We investigate the link between exchange-traded funds and real investment. Cross-sectionally higher ETF ownership is associated with an increased sensitivity of real investment to Tobin’s q and a heightened ability of stock returns to forecast future earnings. Inclusion of stocks in industry ETFs enhances investment-q sensitivity and implies greater incorporation of earnings information into prices prior to public releases. Greater non-market ETF ownership leads to increased (reduced) reliance of real investment on own (peers’) stock prices. Overall the evidence is consistent with ETFs exerting a positive effect on real investment efficiency via greater flows of information.
Constantinos Antoniou Frank Weikai Li Xuewen Liu Avanidhar Subrahmanyam Chengzhu Sun
We study inter-department knowledge sharing in an investment research setting where the benefits are potentially significant for the brokerage and the capital market but so are the frictions impeding it. Using hand-collected data on equity analyst access to in-house debt research expertise we find significant benefits to equity analysts in the form of improved ability to forecast cash flows and to anticipate credit rating downgrades. Moreover we find evidence that access to management and research expertise underlie in-house debt analysts’ capacity to generate information beneficial to equity analysts. Finally these benefits exist only in the presence of a collaborative brokerage culture or debt-equity analyst collocation consistent with these factors promoting knowledge sharing in the investment research industry.
A large body of empirical literature has shown that market impact of financial prices is transient. However from a theoretical standpoint the origin of this temporary nature is still unclear. We show that an implied transient impact arises from the Nash equilibrium between a directional trader and one arbitrageur in a market impact game with fixed and permanent impact. The implied impact is the one that can be empirically inferred from the directional traders trading profile and price reaction to order flow.Specifically we propose two approaches to derive the functional form of the decay kernel of the Transient Impact Model one of the most popular empirical models for transient impact from the behaviour of the directional trader at the Nash equilibrium. The first is based on the relationship between past order flow and future price change while in the second we solve an inverse optimal execution problem. We show that in the first approach the implied kernel is unique while in the secon
In many environments agents form agreements which are multilateral and/or have externalities. We show that stable outcomes exist in these environments when the irrelevance of rejected contracts condition survives aggregation either among all agents or within two implicit sides of the market for whom contracts are substitutes. In settings where agents are strategically sophisticated in the sense that they make correct conjectures about how other agents will choose from each set of contracts the survival of IRC under aggregation is equivalent to a robustness criterion on those conjectures. When each agent is strategically sophisticated about the behavior of all other agents stable outcomes always exist: No conditions on preferences or market structure are necessary. Our characterization of these outcomes allows the application of matching theory to new settings such as legislative bargaining or free trade agreement formation.
In this paper we ask a fundamental design question in the theory of contests: Should contestants and reward money be pooled into a single grand contest or should they be divided into parallel subcontests? We theoretically explore optimal divisioning using Tullock’s lottery contest framework and compare the performance i.e. total effort generated of the grand contest to the performance of contest divisioning based on players ability or risk attitude. When all players are risk neutral contest divisioning is never optimal. However given that players are heterogeneous in either ability or risk attitude we find that contest divisioning is optimal when the degrees of absolute risk aversion are sufficiently large. Importantly our results support the widespread use of divisioning seen in practice.
Inspired by the classical riot model proposed by Granovetter in 1978 we consider a parametric stochastic dynamical system that describes the collective behavior of a large population of interacting agents. By controlling a parameter a policy maker seeks to minimize her own disutility which in turn depends on the steady state of the system. We show that this economically sensible optimization is ill-posed and illustrate a novel way to tackle this practical and formal issue. Our approach is based on the $\Gamma$-convergence of a sequence of mean-regularized instances of the original problem. The corresponding minimum points converge towards a unique value that intuitively is the solution of the original ill-posed problem. Notably to the best of our knowledge this is one of the first applications of $\Gamma$-convergence in economics.
Rosario Maggistro Paolo Pellizzari Elena Sartori Marco Tolotti
Turning points are the Achilles heel of time-series momentum portfolios. Slow signals fail to react quickly to changes in trend while fast signals are often false alarms. We analyze how momentum portfolios of various intermediate speeds formed by blending slow and fast strategies handle turning points. We find that the intersection of slow and fast signal directions possesses predictive information including predictably negative returns when both signals are negative. We propose a novel decomposition of momentum strategy alpha highlighting the role of volatility timing; and a mean-variance optimal dynamic speed-selection strategy with efficient out-of-sample performance across international equity markets.
Christian L. Goulding Campbell R. Harvey Michele Mazzoleni
If the capital markets described the year 2020 in a few words it would certainly be Special Purpose Acquisition Company (SPACs) which - although to a different extent - are now gaining momentum on both shores of the pond. While in the United States SPACs are really enjoying a new lease on life due to the pandemic the outlook seems positive in Europe too although data are not comparable to those registered across the Atlantic.This article focuses on SPACs in the United States prior to the COVID-19 pandemic (between January 2010 and December 2019) in order to understand their structural changes over the years and the grounds for their recent resurgence. First the article aims to identify the length and profitability of such an investment phenomenon and also understand the behavior of institutional investors in this context. Second the article analyzes the possible investment shifts in the sector of SPACs driven by the 2020 post-COVID bubble relying on data retrieved from different provid
In response to Morningstar’s release of carbon risk (CR) scores in May 2018 (environmentally) sustainable mutual funds in the U.S. showed a greater reduction in their portfolio CR relative to conventional funds. The observed causal impact of disclosures is consistent with the funds’ primary investment objectives. Conventional funds that are signatories to the UN’s Principles for Responsible Investment (PRI) or those with secondary sustainability mandates behave more like other conventional funds rather than sustainable funds. These funds appear insensitive to disclosures as their sustainability considerations are superseded by other primary investment criteria. Fiduciary and legal bonding influences fund managers’ response to sustainability disclosures. Sustainable funds lower their CR score by reducing exposure to fossil fuels not by increasing exposure to renewables.
This paper investigates the moderating impact of FDI & FPI in the association of macro-economic variables along with Oil prices & Index returns. Monthly data has been used from the period 2005 to 2018. Efficient unit root & break point unit root tests results indicate that all variables are stationary at 1st difference. Co -integration test results signify the presence of long-run relationship in model. GARCH (11) model has been applied for analyzing the volatility in the data series. Furthermore least square method is employed to check dependency & fitness level of model. In order to investigate the moderating impact regression technique has been applied. Findings of LSM technique indicate that index returns aren’t significantly dependent on macro-economic variables on 1st difference of data series because variables predicting behavior has been changed with respect to stationarity of data. Exchange rate & interest rate have negative significant association with index returns. Oil pric
The conventional wisdom is that you must reveal something about how you pick stocks in order to prove that you have stock-picking skill. In this paper I show that prior to executing any trades it is possible to prove you have stock-picking skill without revealing any additional information about your underlying trading signal. The protocol I outline represents a zero-knowledge proof of stock-picking skill—i.e. a proof which reveals nothing except for the validity of a claim. Zero-knowledge proofs allow any skilled stock picker to advertise his ability without fear of his trading signal getting scooped. As a result they have important implications for how the active-management industry is organized.
We find that the economic content of the low market-beta anomaly is changeable in a multi-factor world: once the return source underlying the known low market-beta anomaly (i.e. the low CAPM-beta anomaly) is controlled a new low market-beta anomaly with different economic content can emerge. In light of this finding we propose to recognize the difference between the low market-beta anomaly and its known version and raise the bar for an explanation of the phenomenon to be sufficient. Under the stricter standard a sufficient explanation should capture all the anomaly’s profitable sources. We test existing explanations that subsume the low CAPM-beta anomaly but find them falling short of this standard. Our tests identify a new low market-beta anomaly that is orthogonal to the well-documented low CAPM-beta anomaly and remains unexplained.
Problems of interpolation classification and clustering are considered. In the tenets of Radon--Nikodym approach ⟨f(x)𝜓⟩/⟨𝜓⟩ where the 𝜓(x) is a linear function on input attributes all the answers are obtained from a generalized eigenproblem |f|𝜓⟩=λ|𝜓⟩. The solution to the interpolation problem is a regular Radon-Nikodym derivative. The solution to the classification problem requires prior and posterior probabilities that are obtained using the Lebesgue quadrature technique. Whereas in a Bayesian approach new observations change only outcome probabilities in the Radon-Nikodym approach not only outcome probabilities but also the probability space |𝜓⟩ change with new observations. This is a remarkable feature of the approach: both the probabilities and the probability space are constructed from the data. The Lebesgue quadrature technique can be also applied to the optimal clustering problem. The problem is solved by constructing a Gaussian quadrature on the Lebesgue measure. A dist
We study a duopoly model of behavior-based pricing where consumers decide whether they reveal their data or remain anonymous. We contrast two data policies: in an open data policy revealed data is accessible by both sellers in the market. The unique equilibrium displays that all consumers reveal their data while firms price discriminate causing welfare losses due to poaching. In an exclusive data policy revealed data is only accessible by the one firm a consumer bought from. In equilibrium consumers anonymize prices are uniform and the market is efficient. We test these contrasting predictions in an experiment. In the open data treatment subjects predominantly act as predicted. In the exclusive data treatment buyers initially reveal their data as sellers reward loyalty. Subsequently buyers adjust more towards anonymization when sellers begin to employ poaching strategies.
Goal-setting is a common practice to motivate effort. However little is known about the effectiveness of group goal difficulty on shirking depends on team dynamics such as group identity. We study the question under a mixed incentives setting where a combination of a tournament incentive and a group-based pay is offered as such an incentive setting is widely used in practice. Using a real-effort experiment we predict and find that group goal difficulty has a negative effect on shirking when group identity is strong but has a positive effect when group identity is weak. That is in strongly identified groups increasing group goal difficulty motivates shirking. Yet in weakly identified groups increasing group goal difficulty reduces shirking. The reason is that when group identity is weak group members focus on individual interests and compete for a larger tournament incentive. When group identity is strong group members focus on the groups common good. Failing to reach group goals weaken
One of the most exciting recent developments in financial research is the availability of new administrative private sector and micro-level datasets that did not exist a few years ago. The unstructured nature of many of these observations along with the complexity of the phenomena they measure means that many of these datasets are beyond the grasp of econometric analysis. Machine learning (ML) techniques offer the numerical power and functional flexibility needed to identify complex patterns in a high-dimensional space. However ML is often perceived as a black box in contrast with the transparency of econometric approaches. In this article the author demonstrates that each analytical step of the econometric process has a homologous step in ML analyses. By clearly stating this correspondence the author’s goal is to facilitate and reconcile the adoption of ML techniques among econometricians.
We quantify the exposure of major financial markets to news shocks about global contagion risk accounting for local epidemic conditions. For a wide cross section of countries we construct a novel data set comprising (i) announcements related to COVID19 and (ii) high-frequency data on epidemic news diffused through Twitter. Across several classes of financial assets we provide novel empirical evidence about financial dynamics (i) around epidemic announcements (ii) at a daily frequency and (iii) at an intra-daily frequency. Formal estimations based on both contagion data and social media activity about COVID19 confirm that the market price of contagion risk is very significant. We conclude that prudential policies aimed at mitigating either global contagion or local diffusion may be extremely valuable.
Maria Jose Arteaga-Garavito Mariano (Max) Massimiliano Croce Paolo Farroni Isabella Wolfskeil
In this paper we examine the benefits of accounting comparability for cross-border investments in private firms. Exploiting a quasi-experimental setting we examine the real effect of an increase in accounting comparability using a difference-in-differences research design. We find that the increase in accounting comparability after a major accounting reform leads to an average increase in foreign ownership of about 2 to 6 percentage points. Cross-sectional and industry results confirm that the effect is stronger for smaller highly profitable intangible-intensive and more stable firms that are in the consumer durables and manufacturing industries. The findings are robust to different forms of matching procedures variations in the measurement windows and a placebo-test. Our large sample evidence based on the historical shareholder information of private firms provides insights on the real effects of increasing the comparability of local GAAP for foreign-direct investments in private firm
Many governments consider carbon taxation as an efficient tool to reduce carbon emissions. How can carbon taxation be best introduced? This paper examines the effect of selective carbon taxation on aggregate emissions in the context of input-output linkages. Our contribution is to model carbon taxes as a charge on the emissions of individual energy sources rather than on output or the final consumption good. We show theoretically the difference between taxing sectors and energy sources for the effect of carbon taxation on aggregate emissions. We then introduce the measure of emission centrality and show that it is a helpful statistic to evaluate how price effects influence emissions within the production network following the introduction of a carbon tax. Our empirical contribution is to exploit the introduction of carbon taxation in Mexico in 2014 and use input-output data to show that the political economy effects that made government eliminate taxation on some energy sources resulte
This paper assumes that the market returns follow a two-state Markov process that randomly switches between bull and bear states. We show that in this case the exponential moving average (EMA) represents the optimal trend-following rule. The paper provides the analytical solution to the optimal window size (decay constant) in the EMA rule. We estimate the optimal window size for timing the S&P 500 stock market index using real-world data. A comparative statics analysis finds that the optimal window size depends mainly on the signal-to-noise ratio of returns and the state transition probabilities.
We employ machine learning to develop measures of residential real estate uniqueness from written advertisements. These measures are exogenous from sales prices. We distinguish the effect of market uniqueness (compared to houses for sale at the same time) from the effect of universal uniqueness (compared to houses in the same sub-market) on sale prices and time-on-the-market (TOM). The hedonic models show that a one standard deviation increase in market uniqueness leads to a 13% ($48490) increase in sale prices at the cost of delaying the transaction for 1.7 days whereas a one standard deviation increase in universal uniqueness only leads to an 11% ($41030)increase in sale prices at the cost of delaying the transaction for 3 days. We validated the impact of uniqueness on TOM using two hazard models. Our results highlight the importance of uniqueness and market timing in real estate.
How do slums shape the economic and health dynamics of pandemics? A difference-in-differences analysis using millions of mobile phones in Brazil shows that residents of overcrowded slums engaged in less social distancing after the outbreak of Covid-19. We develop and calibrate a choice-theoretic equilibrium model in which individuals are heterogeneous in income and some people live in high-density slums. Slum residents account for a disproportionately high number of infections and deaths and without slums deaths increase in non-slum neighborhoods. Policy analysis of reallocation of medical resources lockdowns and cash transfers produce heterogeneous effects across groups. Policy simulations indicate that: reallocating medical resources cuts deaths and raises output and the welfare of both groups; mild lockdowns favor slum individuals by mitigating the demand for hospital beds whereas strict confinements mostly delay the evolution of the pandemic; and cash transfers benefit slum residen
Luiz Brotherhood Tiago Cavalcanti Daniel Da Mata Cezar Santos
Chinese local governments have issued a large number of local government financing vehicle (LGFV) bonds since 1994 when the Budget Law was promulgated where local governments were prohibited from raising debt on their own. Although LGFV bonds are implicitly backed by governments there has been no consensus on which level of government is expected to bail out the issuer in the event of financial distress. Based on the public disclosures of bond-issuing firms we create a proxy for total municipal implicit debt using the total outstanding interest-bearing debt of LGFVs under the jurisdiction of a local government and further analyze the impact of this debt on a LGFV bond’s credit spread in both the primary and secondary markets. In this way we can also identify the level of government that is considered as an implicit guarantor. We find that a LGFV bond’s credit spread is positively correlated with local governments’ implicit debt ratios and that their correlation changes with government
We examine the impact of population aging on municipal access to credit. A one standard deviation increase in a state’s population age leads to a 23 basis point increase in municipal bond issue spread. Three mechanisms drive this effect: income tax revenue healthcare spending and pension liabilities. Constitutional pension protections and securities with lower credit quality or longer maturity exacerbate the effect. To control for endogenous migration and mortality patterns we exploit variation from historical state fertility trends. Our findings highlight the challenges municipalities face to cope with systemic demographic transition.
How might markets exhibit both short-term reversals and longer-term momentum? Motivated by this question we develop a dynamic model which includes noise traders and investors who underreact to signals that they do not themselves produce. Our setting implies the following: Return predictability transitions from reversals to weak predictability to momentum as the lag horizon lengthens. Short-term reversals weaken following earnings announcements and increase when retail trading is higher. These predictions are supported empirically. If noise trader demands are positively autocorrelated our model generates sharp buildups and collapses of stock prices as in the recent GameStop episode.
Narasimhan Jegadeesh Jiang Luo Avanidhar Subrahmanyam Sheridan Titman
We find firms strategically reduce their pension contributions through the choices of pension discount rates asymmetrically: firms slowly lower rates when interest rates drop but quickly raise rates when rates rise. Cross-sectionally distressed firms set pension discount rates higher than healthy firms yet corporations setting high discount rates are better funded and more profitable. Non-distressed companies have a strong positive relationship between investment productivity and pension discount rates but this is weaker among distressed firms. Overall the imperfect elasticity of pension discount rates to interest rates offers corporations leeway to alleviate the constraints from pension liabilities.
Previous studies show that stocks with abnormally high volumes are associated with high subsequent returns. Using an extrapolation measure implied by survey evidence and theoretical models I show that the high-volume premium is more pronounced among firms with low extrapolative value whereas the premium is mitigated among firms with high extrapolative value. The difference in the high-volume premium between low- and high- extrapolative value firms can be predicted by DOX the market-wide extrapolation level (Cassella and Gulen 2018). I also provide evidence that the documented cross-sectional variation of the high-volume premium is not driven by stock visibility. The results indicate the extrapolative expectation is an important contributor to cross-sectional expected returns.
In this paper we examine whether mutual fund managers around the world are able to implement synchronization strategies with respect to different investment styles a fundamental aspect in the efficient management of an investment portfolio. We also analyze the skills of these managers to properly select stocks that make up their portfolios. For this purpose we use a sample of equity mutual funds registered in 35 countries around the world for the 1990-2021 period for our analysis we employ multifactor and conditional versions of the market timing models of Treynor and Mazuy and Henriksson and Merton. The results obtained are very similar across countries. We find a correct stock selection and synchronization skills with respect to the book-to-market style and a negative ability to synchronize size and 1-year momentum investment styles.
In a setting with information asymmetry and a tradable value-weighted market index ambiguity averse investors hold undiversified portfolios and assets have nonzero alphas. But when a passive fund offers the risk-adjusted market portfolio (RAMP) whose weights depend on information precisions as well as market values all investors hold the same portfolios as in the economy without model uncertainty and thus engage in index investing. So RAMP improves participation and risk sharing. Asset alphas are zero with RAMP as pricing portfolio. RAMP can be implemented by a fund of funds even if no manager individually has sufficient knowledge to do so.
We examine the stock price reactions to the mass inclusion of China A-shares in the Morgan Stanley Capital International (MSCI) global indices and find that stocks that would be included in the MSCI global indices earned significantly positive abnormal returns when the inclusion plan was first announced. These unusual stock price changes are associated with firm-level risk-sharing potential but not with firm-level changes in expected future cash flows liquidity or shareholder base. Moreover we show that firm transparency reinforces the effect of risk-sharing potential on stock prices. There is also a positive externality effect on the stock prices and risk exposures of stocks that would not be included in the MSCI global indices. Our results support the view that MSCI inclusion not only directly integrates index-included stocks with the global market but also indirectly integrates nonindex-included stocks with the global market which is consistent with the predictions of Alexander et a
In this paper we review the pricing and model calibration of Credit Default Swaps referring to both the International Swaps and Derivatives Association (ISDA) CDS contract and credit model standardization guidelines. Furthermore we provide an Excel pricing workbook to supplement the materials discussed. The main goal is for this paper to act as a credit primer and to review the impact and purpose of ISDA contract and model standardization on credit pricing and modelling techniques.We review the Credit Default Swap (CDS) product highlighting contract specifications terminology and how the product has been standardized for increased liquidity and XVA capital cost reduction. We perform a fundamental review of probability and credit modelling outlining standard market assumptions and techniques used by traders and other market practitioners. Furthermore we demonstrate how to price CDS contracts calibrate credit models and discuss the ISDA Standard Model ISDA Fair Value Model and Bloomberg
Lobiettivo di queste note è evidenziare il metodo di ottimizzazione del portafoglio unico per cui linvestitore massimizza la sua funzione di utilità in media e varianza del portafoglio rispetto al vincolo della frontiera efficiente dei possibili pesi in cui le attività finanziarie disponibili sono detenute nel portafoglio. Tale frontiera sarà una retta la "capital market line" se esiste unattività risk-free o una curva se vi sono solo attività rischiose. Il CAPM non è altro che il primo caso ma dove la CML è tangente alla frontiera efficiente delle attività rischiose. Essendo tale punto il portafoglio dominante dovrà essere lindice di mercato. Tale tangenza definisce i "beta" come i coefficienti di regressione del rendimento di unattività finanziaria qualunque verso leccesso di rischio presento sul mercato. Di conseguenza tale regressione calcola il rendimento medio atteso per unattività finanziaria che abbia correlazione "beta" verso il rischio di mercato. The aim of these notes is to
Using a sample of scandals involving US congresspersons we investigate the spillover from the scandal-tainted congresspersons to firms connected to them through PAC contributions. Following the first media report of a scandal firms connected to the scandal-tainted congresspersons experience a loss in market value and in operating and financing prospects. The effects are more pronounced if the congressperson does not resign following the first media report of the scandal. Our findings indicate that a potential cost of political connections is the loss that occurs when a congressperson to whom the firm is connected is caught up in a scandal.
April M. Knill Baixiao Liu John J. McConnell Cayman Seagraves
This study examines the role of the anti-corruption campaign in capital structure decisions for Chinese listed firms using investigations of senior officials from 2007 to 2019. We find a positive effect of the anti-corruption campaign on the firm’s leverage adjustment speed consistent with the notion that purified political ecology helps reduce financial frictions in the capital market. The positive relationship is alleviated for firms located in cities ruled by the investigated officials as they face a loss of political resources and financing advantages. Financial frictions agency costs and credit reallocation are identified as three possible channels affecting capital structure dynamics. Further evidence suggests that the anti-corruption campaign reduces the deviation from the optimal capital structure facilitates external financing and increases executive incentives.
We conduct a hybrid experimental-observational study on college students to investigate whether the exposure to institutions of significantly heterogeneous quality affects their behavior and their stereotypes about others behavior in a corruption experiment. The 2x2 between-subject experimental design varies: (i) the availability of information on the geographic origin of the participants; and (ii) whether participants are matched with others from the same macro-region.Experimental results show that: (i) knowing the other’s region of origin significantly increases the probability of engaging in corruption but mostly when briber and bribee belong to different macro-regions; (ii) coming from municipalities with a lower contemporary and historical level of civic capital significantly increases the probability of engaging in corruption. Our findings suggest that the quality of institutions has a persistent effect on an individuals internalized prosocial norms and that these effects are
We study a two sided one-to-one matching model with two periods in which agents decide to match early and exit in the first period or to wait and search for more agents to find a match in the second period where a stable matching is implemented for those who remain in the market. The distribution of the quality of a potential match varies over time as some agents who have found mutually agreeable matches exit the market. We show that in equilibrium: (i) similar and relatively high type pairs match early (ii) the probability of matching early is a non-monotonic function of type and (iii) markets do not necessarily unravel even if each meeting is costly and agents have the option to make exploding offers. We also designed experiments with real time interactions to test our theoretical predictions and provide an extensive analysis of early matching incentives in a dynamic matching environment. In the experiments we turn on and off the possibility of matching with partners from previous pe
This study examines the effect of sustainability ratings on investors’ asset allocation decisions. Using a proprietary dataset of monthly equity and bond holdings of European private wealth investors we document significantly larger investment flows into assets with high sustainability ratings compared to those with low ratings. We further find that investors react to changes in sustainability ratings of their portfolio assets by rebalancing their portfolios towards assets with higher sustainability ratings. Exploiting a quasi-exogenous shock to the salience of sustainability ratings we document a plausibly causal effect of assets sustainability ratings on wealthy retail investors investment decisions. We do not find that the larger investments into assets with high sustainability ratings can be explained by differences in attention or news flow or that they are due to significant differences in financial performance.
Amir Amel-Zadeh Rik Lustermans Mary Pieterse-Bloem
We investigate stock return predictability by various option price-based measures using real estate investment trusts (REITs). REITs are more transparent and efficiently priced than general stocks but REIT options are less liquid. We find that most of the option price-based measures do not significantly forecast REIT stock returns but changes in option implied volatilities are robust and significant return predictors. We provide further evidence supporting the informed trading channel instead of price pressure effects as the explanation for this return predictability.
Concerns about climate change are now widespread and the risks for financial assets have become more evident. Investors are increasingly aware of the need to incorporate climate-related considerations in their investment decisions. All this has had an impact on market valuations. In this paper we extend the framework of the factor models that explain the expected return of stock models to include a climate change exposure factor. To do so we built a portfolio that is long on companies with low carbon emissions and short on companies with high carbon emissions. We show that this factor is relevant in the market and allows for an approximation of the climate change exposure of firms with poor disclosure of their green performance. Thus the betas of this factor could be a useful tool for investors that wish to incorporate these aspects in the management of their portfolios and analysts interested in corporate exposure to climate change risks.
Very little research has been done on strategic financial planning software programming for retirement income planning. Todays approach is to perform a single simulation calculation or utility application and assume the results apply to all times and allocations for all future ages. But time periods change with age as do allocation characteristics over time. This paper steps back to look at financial planning software programming as a foundational strategy to model retirement income while aging that same retiree over time meaning looking at all the possible future time periods as well as all prudent allocations over those possible future time periods. Additionally research to date has focused on “early stage” retirement meaning the retirement event occurs sometime in the retiree’s age-60’s. In other words the inception of retirement. Little research has been done looking at the transition into later stage ages or later allocations for portfolio income distributions through “late stage”
We propose a bounds testing procedure (BTP) with a battery of tests for the existence of a non-degenerate co-integrating relationship in levels for long panels. It is a natural extension to panel data of the respective approach in time series as described by Pesaran Shin and Smith (2001) and extended by Bertsatos Sakellaris and Tsionas (2022). Simulations suggest that standard inference is not valid for at least one of the tests in our proposed panel BTP. Codes that generate sample-specific critical values are also provided.
Georgios Bertsatos Plutarchos Sakellaris Mike Tsionas
The digitization of media and the growth of broadband internet has transformed the streaming video industry and the subscription video on demand (SVOD) industry in particular. Online content providers (CPs) are trying out new business models that upend the traditional television industry that has relied overwhelmingly on revenue from advertisers. The extant economics literature in this area has concentrated mostly on the choices of a monopolist CP or on the competition between two symmetric CPs. In contrast we model the competition between two horizontally-differentiated CPs with asymmetric strategies. One CP N pursues the strategy of developing a large content inventory that allows it to personalize its service offerings to consumers who have different preferences for content. It charges a subscription fee but eschews any revenue from advertisers. The other CP H has two services – a “premium” service without ads (H-P) and a lower-priced service with ads (H-A). The service from H-A tak
Anurag Garg Vashkar Ghosh Soohyun Cho Arunava Banerjee Shubho Bandyopadhyay
Relative performance (RPE) awards have become an important component of executive compensation. We examine whether RPE awards particularly the peer group are structured in a manner consistent with economic theory. For RPE awards using a custom peer group we find that the custom group is significantly more effective than four plausible alternative peer groups at filtering out common shocks lowering the cost of compensation and increasing managerial incentives. For RPE awards using a market index we find some evidence that firms could have selected a custom set of peers with better filtering properties at a lower cost with similar incentives. For example firms could have saved around $118000 in present value terms on average for an RPE award had they chosen a custom group comprising of their product market peers instead of a market index.
John M. Bizjak Swaminathan L. Kalpathy Zhichuan Frank Li Brian Young
Since the GameStop short squeeze episode investors regulators and policymakers have been concerned about the impacts of social trading on financial markets. Following the unprecedented retail investors’ assault on a few “viral” stocks known as “meme stocks” we witnessed an unprecedented ban imposed in a small corner of the market where Robinhood Markets Inc. restricted purchases for some meme stocks from January 28th to February 5th 2021. Based on the lists of restricted stocks we created two meme stock indices. We employed robust tests of market efficiency using daily changes of our two indices and the S&P 500 index. Our results indicate that meme stock trading does not degrade market efficiency. In addition recent lawsuits have revealed that both conventional short sellers and unconventional social traders consider themselves victims of market manipulation. Through the lens of financial economics we investigated the rationale of these complaints. Using hourly data we find that the tr
Using Form PF filings over 2013–2017 we find that hedge funds maintain higher levels of cash holdings and available borrowing (“liquidity buffers”) when they hold more illiquid assets have shorter-term commitments from investors and creditors and when market volatility is greater. Funds with low abnormal buffers – liquidity buffers below the level predicted by fund attributes – outperform their benchmarks. Stocks with greater ownership by managers with abnormally low buffers subsequently outperform other stocks especially around earnings announcements. We conclude that managers with better investment opportunities utilize more of their capital and have lower liquidity buffers than their peers
We introduce safe asset demand for dollar-denominated bonds into a tractable incomplete-market equilibrium model of exchange rates and interest rates. The convenience yield on dollar safe bonds enters as a stochastic wedge in the Euler equation for exchange rate determination. Our model makes progress on three exchange rate puzzles. (1) The model can rationalize the low pass-through of SDF shocks to exchange rates and hence low exchange rate volatility. (2) It helps address but does not fully resolve the exchange rate disconnect puzzle. (3) The model generates an unconditional log currency expected return on the dollar that is in line with the data. Our model also identifies a novel safe-asset convenience yield channel by which quantitative easing and the Feds dollar swap lines impact the dollar exchange rate.
Zhengyang Jiang Arvind Krishnamurthy Hanno N. Lustig Jialu Sun
Basic asset pricing theory predicts high expected returns are a compensation for risk. However high expected returns might also represent an anomaly due to frictions or behavioral biases. We propose two complementary simple-to-use tests to assess whether risk can explain differences in expected returns. We provide general-equilibrium foundations for the tests and show their properties in simulations. The tests take into account any risk disliked by risk-averse individuals including high-order moments and tail risks. The tests do not rely on the validity of a factor model or other parametric statistical models. Empirically we find risk cannot explain a large majority of variables predicting differences in expected returns. In particular value momentum operating profitability and investment appear to be anomalies.
We examine the association between margin requirements and the market’s efficiency in incorporating firm-specific and market-level public news. Combining the Fed’s 22 changes in margin requirements with a hand-collected sample of earnings announcements between 1934-1975 we show that higher margin requirements induce greater delay in incorporating earnings information into prices. We draw similar conclusions when we analyze the Hou and Moskowitz (2005) price delay measure as well as indirect measures of leverage constraints over recent years. Further tests suggest that despite the Fed’s expressed intent to curtail excess speculation higher margin requirements restrict trading by arbitrageurs more than noise traders.
We present a statistical model that accounts for persistent fluctuations in characteristic-sorted portfolio returns. The model provides a simple formula for adjusting the standard errors of expected return estimates. With plausible parameter values the adjusted standard errors double casting doubt on the interpretation of the historical performance of characteristic-sorted portfolios as evidence of long-term return premia. Similarly maximum likelihood estimates of the model indicate that the historical data are consistent with a wide range of return processes. Finally we use Bayesian methods to show that investors posterior beliefs about expected returns are highly dependent on their priors about persistence even after observing close to 60 years of data.
For many accounting research questions empirical researchers cannot randomly assign observations to treatment conditions or identify a quasi-experimental setting. In these cases entropy balancing (Hainmueller 2012) is an increasingly popular statistical method for identifying a control sample that is nearly identical to the treated sample with respect to observable covariates. In this paper we compare entropy balancing’s approach of reweighting control sample observations to ordinary least squares and propensity score matching. We demonstrate that researchers applying entropy balancing in empirical settings involving panel data with features common in accounting research may encounter implementation issues that render the resulting estimates sensitive to relatively minor changes in the control sample or the research design. Using the setting of estimating the Big-N audit fee premium we empirically demonstrate these issues and propose solutions.