Markus Leippold, Hanlin Yang, Mixed-Frequency Predictive Regressions, In: SSRN, No. 3157988, 2019. (Working Paper)
This paper explores the performance of mixed-frequency predictive regressions for stock returns from the perspective of a Bayesian investor. We develop a parameter learning approach for sequential estimation, allowing for belief revisions. Empirically, we find that mixed-frequency models improve predictability, not only because of the combination of predictors with different frequencies but also due to the preservation of the time-variation in the volatility of predictors. Mixed-frequency models produce higher volatility timing benefits, compared to temporally aggregate models. Therefore, our results highlight the importance of consistently incorporating predictors of mixed frequencies and correctly specifying the volatility dynamics in predictive regressions. |
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Simon Hediger, Loris Michel, Jeffrey Näf, On the Use of Random Forest for Two-Sample Testing, In: ArXiv.org, No. 190306287, 2019. (Working Paper)
We follow the line of using classifiers for two-sample testing and propose several tests based on the Random Forest classifier. The developed tests are easy to use, require no tuning and are applicable for any distribution on Rp, even in high-dimensions. We provide a comprehensive treatment for the use of classification for two-sample testing, derive the distribution of our tests under the Null and provide a power analysis, both in theory and with simulations. To simplify the use of the method, we also provide the R-package "hypoRF". |
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Adriano Tosi, International Volatility Arbitrage, In: SSRN, No. 3203445, 2018. (Working Paper)
Are options on exchange-traded products (ETPs) and indexes consistently priced internationally? The cross-section of international option returns exhibits a mispricing by sorting on ex-ante volatility returns. In addition, selling international ETP options and buying their corresponding index options commands a positive risk premium. Both empirical findings are economically large and pervasive internationally, whereas they are comparably small domestically. While volatility hedge funds are exposed towards domestic option products, they neglect the possibility of engaging in foreign volatility arbitrage. These findings entail that alpha seekers may expand their horizon towards international derivatives which at first glance are similar, but institutionally are not. |
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Adriano Tosi, Alexandre Ziegler, The Timing of Option Returns, In: SSRN, No. 2909163, 2018. (Working Paper)
We document empirically that the returns from shorting out-of-the-money S&P 500 put options are concentrated in the few days preceding their expiration. Back-month options generate almost no returns, and front-month options do so only towards the end of the option cycle. The concentration of the option premium at the end of the cycle reflects changes in options’ risk characteristics. Specifically, options’ convexity risk increases sharply close to maturity, making them more sensitive to jumps in the underlying price. By contrast, volatility risk plays a smaller role close to maturity. Our results imply that speculators wishing to harvest the put option premium should short front-month options only during the last days of the cycle, while investors wishing to protect against downside risk should use back-month options to reduce hedging costs. |
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Regina Hammerschmid, Harald Lohre, Regime Shifts and Stock Return Predictability, In: SSRN, No. 2445086, 2017. (Working Paper)
Identifying economic regimes is useful in a world of time-varying risk premia. We apply regime switching models to common factors proxying for the macroeconomic regime and show that the ensuing regime factor is relevant in forecasting the equity risk premium. Moreover, the relevance of this regime factor is preserved in the presence of fundamental variables and technical indicators which are known to predict equity risk premia. Based on multiple predictive regressions and pooled forecasts, the macroeconomic regime factor is deemed complementary relative to the fundamental and technical information sets. Finally, these forecasts exhibit significant out-of-sample predictability that ultimately translates into considerable utility gains in a mean-variance portfolio strategy. |
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Gazi Kabas, Yavuz Arslan, Ahmet Degerli, Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks, In: SSRN, No. 3280437, 2018. (Working Paper)
Unemployment insurance (UI) policies are implemented by many countries to lower individual income risk and to automatically stabilize macroeconomic fluctuations. To the extent that these policies are successful, they should be reducing precautionary savings and hence bank deposits - households' major saving instrument. In this paper, we use this lower incentive to save and uncover a novel distortionary mechanism through which UI policies affect the economy. In particular, we show that when state UI benefits become more generous bank deposits decrease. Since deposits are the main and uniquely stable funding source for banks, the decrease in deposits squeezes bank commercial lending, which in turn reduces firm investment. These results imply that UI policies have the potential to destabilize the economy through banking sector by impairing banks' deposit funding - banks' major and stable funding source, which makes banks more exposed to negative shocks during bad times. |
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Felix Kübler, Runjie Geng, Existence of Equilibrium in Stochastic Overlapping Generations Economies with Nonconvexities, In: -, No. -, 2018. (Working Paper)
Non-convexities and discrete choices have become important modeling tools in modern macro-economics. Unfortunately, existence of competitive equilibria in the presence of such non-convexities is not always ensured and most results on the existence of equilibrium that can be found in the literature consider a very general model and are not directly applicable to the macro-models used in the literature. In this paper we explain the three main problems one needs to face when proving existence
and give simple sufficient conditions for the existence of competitive equilibria in stochastic OLG models with discrete choices and non-convex preferences. We also consider a version of the model without aggregate uncertainty but with bankruptcy and default and prove existenceof a steady state equilibrium. |
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Regina Hammerschmid, Alexandra Janssen, Crash-o-phobia in Currency Carry Trade Returns, In: Swiss Finance Institute Research Paper, No. 18-64, 2018. (Working Paper)
Currency carry trade returns are on average large and non-normally distributed. While the literature has found different explanations for the existence of carry trade returns, the higher order moments of their return distribution still pose a puzzle. We propose a new model to explain these non-normal properties of currency carry trade returns, by assuming that agents are loss averse and overweight states with low probabilities. This combination of loss aversion and probability weighting is called crash-o-phobia. Using non-linear least squares and risk-neutral state prices implied by currency options, we estimate this crash-o-phobia model to price developed and emerging market currencies. The parameter estimates reveal crash-o-phobic beliefs and preferences with significant differences across currencies. Compared to a model with rational beliefs and CRRA utility, our crash-o-phobia model performs significantly better at explaining the whole distribution of currency carry trade returns. |
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Philipp Müller, Gregor Philipp Reich, Structural Estimation Using Parametric Mathematical Programming with Equilibrium Constraints and Homotopy Path Continuation, In: Econometrics: Econometric & Statistical Methods - General eJournal - CMBO, No. 12, 2019. (Working Paper)
In this paper, we formulate the likelihood function of structural models as a parametric optimization problem, where the model equations enter as constraints, forming a mathematical program with equilibrium constraints (Su and Judd, 2012). We trace the solution to its first-order conditions in dependence on a controlled parameter using homotopy continuation, delivering a relation from the controlled parameter to the corresponding maximum likelihood estimates and their confidence intervals. This enables us to estimate models with identification issues, multiplicity of equilibria, etc. As applications, we first trace the parameter estimates of the bus engine replacement model of Rust (1987), a dynamic discrete choice model, in dependence of the discount factor β. Using relative value iteration, we find that β is well identified and statistically significantly larger than 1. Second, for a simple static binary choice model, we demonstrate how the effects of multiplicity of equilibria and a lack of identification can be mitigated by the tracing method. |
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Jose Parra Moyano, Karl Schmedders, The liberalization of data: a welfare-enhancing information system, In: Working paper series / Department of Economics, No. 2, 2019. (Working Paper)
Users’ data has become a crucial production factor for companies and a necessary asset if they are to compete in the digital ecosystem. However, users’ data is a production factor that is not mobile across companies, since a company can only use the data that its customers—its “users”— generate within its own environment and not the data that its users produce outside of it. This represents a market friction that hinders competition, leads to monopolies, and raises the entry barriers for new companies. Additionally, the users generating and owning the data stored in a company have no control over or overview of their data and cannot monetize it. We model the users’ data as a production factor in the value generation function of companies and introduce the concept of data elasticity of value. Further, and in light of advances in distributed database management, blockchain technology, and data protection regulation, we propose an information system that allows users to sell their data freely to companies other than those within which the data was generated, receiving a self-generated, market-driven basic income. A consequence of this system is that data becomes a mobile production factor, since any company can work with the data that its users generate outside of that company’s own environments. Moreover, our system solves some of the data- ownership problems of the current Internet business model, lowers the entry barriers for new data-intensive companies, and enables new income streams for data-intensive companies, which in the case of online platforms allows them to avoid a dependence on online advertisement to finance their operations. We propose this ecosystem at a conceptual level and simulate the impact of companies having access to higher fractions of their users’ data under different data elasticities of value. We show that the introduction of such a system could theoretically, and under the taken assumptions, more than double the aggregated value of data-intensive companies. |
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Macherel Arthur, Adrien Treccani, Jose Parra Moyano, A 9-dimension grid for the evaluation of central bank digital currencies, In: Working Paper, No. 1, 2018. (Working Paper)
Blockchain technology offers new opportunities for the development of central bank digital currencies (CBDCs). Although discussion on the matter is still in its early stages, researchers and practitioners have proposed possible frameworks via which to explore the potential of this new form of money for central banks and governments. Since blockchain technology is very broad, central banks can conceive of many different blockchain types to sustain CBDC, and the decisions taken by a central bank at a technical level determine the economic possibilities of the resulting monetary system. In other words, the technical attributes of a blockchain have crucial implications for the monetary system that such a blockchain might sustain. In this article, we propose a grid that identifies nine fundamental technical dimensions to be assessed by central banks when establishing a digital currency system based on blockchain technology, and that analyzes the different implications for the central bank as it moves through each of the identified dimensions. Our objective is to offer this grid as a tool to aid in the structured, conceptual, and technical development of national currencies based on blockchain. By way of illustration, we use the grid to analyze three practical scenarios that significantly vary in their implications for the monetary system. |
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Violetta Splitter, Hannah Trittin, Theorizing the ‘social’ in social media:The role of productive dialogs for collaborative knowledge creation, In: SocArXiv Papers, No. w7sd6, 2018. (Working Paper)
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Enrico De Giorgi, Ola Elsayed, Naive Diversification Preferences and their Representation, In: SSRN, No. 2864231, 2016. (Working Paper)
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Enrico De Giorgi, Ola Elsayed, How Elementary is Diversification? A Study of Children’s Portfolio Choice, In: SSRN, No. 3018421, 2017. (Working Paper)
Diversification is a fundamental concept in economics, decision theory, and finance, but the way in which it is implemented in the real world varies greatly. This paper asks how elementary the notion of diversification is by studying whether children apply it as a choice heuristic. We report on results of an experiment that tests whether children diversify in a sequence of hypothetical choice questions and dice-rolling games. Overall, we find that children do exhibit preferences for diversification, both for the sake of variety across consumption goods and for the purpose of mitigating risk when faced with a choice across risky gambles. The naive diversification heuristic, which implies an equal allocation across alternatives, is particularly evident in children's choices when the alternatives are equivalent or unknown. We also investigate the relationship between risk aversion and diversification and find no significant connection between the two. Our results indicate that diversification preferences may have fundamental, developmental roots, which contrasts with the traditional normative view of diversification, in which most economic models take diversification preferences as exogenously given. This may have implications for how one can treat investment anomalies in practice and, in particular, promotes financial literacy training from a young age. |
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Delia Coculescu, Monique Jeanblanc, Some No-Arbitrage Rules under Short-Sales Constraints and Applications to Converging Asset Prices, In: Mathematical Finance, No. n/a, 2017. (Working Paper)
Under short sales prohibitions, no free lunch with vanishing risk (NFLVRS) is known to be equivalent to the existence of an equivalent supermartingale measure for the price processes (Pulido, 2014).We give a necessary condition for the drift of a price process to satsify (NFLVRS). For two given price processes, we introduce the concept of fundamental supermartingale measure, and when a certain condition necessary to the construction of this fundamental supermartingale measure is not fulfilled, we provide the corresponding arbitrage portfolios. The motivation of our study lies in understanding the particular case of converging prices, i.e., two prices that coincide at a bounded random time. |
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Emilia Garcia, Mascia Bedendo, Linus Siming, Cultural Preferences and Firm Financing Choices, In: SSRN, No. 2979247, 2018. (Working Paper)
We document significant differences in the financing structure of small firms with managers of diverse cultural backgrounds. To isolate the effect of culture, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest that there exist significant cultural differences in the preference towards debt funding and in the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industries, trading partners, and headquarters location. |
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Carmen Tanner, Katharina Gangl, Nicole Witt, The Corporate Ethical Culture Scale (CECS): A New Measure of Ethical Culture, In: SSRN, No. 3186096, 2018. (Working Paper)
How to define and measure ethical culture, how many and which dimensions constitute ethical culture are still unresolved questions in research. The goal of this present paper is to present first steps of the development of a new measurement of ethical culture – the Corporate Ethical Culture Scale (CECS). To address this, we build upon previous instruments, but do also integrate the widely accepted, but so far empirically neglected, distinction of organizational culture; the distinction between compliance-oriented components (emphasizing a culture of control) vs. integrity-oriented components (emphasizing a culture of self-governance and responsibility). Three studies with heterogeneous samples of Swiss and German employees and managers were conducted to create and validate the multidimensional scale. Results of the studies do also suggest that the CECS is capable of predicting unethical working behavior beyond other factors (such as variants of formal ethical regulation). Furthermore, comparisons with other scales do suggest that both compliance- and integrity-based factors are related to duty orientation, but the latter components are more than the former positively associated with perceived autonomous work motivation (in contrast to controlled work motivation). |
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Pablo Koch Medina, Santiago Moreno-Bromberg, Claudia Ravanelli, Mario Sikic, Economic Valuation and Financial Management of an Insurance Firm, In: SSRN, No. 3211146, 2018. (Working Paper)
We use a dynamic framework to address the questions: i) when should an insurance firm pay out dividends and raise (costly) capital and ii) when should an insurance firm take (liquid) investment risk. Financial decisions are made by a manager who strives to maximize firm value and operates in the presence of financial frictions and regulatory capital constraints. We show there is a unique pricing measure that is consistent with market prices and a broad ownership base and use it to compute the risk-adjusted net present value of cash flows to shareholders. We describe the capital and dividend strategies of the firm and show that, from a shareholder perspective, investment in risky assets can be value adding. Risky investments may add value by boosting the value of the option to default or, sometimes, by increasing the firm's franchise value. |
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Michel Habib, Josef Falkinger, Principle or Opportunism? Discretion, Capital, and Incentives, In: CEPR Discussion Paper, No. DP12690, 2018. (Working Paper)
When should shareholders afford a manager the discretion to be opportunistic and when should they constrain him to be principled? We show that discretion is associated with lower powered incentives than is constraint: opportunism may put shareholder capital at risk; shareholder can lessen that risk by lowering the power of managerial incentives, thereby decreasing the manager's incentives to spurn principle for opportunity. We further show that the cost of capital plays a central role in favoring discretion over constraint: the use of capital constitutes an externality; when the cost of capital is low, the externality is of relatively little importance, and the manager is afforded the discretion to be opportunistic. |
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Helmut Max Dietl, Anil Özdemir, Andrew Rendall, The role of physical attractiveness in tennis TV-viewership, In: UZH Business Working Paper Series, No. 376, 2018. (Working Paper)
What is beautiful is good, the ancient Greek lyric poet Sappho wrote over 2,500 years ago. Studies in social sciences, anthropology, psychology, and economics have shown various effects of physical attractiveness. Physically attractive people are hired more often, receive faster promotion, and generally earn more per hour; thus, there is a beauty premium. However, within the context of sports, little is known about consumer preferences concerning athletes’ physical attractiveness. In this study, we analyze 622 live tennis matches from 66 Grand Slam tournaments between 2000 and 2016, examining the relationship between attractiveness, measured by tennis players’ facial symmetry, and TV-viewership. We show that facial symmetry plays a positive role for female matches while there is no significant effect for male matches. The effect persists in several sub-sample regressions and robustness checks. Our results have important implications for managers in the field of sports. TV-broadcasters will likely acknowledge additional revenue potential from advertising due to increased viewership and change their programming accordingly. We contribute to the sports management and economics literature in that we introduce a new method to measure facial symmetry and show that physical attractiveness plays a positive role in tennis TV-viewership. |
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