Jakub Rojcek, Ramazan Gençay, Soheil Mahmoodzadeh, Michael C Tseng, Price Impact of Aggressive Liquidity Provision, In: Swiss Finance Institute Research Paper, No. 16-21, 2016. (Working Paper)
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This paper analyzes brief episodes of high-intensity quotes turnover and revision-"bursts" in quotes-in the U.S. equity market. Such events occur very frequently, around 400 times a day for actively traded stocks. We find significant price impact associated to this market-maker initiated event, about five times higher than during non-burst periods. Bursts in quotes are concurrent with short-lived structural break in the informational relationship between market makers and market takers. During bursts, market makers no longer passively impound information from order flow into quotes-a departure from traditional market microstructure paradigm. Rather, market makers significantly impact prices during bursts in quotes. Further analysis shows that there is asymmetry in adverse selection between the bid and ask sides of the limit order book and only a sub-population of market makers enjoy an informational advantage during bursts. Our results call attention to the need for a new microstructure perspective in understanding modern high-frequency limit order book markets. |
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Jakub Rojcek, Alexandre Ziegler, High-Frequency Trading in Limit Order Markets: Equilibrium Impact and Regulation, In: Swiss Finance Institute Research Paper, No. 15-23, 2016. (Working Paper)
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We investigate the impact of high-frequency trading (HFT) on market quality and investor welfare using a general limit order book model. We find that while the presence of HFT always improves market quality under symmetric information, under asymmetric information this is the case only if competition between high-frequency traders is sufficiently strong. While HFT does not negatively impact investor welfare, it reduces the welfare of slow speculators. The flexibility of the model allows investigating the effect of the main recent regulatory initiatives designed to curb HFT on market quality and investor welfare. We consider time-in-force rules, cancellation fees, transaction taxes, rebate fee structures, and speed bumps. While some of these regulations lead to improvements in a number of market quality measures, this generally does not translate into higher welfare for long-term investors. Rather, the main effect of such regulations is to generate wealth transfers from high-frequency traders to slow speculators. These regulations therefore appear inadequate to enhance investor welfare in the presence of HFTs. Of the different measures, transaction taxes are the least harmful; while they reduce welfare roughly by the amount of the tax, they do not significantly worsen market quality. The common practice by exchanges of granting rebates to limit orders is detrimental to market quality and investor welfare, causing both higher effective spreads and longer execution times. |
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Paolo Barucca, Marco Bardoscia, Fabio Caccioli, Marco D'Errico, Gabriele Visentin, Stefano Battiston, Guido Caldarelli, Network Valuation in Financial Systems, In: SSRN, No. 2795583, 2016. (Working Paper)
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We introduce a network valuation model (hereafter NEVA) for the ex-ante valuation of claims among financial institutions connected in a network of liabilities. Similar to previous work, the new framework allows to endogenously determine the recovery rate on all claims upon the default of some institutions. In addition, it also allows to account for ex-ante uncertainty on the asset values, in particular the one arising when the valuation is carried out at some time before the maturity of the claims. The framework encompasses as special cases both the ex-post approaches of Eisenberg and Noe and its previous extensions, as well as the ex-ante approaches, in the sense that each of these models can be recovered exactly for special values of the parameters. We characterize the existence and uniqueness of the solutions of the valuation problem under general conditions on how the value of each claim depends on the equity of the counterparty. Further, we define an algorithm to carry out the network valuation and we provide sufficient conditions for convergence to the maximal solution. |
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Annette Krauss, Catalina Martinez, What Drives Financial Inclusion at the Bottom of the Pyramid - Empirical Evidence from Microfinance Panel Data, In: Center for Microfinance 04 -2015, No. 04-2015, 2015. (Working Paper)
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Microfinance has played a key role in including the poor in financial markets. This paper uses microfinance data to approximate financial inclusion in the poorer segments of the population and proposes a quantile regression approach to study the development of microfinance markets.
Our approach accounts for the dynamic and heterogeneous impacts that key drivers may have
across different stages of market development. It also allows us to go beyond correlations and gets us closer to identifying causal relationships. Our key findings indicate that: i) Microfinance markets are more responsive to the needs of the bottom of the pyramid than to potential growth
opportunities. ii) Enabling institutions that provide credit information become increasingly important with higher market complexity. iii) Formal financial development is a complement of
microfinance development. iv) Technologies can help to overcome market entry barriers, and to enable a higher inclusion in markets with a high degree of complexity. Our results could help policymakers and investors better understand and influence financial inclusion at the bottom of the pyramid across different stages of market development. |
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Marc Chesney, Jonathan Gheyssens, Bruno Troja, Market Uncertainty and Risk Transfer in REDD Projects, In: -, No. -, 2016. (Working Paper)
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Kjell G. Nyborg, Lilia Mukhlynina, The Choice of Valuation Techniques in Practice: Education versus Profession, In: Swiss Finance Institute Research Paper, No. 16-36, 2016. (Working Paper)
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We use a survey approach to learn about valuation professionals’ choices and implementations of valuation techniques in practice. The survey design allows us to control for a respondent’s professional subgroup (e.g., consulting), education, experience, and valuation purpose characteristics. We find support for the “sociological hypothesis” that profession matters more than education; different professions have different valuation cultures. Other factors are less important. There are also many commonalities across respondents. Most use both multiples and DCF, but implement DCF in a way that almost turns it into a multiples exercise. Confusion reigns with respect to interest tax shields and the WACC. Higher educational levels do not reduce the confusion. Our overall findings matter because valuation professionals function as intermediaries in the capital allocation process. The relative unimportance of education raises questions about the role and benefit of higher level finance education. |
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Gabriele Costante, Christian Forster, Jeffrey Delmerico, Paolo Valigi, Davide Scaramuzza, Perception-aware Path Planning, In: ArXiv.org, No. 1605.04151, 2016. (Working Paper)
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In this paper, we give a double twist to the problem of planning under uncertainty. State-of-the-art planners seek to minimize the localization uncertainty by only considering the geometric structure of the scene. In this paper, we argue that motion planning for vision-controlled robots should be perception aware in that the robot should also favor texture-rich areas to minimize the localization uncertainty during a goal-reaching task. Thus, we describe how to optimally incorporate the photometric information (i.e., texture) of the scene, in addition to the the geometric one, to compute the uncertainty of vision-based localization during path planning. To avoid the caveats of feature-based localization systems (i.e., dependence on feature type and user-defined thresholds), we use dense, direct methods. This allows us to compute the localization uncertainty directly from the intensity values of every pixel in the image. We also describe how to compute trajectories online, considering also scenarios with no prior knowledge about the map. The proposed framework is general and can easily be adapted to different robotic platforms and scenarios. The effectiveness of our approach is demonstrated with extensive experiments in both simulated and real-world environments using a vision-controlled micro aerial vehicle. |
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Curdin Pfister, Miriam Rinawi, Dietmar Harhoff, Uschi Backes-Gellner, Regional Innovation Effects of Applied Research Institutions, In: Swiss Leading House "Economics of Education" Working Paper, No. 117, 2021. (Working Paper)
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We analyze the effect of applied research institutions on regional innovation activity. Exploiting a policy reform that creates tertiary education institutions conducting applied research, the Universities of Applied Sciences (UASs) in Switzerland, we apply difference-in-differences estimations to investigate the effect on innovation quantity and quality. Findings show a 7.7 to 13 percent increase in regional patenting activity (i.e., quantity), and a 1.3 to 11 percent increase in patent family size, and the number of granted patents, claims, and citations per patent (i.e., quality). Findings are robust to various model specifications, suggesting that applied research taught in UASs boosts regional innovation. |
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Andrin Bögli, Felix Fattinger, European Puttable Bonds: An Alternative Instrument for Managing the Sovereign Debt Crisis, In: SSRN Electronic Journal, No. 2668176, 2015. (Working Paper)
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Diana Bonfim, Gil Nogueira, Steven Ongena, Sorry, we're closed: Loan conditions when bank branches close and firms transfer to another bank, In: Banco de Portugal-Working Papers 2016, No. 7, 2016. (Working Paper)
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We study loan conditions when bank branches close and firms subsequently transfer to a branch of another bank in the vicinity. Such transfer loans allow us for the first time to observe the conditions granted when banks pool-price new applicants. Consistent with recent theoretical work on hold up in bank-firm relationships we find that transfer loans do not receive the discount in loan rates that prevails when firms otherwise switch banks. We hereby critically augment recent empirical evidence on dynamic cycles in loan rates. |
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Markus Leippold, Nikola Vasiljevic, Pricing and Disentanglement of American Puts in the Hyper-Exponential Jump-Diffusion Model, In: SFI Research Paper, No. 15-08, 2015. (Working Paper)
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We analyze American put options in a hyper-exponential jump-diffusion model. Our contribution is threefold. Firstly, by following a maturity randomization approach, we solve the partial integro-differential equation and obtain a tight lower bound for the American option price. Secondly, our method allows us to disentangle the contributions of jump and diffusion for the American early exercise premium. Finally, using American-style options on S&P 100 index from 2007 until 2013, we estimate a range of hyper-exponential specifications and investigate the implications for option pricing and jump-diffusion disentanglement. We find that jump risk accounts for a large part of early exercise premium. |
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An Zeng, Stefano Battiston, The Multiplex Network of EU Lobby Organizations, In: SSRN, No. 2571869, 2015. (Working Paper)
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Andreas Karpf, Antoine Mandel, Stefano Battiston, A network-based analysis of the European Emission Market, In: Documents de travail du Centre d'Economie de la Sorbonne, No. 2015.84, 2015. (Working Paper)
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Stefano Battiston, Guido Caldarelli, Robert May, Tarik Roukny, Joseph Stiglitz, The Price of Complexity in Financial Networks, In: Columbia Business School Research Paper, No. No. 15-49, 2015. (Working Paper)
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Stefano Battiston, Antoine Mandel, Irene Monasterolo, Franziska Schuetze, Gabriele Visentin, A Climate Stress-Test of the EU Financial System, In: SSRN, No. 2726076, 2016. (Working Paper)
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Tarik Roukny, Stefano Battiston, Joseph E Stiglitz, Interconnectedness as a source of uncertainty in systemic risk, In: SSRN, No. 2726631, 2016. (Working Paper)
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Financial networks have shown to be important in understanding systemic events in credit markets. In this paper, we investigate how the structure of those networks can affect the capacity of regulators to assess the level of systemic risk. We introduce a model to compute the individual and systemic probability of default in a system of banks connected in a generic network of credit contracts and exposed to external shocks with a generic correlation structure. Even in the presence of complete knowledge, we identify conditions on the network for the emergence of multiple equilibria. Multiple equilibria give rise to uncertainty in the determination of the default probability. We show how this uncertainty can affect the estimation of systemic risk in terms of expected losses. We further quantify the effects of cyclicality, leverage, volatility and correlations. Our results are relevant to the current policy discussions on new regulatory framework to deal with systemic events of distress as well as on the desirable level of regulatory data disclosure. |
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Marco Bardoscia, Stefano Battiston, Fabio Caccioli, Guido Caldarelli, Pathways towards instability in financial networks, In: ArXiv.org, No. 1602.05883, 2016. (Working Paper)
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Following the financial crisis of 2007-2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive role, and a general understanding of precisely how network topology creates instability remains lacking. Here we show how processes that are widely believed to stabilise the financial system, i.e. market integration and diversification, can actually drive it towards instability, as they contribute to create cyclical structures which tend to amplify financial distress, thereby undermining systemic stability and making large crises more likely. This result holds irrespective of the details of how institutions interact, showing that policy-relevant analysis of the factors affecting financial stability can be carried out while abstracting away from such details. |
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Urs Birchler, René Hegglin, Michael Rudolf Reichenecker, Alexander Wagner, Which Swiss Gnomes Attract Money? Efficiency and Reputation as Performance Drivers of Wealth Management Banks, In: Swiss Finance Institute Research Paper, No. 16-28, 2017. (Working Paper)
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Wealth management constitutes an important aspect of today's banking world, but very little is known about what explains the differences among banks in their ability to attract new assets under management. Using a unique panel database of Swiss private banks, we test the hypothesis that the performance of a bank in attracting new money depends on two input factors: skill and reputation. Relatively skilled banks -- that is, banks that are more cost-efficient than predicted by their input factors -- also perform better in attracting net new money. We also find that negative media coverage (such as in the context of fraudulent business practices related to tax evasion) strongly diminishes the future ability to attract assets under management, especially at small banks. The present value of lost profits is 3.35 (0.73) times the median annual net profit of a small (large) bank. Thus, adding to the explicit fines that many Swiss banks had to pay in the course of the U.S. Department of Justice's investigations, there are substantial implicit and reputational costs to banks of having negative media coverage. Investment performance for clients seems not to explain future net new money growth. In sum, these results underscore the importance of trust in money management. |
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Stefano Battiston, James Glattfelder, Evolving Power-Structures: The Network of Global Economic Influence, In: -, No. -, 2016. (Working Paper)
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Marc Chesney, Nikola Vasiljevic, Québécoisation method for the pricing of Parisian options with jump risk, No. -, 2016. (Working Paper)
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In this paper, a new technique for pricing of European and American Parisian options, that we call the québécoisation method, is developed. We study the pricing of Parisian options in a hyper-exponential jump-diffusion model using the double Laplace-Carson transform with respect to the time to maturity and the residual Parisian time (time to expiration of the Parisian window) of the system of two partial integro-differential equations describing the option price dynamics. The transformed, i.e., québécoised, option price and hedging parameters delta and gamma are computed in a closed form, and the final results are obtained via the two-dimensional Gaver-Stehfest inversion algorithm. Our pricing method is analytically tractable, and it provides important economic insights for pricing and hedging of European and American Parisian options in the presence of jumps. |
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