. Organic personal care products are becoming very popular, and they occupy a strong market place.The purpose of this study is to identify the preference and satisfaction of consumers’ towards organic personal care brands consumers towards green products at Chennai city, Tamil Nadu. The study was analytical in nature. The target population of the study consists of consumer of organic personal care brands at Chennai city. The sample size of the study was 100 consumers. Judgment sampling technique has been used to collect data from the consumers. The data were collected by using primary and secondary data source. The questionnaire consisted with three dimensions namely socio-economic factors of the consumers, consumers’ preference on organic personal care brands and consumers’ satisfaction on organic personal care brands. The questionnaire was developed by using a five point Likert scale. The secondary data were collected from related articles, journals, thesis, books, newspapers and internet, etc. To analyze the data the statistical measures namely reliability, descriptive statistics, chi-square, correlation and Friedman test were used. The study found that that there is a significant and positive relationship between consumer preference and satisfaction towards organic personal care products at Chennai city. Conclusions as well as suggestions were discussed

Cross-cryptocurrency Return Predictability
Guo, Li,Kang, Donghun,Sang, Bo,Wang, Yu
Using the minute-frequency data on Binance, we document strong evidence of cross-cryptocurrency return predictability. The lagged returns of other cryptocurrencies serve as significant predictors of focal cryptocurrencies up to ten minutes without return reversals, in line with gradual information diffusion. To alleviate statistical issues, we employ the adaptive LASSO method to identify informative predictors and find consistent results. Furthermore, accounting for the highest transaction costs on Binance, a long-short portfolio formed on our findings with a ten-minute rebalancing frequency generates a significant out-of-sample return of 1.14 bps on a minute basis for the futures trading, indicating a profitable investment strategy.

Deep Learning in Asset Pricing
Luyang Chen,Markus Pelger,Jason Zhu

We use deep neural networks to estimate an asset pricing model for individual stock returns that takes advantage of the vast amount of conditioning information, while keeping a fully flexible form and accounting for time-variation. The key innovations are to use the fundamental no-arbitrage condition as criterion function, to construct the most informative test assets with an adversarial approach and to extract the states of the economy from many macroeconomic time series. Our asset pricing model outperforms out-of-sample all benchmark approaches in terms of Sharpe ratio, explained variation and pricing errors and identifies the key factors that drive asset prices.

Design of Low Power Phase Locked Loop (PLL) Using 45NM VLSI Technology
Belorkar, Ujwala A.,Ladhake, S. A.
Power has become one of the most important paradigms of design convergence for multi gigahertz communication systems such as optical data links, wireless products, microprocessor & ASIC/SOC designs. POWER consumption has become a bottleneck in microprocessor design. The core of a microprocessor, which includes the largest power density on the microprocessor. In an effort to reduce the power consumption of the circuit, the supply voltage can be reduced leading to reduction of dynamic and static power consumption. Lowering the supply voltage, however, also reduces the performance of the circuit, which is usually unacceptable. One way to overcome this limitation, available in some application domains, is to replicate the circuit block whose supply voltage is being reduced in order to maintain the same throughput .This paper introduces a design aspects for low power phase locked loop using VLSI technology. This phase locked loop is designed using latest 45nm process technology parameters, which in turn offers high speed performance at low power. The main novelty related to the 45nm technology such as the high-k gate oxide ,metal-gate and very low-k interconnect dielectric described. VLSI Technology includes process design, trends, chip fabrication, real circuit parameters, circuit design, electrical characteristics, configuration building blocks, switching circuitry, translation onto silicon, CAD, practical experience in layout design

Do firms with specialized M&A staff make better acquisitions?
Gokkaya, Sinan,Liu, Xi,Stulz, René M.
We open the black box of the M&A decision process by constructing a comprehensive sample of US firms with specialized M&A staff. We investigate whether specialized M&A staff improves acquisition performance or facilitates managerial empire building instead. We find that firms with specialized M&A staff make better acquisitions when acquisition performance is measured by stock price reactions to announcements, long-run stock returns, operating performance, divestitures, and analyst earnings forecasts. This effect does not hold when the CEO is powerful, overconfident, or entrenched. Acquisitions by firms without specialized staff do not create value, on average. We provide evidence on mechanisms through which specialized M&A staff improves acquisition performance. For identification, we use the staggered recognition of inevitable disclosure doctrine as a source of exogenous variation in the employment of specialized M&A staff.

Emerging Markets Currency Factors and U.S. High-Frequency Macroeconomic Shocks
Alvero, Adrien,Eterovic, Dalibor S.
Relying on the structural vector autoregression developed by Cieslak and Pang (2021), we identify four shocks to the U.S. economy based on the U.S. Treasury yield curve and the stock market: two fundamental news shocks (growth and monetary policy) and two risk-premium shocks (common and hedging). We find that these shocks explain over 40% of the time-series variation of emerging markets currency (EMFX) returns. Additionally, EMFX returns increase significantly with positive U.S. growth shocks and decrease with monetary tightening and risk-premium shocks. We then build long-short currency portfolios based on several academically researched style factors and test their relative exposure to U.S. macroeconomic shocks. We find that only Carry and Macro Momentum long-short portfolios generate positive and significant alphas and excess returns over our sample. However, all single factor portfolios have sizable exposure to U.S. high-frequency shocks. We show that a simple multifactor approach to investing in EMFXs eliminates the exposure of excess returns to U.S. macroeconomic shocks.

Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation
Morais, Bernardo,Perez-Estrada, Javier,Peydró, José-Luis,Ruiz Ortega, Claudia
We study the impact of public debt limits on economic growth exploiting the introduction of a Mexican law capping the debt of subnational governments. Despite larger fiscal consolidation, states with higher ex-ante public debt grew substantially faster after the law, albeit at the expense of increased extreme poverty. Credit registry data suggests that the mechanism behind this result is a reduction in crowding out. After the law, banks operating in more indebted states reallocate credit away from local governments and into private firms. The unwinding of crowding out is stronger for riskier firms, firms borrowing from banks more exposed to local public debt, and for firms operating in states with lower public spending on infrastructure projects.

Fifty Shades of QE: Comparing Findings of Central Bankers and Academics
Fabo, Brian,Jancokova, Martina,Kempf, Elisabeth,Pastor, Lubos
We compare the findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers find QE to be more effective than academic papers do. Central bank papers report larger effects of QE on output and inflation. They also report QE effects on output that are more significant, both statistically and economically, and they use more positive language in the abstract. Central bank researchers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.

Forecasting Earnings with Predicted, Conditional Probability Density Functions
Hendriock, Mario
This study provides empirical evidence for the efficacy of deriving firms' earnings forecasts from predictions of the complete, conditional probability density function (pdf). Relative to cross-sectional earnings forecasts based on OLS regressions, improvements of accuracy, bias and measures for the validity as an expectation's proxy amount to approximately two fifths, when conditional pdfs are obtained via quantile regressions. In turn, another fifth is gained substituting quantile regressions by artificial neural networks. Cross-sectional analyses are consistent with improvements deriving from taking into consideration pdfs of firms which are particular peculiar. Furthermore, also recent point estimation methods fall behind the pdf-based approach.

Handbook of Real Estate and Macroeconomics: An Introduction
Economic Research, Institute of Social and,Leung, Charles K.
This paper provides some background for the book, Handbook of Real Estate and Macroeconomics. It gives an overview of different chapters and how various themes and ideas can be connected. Directions for future research are also discussed.

Impact of Software Expenses on Financial Statements and Capital Ratios in the Financial Sector Empirical: Evidence from Germany and Austria
Leitner-Hanetseder, Susanne,Arminger, Josef,Hangl, Christa
In a world of digital technologies, software solutions become increasingly important for financial institutions and the amount of expenses for intangible assets are increasing. However, expenses for digital financial technologies are capitalized only if the requirements of the International Financial Reporting Standards (IFRS) are met. Even if the expenses for digital financial technologies are capitalized, for calculating Key Performance Indicators (KPIs) under the Capital Requirements Regulation (575/2013) (CRR), the capitalized intangible assets must be deducted from Common Equity Tier 1 (CET1) capital as a prudential filter. This deduction leads to a reduction of capital ratios and therefore to a disadvantage for financial institutions with investments in software solutions. In June 2019, the European Parliament amended regulations of CRR so that in the future capitalized software as intangible assets will not be deducted from the CET1 capital. This paper examines the impact of this amendment on the capital ratios of German and Austrian firms classified as other-systemically important institutions (O-SIIs). The paper shows the growing relevance of software capitalization in the financial sector. However, based on the 2018 data, the impact of the amendment on capital ratios is not material for German and Austrian financial institutions.

Impact of the 2017 Tax Cuts and Jobs Act on Foreign Cash Holdings of U.S. Multinational Corporations
Manakyan, Herman,Mathers, Ani Manakyan
U.S. Multinational Corporations (MNCs) generate significant amounts of income in foreign countries hrough their international affiliates and subsidiaries. Prior to 2018, this income was subject to U.S. taxation only when repatriated to the U.S., creating an incentive for those firms to retain these earnings in their foreign subsidiaries and leading to the accumulation of large amounts of cash held by U.S. corporations outside of the U.S. The Tax Cuts and Jobs Act (TCJA), which was signed into law by President Trump on December 22, 2017, changed the corporate taxation of U.S. MNCs to a territorial system and created an immediate tax liability for U.S. MNCs’ “deemed repatriation” of their past foreign earnings. A primary objective of the change in the corporate tax structure was to encourage repatriation of accumulated foreign cash, as well as to eliminate the incentives to accumulate cash in foreign jurisdictions. This study examines the impact of the tax law changes on cash transactions and cash holdings of U.S. MNCs. Our results indicate a major policy goal of TCJA was largely accomplished, resulting in U.S. MNCs repatriating significant amounts of accumulated foreign cash, as well as reducing the future retention of earnings in foreign jurisdictions.

Kansas’ Experiment with Private Deposit Insurance
Working Paper Series, FDIC,Davison, Lee,Ramirez, Carlos D.
Between 1909 and 1922 a private deposit insurance company coexisted with the state-sponsoreddeposit insurance program in Kansas. This paper documents its development using primarysources. In addition, it examines if affiliation with the private deposit insurance (i) had an effecton risk-taking and the probability of failure; (ii) increased confidence among depositors, and (iii)was influenced by a neighboring bank’s membership in the state’s deposit insurance. We find thataffiliation with the private deposit insurance did not affect a bank’s likelihood of failure, althoughsmaller national bank members did increase risk-taking. The evidence does not support thehypothesis that the company enhanced depositor confidence. Lastly, we do find strong evidencethat a bank’s decision to join the private deposit insurance was influenced by neighboring banks’affiliation with the Kansas deposit insurance program.

Long-term Investors, Demand Shifts, and Yields
Jansen, Kristy A.E.
In this study, I use detailed data on bond and derivative positions of pension funds and insurance companies (P&Is) in the Netherlands to study demand shifts and their direct effect on yields. In particular, I exploit a change in the regulatory discount curve that made the liabilities more sensitive to changes in the 20-year interest rate but less so to longer maturity rates. Following the regulatory change, P&Is reduced their longest maturity holdings but increased those with maturities close to 20 years. The aggregate demand shift led to a steeping of the long-end of the yield curve with lower yields around 20-year maturities and higher yields at longer maturities. Similar effects on yields appear in a large panel of European countries after EU insurance regulations implemented the same regulatory change. My findings have important policy implications, as they indicate that policymakers should carefully consider the regulatory framework of long-term investors when analyzing the impact of monetary policies on yields.

Makovian approximations of stochastic Volterra equations with the fractional kernel
Christian Bayer,Simon Breneis

We consider rough stochastic volatility models where the variance process satisfies a stochastic Volterra equation with the fractional kernel, as in the rough Bergomi and the rough Heston model. In particular, the variance process is therefore not a Markov process or semimartingale, and has quite low H\"older-regularity. In practice, simulating such rough processes thus often results in high computational cost. To remedy this, we study approximations of stochastic Volterra equations using an $N$-dimensional diffusion process defined as solution to a system of ordinary stochastic differential equation. If the coefficients of the stochastic Volterra equation are Lipschitz continuous, we show that these approximations converge strongly with superpolynomial rate in $N$. Finally, we apply this approximation to compute the implied volatility smile of a European call option under the rough Bergomi and the rough Heston model.

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.

Merkez Bankaları ve Covid-19’a Finansal Yanıtlar (Central Banks and Financial Responses towards COVID-19)
Kizil, Cevdet,Akman, Vedat
Turkish Abstract: COVID-19 salgını ile birlikte baş gösteren küresel ekonomik kriz, Dünya Foreks (FX)piyasasında önemli çalkalanma ve oynaklıklar yaratmıştır. COVID-19 sonrası para birimlerinikorumak isteyen birçok ülke, yurtiçi sektörlere döviz likiditesi sağlamak için Amerikan Dolarırezervlerine başvurmuştur. Küresel Amerikan Doları likidite sıkıntısı karşısında, bazı GelişenPiyasa Ekonomileri (EME) merkez bankaları döviz piyasasına müdahale etmiştir. Değerkaybeden para birimlerini korumak için merkez bankaları takas hatları kurmuş veyagenişletmiştir. Bununla birlikte, COVID-19 salgını sonrası Amerikan Doları tüm para birimlerikarşısında değer kazanmamıştır. Aksine, savunmasız ülkelerin para birimleri diğer ülkelerinpara birimlerinin aleyhinde değer kaybına uğramıştır. Kırılganlığın iki ana kaynağı, dövizrezervlerini aşan döviz cinsinden ihraç edilen borç stokları ve emtia ile enerji ihracatınabağımlılık olmuştur. Amerikan doları, COVID-19 sonrası Avro ve Japon Yeni gibi diğer anarezerv para birimleri karşısında çok az hareketlilik göstermiştir. Aksine, rezerv parabirimlerinde sert bir şekilde düşüş yaşayan enerji ihracatçısı ülkelerin para birimleri olmuştur.Brexit görünümünden etkilenmiş olabilecek İngiliz Sterlini haricinde, diğer rezerv parabirimleri Amerikan Doları karşısında çok az hareketlilik göstermiştir. Arjantin ve Türkiye gibiülkeler döviz rezervlerini aşan dış borçları yüzünden para birimlerinde büyük sessiz düşüşleryaşamışlardır. COVID-19 sonrası ülkelerin merkez bankalarının kullandığı en yaygın “ParaBirimine Dayalı Tedbir” araçları arasında “Rezerv Opsiyonu Mekanizması”, “Döviz TürevLimitleri” ve “FX Swap Düzenlemeleri” bulunmaktadır.English Abstract: The global economic crisis that broke out with the COVID-19 epidemic has created significant turbulence and volatility in the world Forex (FX) market. Many countries seeking to protect their currencies after COVID-19 resorted to American Dollar reserves to provide foreign currency liquidity to domestic sectors. In the face of global American Dollar liquidity shortage, some Emerging Market Economies (EME) central banks have intervened in the foreign exchange market. To protect depreciating currencies, central banks have established or expanded Swap lines. However, American dollar did not appreciate against all currencies after the COVID-19 outbreak. On the contrary, currencies of vulnerable countries have depreciated against currencies of other countries. Two main sources of vulnerability have been debt stocks issued in foreign currencies that exceed foreign exchange reserves and dependence on exports of commodities, especially energy. The American Dollar has shown little activity against other major reserve currencies, such as the Euro and Japanese Yen after COVID-19. On the contrary, countries that experienced a sharp decline in their reserve currencies became the currencies of energy exporting countries. With the exception of the British pound, which may have been affected by the Brexit outlook, other reserve currencies showed little activity against the American Dollar. Because of external debt in excess of foreign exchange reserves, in countries such as Argentina and Turkey, currencies saw large declines quietly. Among the most common "Currency Based Measure" tools used by central banks of countries after COVID-19 are "Reserve Option Mechanism", "Foreign Exchange Derivative Limits" and "FX Swap Regulations"

MiFID II: The Impact of Double Volume Cap Mechanism on Market Quality
Ran, Zhenkai
I provide a comprehensive evaluation of the Double Volume Cap mechanism, a regulation that regularly triggers dark trading suspension based on a stock's historical dark trading activity. By analysing the impact of each suspension wave occurring between 2018 and 2020, I show that, during the pre-COVID-19 pandemic period, the dark trading suspension improves market liquidity, worsens informational efficiency, and reduces return volatility, whereas, during the post-COVID-19 pandemic period, the suspension imposes exactly opposite effects on market quality. I also find that lifting the dark trading suspension induces exactly opposite impacts, with a larger effect size, compared to triggering suspension, providing more statistically powerful evidence of how dark trading affects market quality. These results imply that the Double Volume Cap mechanism may have brought about many unintended consequences to the market when the market needs liquidity and stability the most and when the suspension is relaxed. Nevertheless, I do identify evidence that the market gradually learns and adapts to the new trading environment as market participants reduce their reliance on dark pools over time, a result consistent with the policymaker's original objective.

Mortgage Lending in January-May 2021: the Upside Risk of the Real Estate Market
Zubov, Sergey
At the beginning of this year, the growth rate of residential mortgage lending (RML) corresponded to the average level of 2020. The market situation is largely influenced by the reduction in interest rates caused by the implementation of state preferential mortgage programs. The rise in prices in the primary and secondary housing markets amid more expensive bank funding and an increase in construction costs create potential upside risks in the real estate market and results in a mortgage bubble, which forces the government and the Central Bank of the Russian Federation to take measures to cool the market.

Optimal Transport and Risk Aversion in Kyle's Model of Informed Trading
Kerry Back,Francois Cocquemas,Ibrahim Ekren,Abraham Lioui

We establish connections between optimal transport theory and the dynamic version of the Kyle model, including new characterizations of informed trading profits via conjugate duality and Monge-Kantorovich duality. We use these connections to extend the model to multiple assets, general distributions, and risk-averse market makers. With risk-averse market makers, liquidity is lower, assets exhibit short-term reversals, and risk premia depend on market maker inventories, which are mean reverting. We illustrate the model by showing that implied volatilities predict stock returns when there is informed trading in stocks and options and market makers are risk averse.

Pension Return Assumptions and Shareholder-Employee Risk-Shifting
Goto, Shingo,Yanase, Noriyoshi
Firm managers of defined-benefit (DB) pension plan sponsors reveal their primary motives â€" risk-shifting or risk-management â€" through their assumed expected rates of return (ERRs) on the plan assets. Managers with risk-shifting motives choose high ERRs to exploit flexible internal financing from employees via pension underfunding. Those with risk-management motives choose low ERRs to reduce future cash-flow uncertainty by improving the pension funding status. We examine if ERRs predict the firms’ future cash-flow allocation between pension funding and corporate investments, in a Japanese sample that mitigates the selection bias concern for US DB plan sponsors. Using dynamic panel regressions that control for lagged dependent variables, firms’ business prospects, and unobserved fixed effects, we show that higher ERRs precede higher capital investments, R&D expenses, and net pension obligations while revealing managerial aggression, especially among firms with high external financing costs. Higher ERRs predict higher market-to-book ratios for the firms with larger R&Ds and/or underfunding, suggesting that the risk-shifting channel of internal financing with high ERRs can help alleviate underinvestment problems.

Private Equity and Financial Stability: Evidence from Failed Bank Resolution in the Crisis
Working Paper Series, FDIC,Puri, Manju,Johnston Ross, Emily,Ma, Song
We investigate the role of private equity (PE) in the resolution of failed banks after the 2008financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with dataon PE investors, we find that PE investors made substantial investments in underperforming andriskier failed banks. Further, these acquisitions tended to be in geographies where the other localbanks were also distressed. Our results suggest that PE investors helped channel capital tounderperforming failed banks when the “natural” potential bank acquirers were themselvesconstrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use aquasi-random empirical design based on proprietary bidding data to examine ex post performanceand real effects. We find that PE-acquired banks performed better ex post, with positive real effectsfor the local economy. Our results suggest that private equity investors had a positive role instabilizing the financial system in the crisis through their involvement in failed bank resolution.

Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873
Working Paper Series, FDIC,Anderson, Haelim,Hachem, Kinda,Zhang, Simpson
We study financial stability with constraints on central bank intervention. We show that aforced reallocation of liquidity across banks can achieve fewer bank failures than a decentralizedmarket for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium.Importantly, this reallocation can be implemented through the issuance of clearinghouse loancertificates, such as those issued in New York City during the Panic of 1873. With a new datasetconstructed from archival records, we demonstrate that the New York Clearinghouse issued loancertificates to member banks in the way our model suggests would have helped resolve the panic.

Risk Concentration and the Mean-Expected Shortfall Criterion
Xia Han,Bin Wang,Ruodu Wang,Qinyu Wu

Expected Shortfall (ES, also known as CVaR) is the most important coherent risk measure in finance, insurance, risk management, and engineering. Recently, Wang and Zitikis (2021) put forward four economic axioms for portfolio risk assessment and provide the first economic axiomatic foundation for the family of ES. In particular, the axiom of no reward for concen- tration (NRC) is arguably quite strong, which imposes an additive form of the risk measure on portfolios with a certain dependence structure. We relax the axiom of NRC by introducing the notion of concentration aversion, which does not impose any specific form of the risk measure. It turns out that risk measures with concentration aversion are functions of ES and the expec- tation. Together with the other three standard axioms of monotonicity, translation invariance and lower semicontinuity, concentration aversion uniquely characterizes the family of ES. This result enhances the axiomatic theory for ES as no particular additive form needs to be assumed ex-ante. Furthermore, our results provide an axiomatic foundation for the problem of mean-ES portfolio selection and lead to new explicit formulas for convex and consistent risk measures.

Robust Asymptotic Growth in Stochastic Portfolio Theory under Long-Only Constraints
David Itkin,Martin Larsson

We consider the problem of maximizing the asymptotic growth rate of an investor under drift uncertainty in the setting of stochastic portfolio theory (SPT). As in the work of Kardaras and Robertson we take as inputs (i) a Markovian volatility matrix $c(x)$ and (ii) an invariant density $p(x)$ for the market weights, but we additionally impose long-only constraints on the investor. Our principal contribution is proving a uniqueness and existence result for the class of concave functionally generated portfolios and developing a finite dimensional approximation, which can be used to numerically find the optimum. In addition to the general results outlined above, we propose the use of a broad class of models for the volatility matrix $c(x)$, which can be calibrated to data and, under which, we obtain explicit formulas of the optimal unconstrained portfolio for any invariant density.

Skill-driven Recommendations for Job Transition Pathways
Nikolas Dawson,Mary-Anne Williams,Marian-Andrei Rizoiu

Job security can never be taken for granted, especially in times of rapid, widespread and unexpected social and economic change. These changes can force workers to transition to new jobs. This may be because new technologies emerge or production is moved abroad. Perhaps it is a global crisis, such as COVID-19, which shutters industries and displaces labor en masse. Regardless of the impetus, people are faced with the challenge of moving between jobs to find new work. Successful transitions typically occur when workers leverage their existing skills in the new occupation. Here, we propose a novel method to measure the similarity between occupations using their underlying skills. We then build a recommender system for identifying optimal transition pathways between occupations using job advertisements (ads) data and a longitudinal household survey. Our results show that not only can we accurately predict occupational transitions (Accuracy = 76%), but we account for the asymmetric difficulties of moving between jobs (it is easier to move in one direction than the other). We also build an early warning indicator for new technology adoption (showcasing Artificial Intelligence), a major driver of rising job transitions. By using real-time data, our systems can respond to labor demand shifts as they occur (such as those caused by COVID-19). They can be leveraged by policy-makers, educators, and job seekers who are forced to confront the often distressing challenges of finding new jobs.

The Determinants of Financial Inclusion
Mose, Naftaly,Thomi, John
There are hosts of dynamics contributing to financial inclusion. These sources may be both from the demand side and supply side. The government and financial institutions use several policy initiatives to encourage the supply of financial services to the excluded sector. However, the demand-side factors of financial access have attracted little focus. This study provides an over-view of sources of financial inclusion and highlights the policy measures from the perspective of consumers of financial services â€" also known as the demand-side. The secondary series data were estimated using the ordinary least square method. The findings of the study indicate that economic growth and the number of internet users exert a positive and significant effect on financial access in East Africa. On the other hand, the result indicates that the deposit interest rate was insignificant. The study recommends the deposit interest rate be made attractive to promote continuous saving and access to loanable funds in the financial market. The policy strategies therefore should be aimed at cultivating a conducive financial system that upholds financial access-demand-driven rates to stimulate financial growth.

The Economical and Financial Impact of COVID-19 Epidemic on Migrant Labor Force
Akman, Vedat,Erarslan, Ä°lkay,Kizil, Cevdet
The objective of this study is to investigate the economic and financial effects of COVID-19 epidemic on migrant labor force. Literature review is the research design of this study. It is possible to achieve economic growth in the short term with some productivity-enhancing measures. However, what matters is the long-term economic growth. This is because, as the source of long-term economic growth and technological innovations, skilled labor force is more concrete. Therefore, for long-term economic growth, supply of skilled workforce is an indispensable precondition. Results are analyzed by comparing different resources, evaluating the literature and taking advantage of International Labor Organization (ILO) and Organization for Economic Co-operating and Development (OECD) statistics. According to study results, COVID-19 poses an unprecedented negative impact on working conditions of migrant work force. Migrant workers are among the most vulnerable in the global labor force affected by the COVID-19 epidemic. But, COVID-19 lock downs will particularly have the highest negative impact on low paid and low skilled (unskilled) migrant work force. Unskilled migrant workers are often excluded from national COVID-19 policy responses in hosting countries, such as wage subsidies, unemployment benefits or social security and social protection measures. Also, access to COVID-19 testing or medical treatment might not be available to unskilled migrant workers. Concerning conclusion and recommendations, migrant workers, should be integrated into risk pooling mechanisms to guarantee social insurance and universality of coverage and solidarity in financing. Health care related benefits can also assist to protect both migrant workers and their host countries.

The Effects of Bank Regulation on Financial Development in the MENA Countries: The Supporting Role of Supervision
Azmeh, Chadi
This study investigates the impact of bank regulation on financial development in the MENA countries for the period 1995-2014. Restrictions on activity, foreign banks, and capital were used as proxies for bank regulation. Also, bank supervisory power, independence, private monitoring, and moral hazard were used as proxies for bank supervision. Liquid liabilities, private credit, and z-score were chosen as proxies for financial development. They represent, consecutively, size, activity, and stability of the financial sector. A positive and significant impact of bank regulation was observed on all measures of financial development. The most important contribution of the present study is that, it gives evidence of an important supporting role of supervision on bank regulation, to realize its desired impact on financial development. This final result is important for the MENA countries, since data analysis shows that financial sector reform is more concentrated on regulation than supervision. Policy makers in the MENA countries need to focus more, in their financial sector reform, on bank supervision to realize the expected impact of bank regulation on financial development.

The Impact of a Government Risk Pool and an Opt-Out Framing on Demand for Earthquake Protection
Kunreuther, Howard,Conell-Price, Lynn,Kovacs, Paul,Goda, Katsu
This paper describes the design and analysis of a web-based choice experiment that examines how the demand for earthquake protection in Quebec and British Columbia is influenced by the default option and the structure of the insurance plan. Homeowners in both provinces were given the opportunity to purchase protection against earthquake losses when presented with one of the following options: the current private insurance plan, a high deductible private insurance plan, and a proposed public-private risk pool. The default frame was changed so the homeowner could either opt-in by purchasing this coverage or opt-out of being given this protection and receiving a premium discount. Assigning participants to a public-private risk pool rather than the current private insurance plan increases the likelihood of purchasing earthquake protection by 151%. The opt-out frame leads to a likelihood greater than 1.6 of purchasing coverage relative to the opt-in frame when given the same plan structure. The policy implications of this finding are discussed.

The Impacts of Strengthening Regulatory Surveillance on Bank Behavior: A Dynamic Analysis from Incomplete to Complete Enforcement of Capital Regulation in Microprudential Policy
Nakashima, Kiyotaka,Ogawa, Toshiaki
This study examines the impact of strengthening bank capital supervision on bank behavior in the incomplete enforcement of regulations. In a dynamic model of banks facing persistent idiosyncratic shocks, banks accumulate regulatory capital and decrease charter value and lending in the short run, while in the long run, the banking system achieves stability. To test the short-run implications, we utilize the introduction of the prompt corrective action program in Japan as a quasi-natural experiment. Using some empirical specifications with bank- and loan-level data, we find empirical evidence consistent with the theoretical predictions.

The Socio-Political Theory of Crises (SPTC)
Diamondopoulos, John
Crises are difficult to predict with the most recent and notable examples being the failure of the profession to see the 2007-2008 Credit Crunch. The failure of quantitative approaches to crises is due to the relative non-comparability of crises when using large-N methods that leave out context â€" social, political, and institutional. This led to a search for an alternative approach. The theory development research strategies of abduction/retroduction were used to develop a process-oriented theory of financial crises. The process of how a crisis unfolds happens through a 4-step macro-level process: Social, Trigger, Disruption and Psychological. Embedded within the Socio-Political Theory of Crises (SPTC) are three mechanisms: macro-level, disruption, and micro-level. This theory, which now has at its core the social, political, and institutional context, can be used to understand and to explain a variety of financial crises and to compare crises based on the process of how they unfold.

Unemployment Problem and Global Financing Related to COVID-19 Epidemic
Akman, Vedat,Kizil, Cevdet
The COVID-19 epidemic has caused a serious economic fluctuation in the World. One of the leading reasons behind this great impact is the lack of an evident authority concerned with the management of global economy. That has caused the already existing unemployment problem reaching to new critical levels. COVID-19 has also created a perception that, local governments will get stronger following the epidemic. However, almost all governments in the World are currently dealing with the unemployment problem that has become more severe. Definitely, it seems that all governments have their own methods to deal with the growing unemployment issue triggered by COVID-19 epidemic. This paper argues that, passive methods to eliminate the unemployment problem through COVID-19 epidemic such as incentives, benefits, aids and unemployment insurance are not completely correct techniques. The reason is that, we believe such methods bring a great burden on national budgets and they are also temporary short-term solutions. This study puts forward that, active methods aimed at the long-run should be implemented in order to solve the unemployment problem permanently. Also, efficiency based wage rise policies must be adopted for the welfare of economy, employees and employers. Absolutely, the COVID-19 epidemic has proved us that, healthy and safe working environments are a must for the employees. In fact, this factor is expected to become more important in the post-COVID-19 era.

What Can the Concept of ‘Public Value’ Contribute to Financial Regulation?
Salem, Omar
The purposes of financial regulation have traditionally been related to correcting market failure and maximizing market efficiency. This approach to public policy has been challenged by an approach that focuses on maximising public value rather than solely correcting market. This article identifies that significant problems with the orthodox approach to financial regulation and sets out how the concept of public value could provide a useful conceptual framework for the design and assessment of financial regulation. The article also looks at practical examples of how the concept of public value could be applied to financial regulation.

Why is the Vaccination Rate Low in India?
Pramod Kumar Sur

Why does the vaccination rate remain low, even in countries where long-established immunization programs exist, and vaccines are provided for free? We study this lower vaccination paradox in the context of India- which contributes to the largest pool of under-vaccinated children in the world and about one-third of all vaccine-preventable deaths globally. We explore the importance of historical events shaping current vaccination practices. Combining historical records with survey datasets, we examine the Indian government's forced sterilization policy implemented in 1976-77 and find that greater exposure to forced sterilization has had a large negative effect on the current vaccination completion rate. We explore the mechanism for this practice and find that institutional delivery and antenatal care are low in states where policy exposure was high. Finally, we examine the consequence of lower vaccination, suggesting that child mortality is currently high in states with greater sterilization exposure. Together, the evidence suggests that government policies implemented in the past could have persistent impacts on adverse demand for health-seeking behavior, even if the burden is exceedingly high.