Correction to: Earnings announcement return extrapolation

Review of Accounting Studies - A Correction to this paper has been published: https://doi.org/10.1007/s11142-021-09605-9     

Correction to: using accounting earnings and aggregate economic indicators to estimate firm-level systematic risk

Review of Accounting Studies - A Correction to this paper has been published: https://doi.org/10.1007/s11142-021-09637-1     

Correction to: Voluntary disclosure when private information and disclosure costs are jointly determined

Review of Accounting Studies - A Correction to this paper has been published: https://doi.org/10.1007/s11142-021-09623-7     

A Stability Approach to Mean‐Variance Optimization

I jointly treat two critical issues in the application of mean‐variance portfolios, that is, estimation risk and portfolio instability. I find that theory‐based portfolio strategies, which are known to outperform naive diversification () in the absence of transaction costs, heavily underperform it under transaction costs. This is because they are highly unstable over time. I propose a generic method to stabilize any given portfolio strategy while maintaining or improving its efficiency. My empirical analysis confirms that the new method leads to stable and efficient portfolios that offer equal or lower turnover than and larger Sharpe ratio, even under high transaction costs.     

Optimal Mortgage Refinancing: A Closed‐Form Solution

We derive the first closed‐form optimal refinancing rule: refinance when the current mortgage interest rate falls below the original rate by at least In this formula W(.) is (the principal branch of) the Lambert W‐function, where ρ is the real discount rate, λ is the expected real rate of exogenous mortgage repayment, σ is the standard deviation of the mortgage rate, is the ratio of the tax‐adjusted refinancing cost and the remaining mortgage value, and τ is the marginal tax rate. This expression is derived by solving a tractable class of refinancing problems. Our quantitative results closely match those reported by researchers using numerical methods.     

Temperature and Growth: A Panel Analysis of the United States

We document that seasonal temperatures have significant and systematic effects on the U.S. economy, both at the aggregate level and across a wide cross section of economic sectors. This effect is particularly strong for the summer: a F increase in the average summer temperature is associated with a reduction in the annual growth rate of state‐level output of 0.15 to 0.25 percentage points. We combine our estimates with projected increases in seasonal temperatures and find that rising temperatures could reduce U.S. economic growth by up to one‐third over the next century.     

Book review

Georgina Ferry (2003) A Computer Called LEO: Lyons Teashops and the World's First Office Computer, London: Fourth Estate, pp. xii + 221. £15.99 (hbk), ISBN 1841-15185-8.     

Stochastic automatic differentiation: automatic differentiation for Monte-Carlo simulations

In this paper we re-formulate the automatic differentiation (and in particular, the backward automatic differentiation, also known as adjoint automatic differentiation, AAD) for random variables. While this is just a formal re-interpretation it allows one to investigate the algorithms in the presence of stochastic operators like expectation, conditional expectation or indicator functions.

We then specify the algorithms to efficiently incorporate non-pathwise operators (like conditional expectation operators). Under a comparably mild assumption it is possible to retain the simplicity of the backward automatic differentiation algorithm in the presence of conditional expectation operators. This simplifies important applications like - in mathematical finance - the application of backward automatic differentiation to the valuation of Bermudan options or calculation of xVA's.

We give the proof for a generalized version of the result. We then discuss in detail how the framework allows dramatic reduction of the memory requirements and improves the performance of a tapeless implementation of automatic differentiation (while the implementation brings advantages similar to ‘vector AAD’ (sometimes called tape compression) for free, it allows improvements beyond this. We present the implementation aspects and show how concepts from object-functional programing, like immutable objects and lazy evaluation enable additional reductions of the memory requirements.     

On the Price of Risk Under a Regime Switching CGMY Process

In this paper, we study option pricing under a regime-switching exponential Lévy model. Assuming that the coefficients are time-dependent and modulated by a finite state Markov chain, we generalise the work in Momeya and Morales (Method Comput Appl Probab, 2014, doi: 10.1007/s11009-014-9399-2), and Siu and Yang (Acta Mathe Appl Sin 2:369–388, 2009), that is, we use a pricing method based on the Esscher transform conditional on the information available on the Markov chain. We also carry out numerical analysis, to show the impact of the risk induced by the underlying Markov chain on the price of the option.     

The temporal nature of legitimation: the case of IFRS8

Legitimation can operate on an episodic or continual basis [Suchman, M.C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610]. We examine the temporal legitimation of the International Accounting Standards Board (IASB)’s actions during the adoption and review of International Financial Reporting Standard (IFRS) 8 ‘Operating Segments’. We conceptualise the controversy surrounding IFRS8 as an episode when the IASB sought segmental reporting convergence with the US standard, Statement of Financial Accounting Standard 131. Interpreting evidence from 15 (20) semi-structured interviews undertaken in 2009 (2011), before (after) entities reported under IFRS8, reveals its adoption precipitated an episodic legitimacy threat from selected audiences to the actions of the IASB. We discuss the IASB's attempt to influence legitimation for this episode through commitment to a post-implementation review [IFRS Foundation. (2011). Post implementation reviews: Plan for developing the framework for conducting post-implementation reviews. IASB Board meeting February 2011. Retrieved July 27, 2011, from http://www.ifrs.org/NR/rdonlyres/3E1502E4-F1E8-4907-838B-FFB20C7268ED/0/PIR02111st2ndb04obs.pdf] of IFRS8. Interpreting legitimacy concerns across diverse audiences about specific actions of the IASB (the introduction of IFRS8) enables us to draw conclusions about the resilience of the IASB as a standard setting organisation, in itself.     

Information Transmission in the World Money Markets

Using 1,966 daily observations since the introduction of the euro, we apply cointegration and error correction tests to examine information transmission in the major world money markets as represented by the domestic CD markets and the Eurocurrency market for the US dollar, euro, Japanese yen, and British pound sterling. Our inter‐market tests show a high degree of integration and interdependency among inter‐market interest rates. Our intra‐market results show that $ LIBOR and LIBOR rates drive LIBOR and £ LIBOR. Application of Johansen's (1988) multivariate test procedure and Gonzalo and Granger's (1995) long‐memory components technique confirms and reinforces our intra‐market findings that the system of four LIBOR rates is fully integrated (i.e., three cointegrating vectors), with the single common trend driven by $ LIBOR and LIBOR. These results are consistent with the strength of the dollar and yen relative to the pound sterling and the euro during the developing world financial crisis in late 2008.