Diversified behavioral portfolio as an alternative to Modern Portfolio Theory

The traditional mean–variance approach has been complemented by alternative theories that use risk measures different from standard deviation of returns or involve additional distributional features of returns like skewness and kurtosis. We propose a portfolio choice model that combines different distributional characteristics of the returns in the decision-making making process, considering preferences of investors which are modeled as non-statistical uncertainties of investors using fuzzy theory. We use 20 stocks of the S&P500 from January 2013 to December 2017. We assess the obtained portfolios’ performance, and the diversified behavioral portfolios outperform than the mean–variance portfolio. This methodological proposal can be seen as a strong managerial tool to make investment portfolio decisions.     

Why Do Politicians Intervene in Accounting Regulation? The Role of Ideology and Special Interests

Politicians frequently intervene in the regulation of financial accounting. Evidence from the accounting literature shows that regulatory capture by special interests helps explain these interventions. However, many accounting rules have broad economic or social consequences, such as their effects on income distribution or private sector subsidies. The perception of these consequences varies with a politician's ideology. Therefore, if accounting rules produce those consequences, ideology plausibly spills over and explains a politician's stance on the technical accounting issue, beyond special interest pressure. We use two prominent U.S. political debates about fair value accounting and the expensing of employee stock options to disentangle the role of ideology from special interest pressure. In both debates, ideology explains politicians’ involvement at exactly those points when the debate focuses on the economic consequences of accounting regulation (i.e., bank bailouts and top management compensation). Once the debates focus on more technical issues, connections to special interests remain the dominant force.     

Do currency undervaluations affect the impact of inflation on growth?

In this paper, we investigate how the level of currency undervaluations affects the effect of inflation on growth in a sample of 62 countries over the 1980–2015 period. While previous studies find a positive effect of an undervalued currency, we show that higher currency undervaluations reinforce the contractionary effect of inflation on growth. As an undervalued currency is associated with supplementary inflation pressures arising from a cost-push inflation phenomenon and economy overheating, growth is thus penalized. This result is shown to be robust to the exclusion of currency crises episodes from our sample, and dependent of the development level of countries. Specifically, it holds in the case of emerging countries, but not for developing economies. Consequently, policies based on undervaluations should not be encouraged for emerging economies as they tend to reinforce the contractionary effect of inflation on growth.     

SHIRKING,STANDARDS AND THE PROBABILITY OF DETECTION

By relaxing the common efficiency wage assumption of exogenous shirking detection probabilities, we demonstrate how standards and efficiency wages are related. In a more general setting where the probability of detection depends upon the equilibrium effort level of non‐shirkers, we show that the uniformly positive (negative) supply‐side relationship between wages (unemployment insurance) and effort is no longer guaranteed. Profit maximization on the part of the firm, however, ensures that effort will depend positively (negatively) on wages (unemployment insurance) in equilibrium.     

Consequences of Debt Forgiveness: Strategic Default Contagion and Lender Learning

I use a unique data set of loans to small business owners to examine whether lenders face adverse consequences when they grant debt forgiveness to borrowers. I provide evidence consistent with borrowers communicating their debt forgiveness to other borrowers, who then more frequently strategically default on their own obligations. This strategic default contagion is economically large. When the lender doubles debt forgiveness, the default rate increases by 10.9% on average. Using an exogenous shock to the lender's forgiveness policy, my findings suggest that as the lender learns about the extent of borrower communication the lender tightens its debt forgiveness policy to mitigate default contagion.     

The Coordination Role of Stress Tests in Bank Risk‐Taking

We examine whether stress tests distort banks' risk‐taking decisions. We study a model in which a regulator may choose to rescue banks in the event of concurrent bank failures. Our analysis reveals a novel coordination role of stress tests. Disclosure of stress‐test results informs banks of the failure likelihood of other banks, which can reduce welfare by facilitating banks' coordination in risk‐taking. However, conducting stress tests also enables the regulator to more effectively intervene banks, coordinating them preemptively into taking lower risks. We find that, if the regulator has a strong incentive to bail out, stress tests improve welfare, whereas if the regulator's incentive to bail out is weak, stress tests impair welfare.     

Profit shifting and tax-rate uncertainty

Using firm-level data for 1,084 parent firms in 24 countries and for 9,497 subsidiaries in 54 countries, we show that tax-motivated profit shifting is larger among subsidiaries in countries that have stable corporate tax rates over time. Our findings further suggest that firms move away from transfer pricing and toward intragroup debt shifting that has lower adjustment costs. Our results are robust to several identification methods and respecifications, and they highlight the important role of tax-rate uncertainty in the profit-shifting decision while pointing to an adjustment away from more costly transfer pricing and toward debt shifting.     

Parties,divided government,and infrastructure expenditures: Evidence from U.S. states

This paper examines the impact of parties and divided government on infrastructure expenditures for transportation, education, and social services in U.S. states. As infrastructure expenditures are considered a bi-partisan priority, we hypothesize that divided governments expand infrastructure spending compared to governments under true Democratic or Republican control. We test this hypothesis using U.S. state-level data over the period 1970 to 2008 and find that divided governments indeed increase expenditures for these budget categories. Specifically, divided governments spend more on transportation than unified Democratic governments, and more on education and social services than unified Republican governments. The effect is most pronounced for the core infrastructure of transportation and even stronger when only looking at capital outlays instead of total expenditures.     

Liquidity shocks: A new solution to the forward premium puzzle

The frequent empirical failure of uncovered interest rate parity raises a question that has not been definitively answered: why do predictable excess returns on currencies persist in competitive currency markets? Supported by data from nine major currencies for 1978:08–2019:09, I provide a novel resolution to this enduring forward premium puzzle by building on the financial economics literature that explores the economic implications of limited access to capital markets. A liquidity shock, or the urgent demand for liquidity by credit-constrained arbitragers liquidating bond holdings, causes losses from sudden drops in bond prices. Arbitragers require a liquidity premium to compensate for potential losses that vary directly with the interest rate. It is this liquidity premium that explains persistent excess returns on currencies. I argue for policies favoring a low interest rate environment and macroprudential controls that ease liquidity constraints to increase the efficiency of international capital markets by reducing the liquidity premium.     

Elections and Capital Flows

This paper investigates the extent to which elections affect capital flows. I find little evidence of political capital flow cycles in advanced economies. In emerging and developing countries, however, presidential elections significantly lower preelection foreign direct investment (FDI) inflows but have no effect on other types of capital flows. Furthermore, I find evidence that these cycles are not caused by economic crises related to elections or preelection manipulation of policy variables. These results suggest that uncertainty about future government policies, which should have greater impact on more irreversible forms of capital flows like FDI, may be an important factor in generating this cycle.