Delegation and the regulation of U.S. financial markets

We analyze the institutional determinants of U.S. financial market regulation with a general model of the policy-making process in which legislators delegate authority to regulate financial risk at both the firm and systemic levels. The model explains changes in U.S. financial regulation leading up to the financial crisis. We test the predictions of the general model with a novel, comprehensive data set of financial regulatory laws enacted specifically between 1950 and 2009. The theoretical and empirical analysis finds that economic and political factors impact Congress’ decision to delegate regulatory authority to executive agencies, which in turn impacts the stringency of financial market regulation, and our estimation results indicate that political factors may have been stronger and resulted in inefficiencies.     

Revisiting the ICAPM under the distortion of risk–return tradeoff in short-horizon stock returns

We suggest that the distortion of the positive risk–return relation in the ICAPM is a consequence of trading by informed investors to exploit mispricing. We hypothesize and demonstrate that a non-positive (strongly positive) risk–return relation following positive (negative) market returns is attributed to short-selling (purchasing) of overpriced (underpriced) stocks along with optimistic (pessimistic) expectations conditional on good (bad) market news. We verify this asymmetry in the risk–return relation through the indirect risk–return relation conditional on good (bad) market news. We also find that the attenuation (reinforcement) of the positive risk–return relation is more profound in high- (low-) sentiment periods.     

Exchange rate dynamics and US dollar-denominated sovereign bond prices in emerging markets

Using data on Brazil, Colombia, Mexico, the Philippines, Russia and Turkey, our empirical results show that the exchange rates of their currencies have adequate explanatory power in explaining their US dollar-denominated sovereign bonds, particularly in the post-global financial crisis period. We develop a two-factor pricing model with closed-form solutions for the sovereign bonds in which the correlated factors are foreign exchange rates and US risk-free interest rates that follow a double square-root process relevant in the low interest rate environment. The numerical results and associated error analysis show that the model credit spreads can broadly track the market credit spreads.     

Do Cryptocurrencies Increase the Systemic Risk of the Global Financial Market?

The advance of cryptocurrencies has sparked wide concern over their interplay with the existing global financial market. This paper analyzes the risk spillover relation between cryptocurrencies and major financial assets, and unravels how cryptocurrencies could influence global financial systemic risk. We find that cryptocurrencies function as a separate risk source from traditional assets. Major legislative, financial and technological events in the cryptocurrency market may affect risk spillover dynamics. Although the overall penetration of cryptocurrencies is not yet deep, introducing cryptocurrency can significantly increase the systemic risk to traditional markets during low risk level episodes.     

Transforming under deep uncertainty: A strategic perspective on risk management

Companies increasingly face the need for transformation in today’s rapidly changing business environment, characterized by major shifts in technology, regulation, and customer behavior. A lack of strategic risk insight and foresight leaves many incumbents insufficiently prepared in the face of such deep uncertainty. We argue that traditional risk management falls short because it predominantly focuses on strategy execution while leaving strategy formulation largely untouched. Moreover, an administrative-heavy risk management process can create strategic inertia and a misleading sense of control. In today’s dynamic business context, companies must not only increase the speed and impact of their strategy execution but also continuously explore the development of new strategies in response to disruptive events or emerging opportunities. Our research shows how leading companies develop a strategic risk management (SRM) capability to increase their resilience and agility in response to deep uncertainty. SRM takes a strategic, forward-looking perspective and focuses on strengthening processes, people, and practices for purposefully integrating risk into the strategy formulation process. This article offers a framework with three proven configurations of content and timing integration, risk management roles, and leading practices that enable effective SRM.     

Predicting credit card delinquencies: An application of deep neural networks

The objective of this paper is twofold. First, it develops a prediction system to help the credit card issuer model the credit card delinquency risk. Second, it seeks to explore the potential of deep learning (also called a deep neural network), an emerging artificial intelligence technology, in the credit risk domain. With real-life credit card data linked to 711,397 credit card holders from a large bank in Brazil, this study develops a deep neural network to evaluate the risk of credit card delinquency based on the client's personal characteristics and the spending behaviours. Compared with machine-learning algorithms of logistic regression, naive Bayes, traditional artificial neural networks, and decision trees, deep neural networks have a better overall predictive performance with the highest F scores and area under the receiver operating characteristic curve. The successful application of deep learning implies that artificial intelligence has great potential to support and automate credit risk assessment for financial institutions and credit bureaus.     

Litigation risk: Measurement and impact on M&A transaction terms

The purpose of the paper is to propose an original proprietary proxy of a firm's litigation risk. We extend the scope of litigation risk outside of the conflicts with shareholders and the domain of security litigation. We demonstrate that the source of the risk of litigation can be found in the firm's policies and in its management's operational or strategic decisions, even if a sector conditioning effect exists. Based on a sample of 465 US M&A transactions between 2000 and 2014, we provide evidence that the level of litigation risk, at the acquirer's level, has a positive and significant impact on the takeover premium. We also provide evidence that a significant relationship exists between the acquirer's litigation risk and the means of payment. An extension of the sample to international transactions is used as a robustness check; it confirms the previous results.     

On credit and output: Is the supply of credit relevant?

The consensus that changes in the supply of credit were irrelevant to making monetary policy decisions existed among macroeconomists during the second half of the twentieth century. Transmission of shocks to the real economy through changes in the supply of credit, however, played an important role in the recent U.S. financial crisis. This paper explores the extent to which policymakers should consider changes in the supply of credit when making forecasts and monetary policy decisions. More specifically, it considers whether a measure of real credit balances offers consistent and stable information, beyond that of a real interest rate and real money balances, about future output gaps during the U.S. post-war era. Results yield evidence that changes in real credit balances are the only variable, among those considered, to provide consistent and stable information about future output gaps over the entire sample period. Each information variable, however, provides relatively little value added for forecasting future output gaps, beyond a simple autoregressive model. To improve upon forecasts and monetary policy decisions, policymakers therefore should consider a broader range of information variables and occasionally reassess the relative weightings assigned to each.     

生态旅游视域下的岷江上游贫困山区生态安全评价

[目的]构建科学合理的评价指标体系,准确评价生态旅游影响下的区域生态安全状况,是推动少数民族山区实现旅游资源环境与区域社会、经济协同发展的前提和基础。[方法]以岷江上游贫困山区为例,应用灰色系统理论与熵值赋权法相结合,基于压力—状态—响应模型,构建生态旅游视域下的区域生态安全评估指标体系,并将评估指数与经济收入状况及贫困人口分布进行空间耦合。[结果](1)区域当前处于较安全水平,生态旅游开发适度;(2)综合评估指数与城镇居民可支配收入增长率、旅游收入对国民经济增长的贡献率呈正相关,且城镇居民在旅游开发中受益与机会较农牧民多;(3)综合评估指数与贫困人口比重呈负相关,与农牧民纯收入增长率没有必然联系。[结论]区域脱贫能够改善当地的生态安全状况,适度生态旅游开发是区域脱贫的有效手段,但应注重扶持农牧民在旅游业中的参与度,增加其旅游收益。