On a Statistical Analysis of Implied Data

We propose a method of evaluating the accuracy of the implied default probabilities. We modify the model proposed by Duffie et al. (Rev Fin Stud 12:678–720, 1999) to allow the parametric statistical analysis. The pseudo maximum likelihood estimator is defined and to justify our method we shall prove the consistency and the asymptotic normality of the estimator. The key step is to define a pseudo score vector and apply the method of Wald (Ann Math Stat 20: 595–601, 1949) and a delta method. We also introduce the bootstrap for estimating the accuracies, which is similar to that for regression models. To implement our method to the real data, we shall recommend the bootstrap rather than asymptotic normality.     

Optimal loan-to-value ratio and the efficiency gains of default

We study the optimal loan-to-value (LTV) ratio in a monetary general equilibrium model with heterogeneous agents, collateral default, production and a banking sector. We find that the welfare of the debtor is not monotonically increasing in the LTV ratio, i.e. tighter financing constraints can be welfare-improving for the debtor. Moreover, the optimal LTV ratio for both the debtor and the creditor allows for the possibility of ex post default. Collateral default enhances efficiency by allowing for better consumption smoothing and risk hedging. Our result improves the argument in Dubey et al. (Econometrica 73(1):1–37, 2005) and Zame (Am Econ Rev 83(5):1142–1164, 1993), which use default penalties instead of collateral to induce repayment and show the efficiency gains of default.     

Pricing of innate and discretionary accruals in Australian debt

This paper addresses the conflicting evidence on the role of accruals in debt pricing. We show that the two subcomponents of accruals quality, innate and discretionary accruals, both impact the debt pricing. Higher innate accruals increases cost of debt, consistent with the prior evidence ( Francis et al., 2005 ; Gray et al., 2009 ). However, we also find that higher discretionary accruals reduce the cost of debt. This contrasts with the prior evidence of a positive association between discretionary accruals and cost and debt ( Francis et al., 2005 ), and no association ( Gray et al., 2009 ). We show that noisy measurement of cost of debt reconciles these results.     

Errata for the article “Pricing and static hedging of American-style options under the jump to default extended CEV model”

This errata corrects an error in Ruas et al. (2013, Equation 27) and updates the numerical results contained in Ruas et al. (2013, Tables 4 and 5). The material provided here is meant to be read strictly in conjunction with Ruas et al. (2013).     

More punishment, less default?

The extent of lender recourse following contractual default varies greatly across economies. Intuitively, one would expect these differences to matter for default behavior at the micro-economic level and for equilibrium quantities. The objective of this paper is to study an equilibrium model in the spirit of Dubey et?al. (Econometrica 73(1):1–37, 2005) where the implications of recourse for default patterns can be characterized. Under plausible conditions, broader recourse causes yields at origination and default rates to fall for a given set of observable borrower characteristics. On the other hand, the effect of broader recourse on average default rates and the quantity of loans issued is deeply ambiguous because the composition of the pool of borrowers can change. Raising the fraction of assets subject to recourse can well increase equilibrium default rates. I discuss the implications of these results for how one should test empirically whether recourse statutes matter for loss severity rates and the frequency of default in secured loan markets.     

Divisia Monetary Aggregates,the Great Ratios,and Classical Money Demand Functions

King et al. ( 1991 ) evaluate the empirical relevance of a class of real business cycle models with permanent productivity shocks by analyzing the stochastic trend properties of postwar U.S. macroeconomic data. They find a common stochastic trend in a three‐variable system that includes output, consumption, and investment, but the explanatory power of the common trend drops significantly when they add money balances and the nominal interest rate. In this paper, we revisit the cointegration tests in the spirit of King et al., using improved monetary aggregates whose construction has been stimulated by the Barnett critique. We show that previous rejections of the balanced growth hypothesis and classical money demand functions can be attributed to mismeasurement of the monetary aggregates.     

Corporate political strategies

The paper offers a comprehensive and integrative review of the current literature on corporate political strategies sharing common boundaries with finance, accounting and corporate governance. While there appears to be a heightened interest among researchers in studying the value relevance of corporate political strategies [ Chen et al. (2010) , Goldman et al. (2009) , Cooper et al. (2010) , Richter et al. (2008) , Hochberg et al. (2007) , de Figueiredo and Edwards (2007) , Faccio and Parsley (2009) , and Myers (2009) among others], interestingly, finance and corporate governance scholars have yet to embrace the research on political strategies as part of their mainstream research. Taking a micro perspective at the firm level, we review the major scholarly works in the economics, finance and management disciplines with respect to the firm attributes shaping the corporate decision to engage politically, modes of corporate political participation, and the value impact of corporate political activity. The overarching theme of the review article is to integrate diverse – political economy and management – paradigms of corporate political participation and rationalize the value relevance within the corporate finance and corporate governance perspective. The paper also presents focused preliminary evidence on the determinants and value impact of corporate lobbying strategies. For the sample of 5452 firm‐year observations, the results indicate that while for large firms corporate lobbying may not be agency driven and may create value, for small firms, despite low shareholder rights associating with higher lobbying engagements, lobbying still relates positively to value added.     

Expected stock returns,common idiosyncratic volatility and average idiosyncratic correlation

Motivated by Herskovic et al. (2016), we examine the role of the average idiosyncratic correlation (ICOR) in two types of markets: an emerging market and a developed market. Examining daily stock data from the Chinese stock market for the period 1995 to 2020 and from the US for the period 1926 to 2019, we adopt high-dimensional principal component analysis (PCA) and thresholding methods to re-estimate ICOR. We find that ICOR plays an important role in explaining the expected stock returns, as the common idiosyncratic volatility (CIV) does in Herskovic et al. (2016). ICOR has been neglected in the literature due to large estimation error in the idiosyncratic covariance matrix and our analysis provides evidence that ICOR is nonnegligible in both markets when we control for several common market factors. We show that the average idiosyncratic covariance, which is the numerator of ICOR, exhibits the same pattern as CIV. Furthermore, our regression analyses of expected stock returns in response to ICOR change in both markets show that, in contrast to the negative result for CIV, the stocks’ high risk exposure to ICOR change comes with a higher risk premium, perhaps because of the synchronized but disproportionate changes in the monthly idiosyncratic covariance and idiosyncratic volatility.     

Comments on “The Effect of a Common Currency on the Volatility of the Extensive Margin of Trade”

In this note, we correct two typos contained in the published version of Auray et al. (2012), which affect the quantitative results, without modifying the qualitative results and then the message of the paper. In addition, we present a modified pricing rule for exported goods, and allow export prices to be sticky as well. This extension slightly improves the quantitative predictions of the model. Finally, predictions are made closer to the data when considering an alternative inflation target.     

Predicting equity premium out-of-sample by conditioning on newspaper-based uncertainty measures: A comparative study

In finance, the use of newspaper-based uncertainty measures has grown exponentially in recent years. For instance, a growing number of researchers have used the newspaper-based U.S. economic policy uncertainty (EPU) index suggested in Baker et al. (2016) as a predictor in their model to forecast the variable of interest out-of-sample. Likewise, inspired by the approach suggested in Baker et al. (2016), several other newspaper-based uncertainty measures have been introduced, such as indices measuring geopolitical risk (GPR) and monetary policy uncertainty (MPU). This study evaluates the relative out-of-sample predictive power afforded by more than fifty different newspaper-based uncertainty measures with regards to predicting excess returns on the S&P 500 index one-month ahead using data from 1985$m$1 through 2020$m$12. Our predictive model accounts for salient data features, namely, predictor endogeneity and persistence. Furthermore, we evaluate the evidence of conditional as well unconditional predictive ability as outlined in Giacomini and White (2006), and also explore whether any identified level of gains from a statistical viewpoint lead to gains from an economic viewpoint. We find that newspaper-based uncertainty measures linked with certain components of the equity market volatility (EMV) tracker suggested in Baker et al. (2019) help improve the accuracy of one month ahead point predictions relative to the benchmark the most. In contrast, EPU, GPR and MPU indices, which are more frequently used by researchers are much less successful.     

A remark on static hedging of options written on the last exit time

In this paper, several different static hedges of the option written on the last exit time are given. One of them was originally presented in Akahori et al. (Methodol Comput Appl Probab 11(4): 661–668, 2009). Another one is derived from an expression in Madan et al. (Asia Pac Financ Mark 15(2): 97–115, 2008d). It is remarked in this paper that these static hedges are also obtained by applying a method in Carr and Chou (Hedging complex barrier options, 2001).     

Detecting Accounting Fraud in Publicly Traded U.S. Firms Using a Machine Learning Approach

We develop a state-of-the-art fraud prediction model using a machine learning approach. We demonstrate the value of combining domain knowledge and machine learning methods in model building. We select our model input based on existing accounting theories, but we differ from prior accounting research by using raw accounting numbers rather than financial ratios. We employ one of the most powerful machine learning methods, ensemble learning, rather than the commonly used method of logistic regression. To assess the performance of fraud prediction models, we introduce a new performance evaluation metric commonly used in ranking problems that is more appropriate for the fraud prediction task. Starting with an identical set of theory-motivated raw accounting numbers, we show that our new fraud prediction model outperforms two benchmark models by a large margin: the Dechow et al. logistic regression model based on financial ratios, and the Cecchini et al. support-vector-machine model with a financial kernel that maps raw accounting numbers into a broader set of ratios.     

Dissecting the idiosyncratic volatility anomaly

The idiosyncratic volatility (IVOL) anomaly, documented in Ang, et al. (2006), has garnered a great deal of attention in the literature. Yet questions remain regarding the robustness and pervasiveness of the IVOL anomaly, with a particular concern that the IVOL anomaly might simply be the manifestation of market microstructure effect. In this paper, we show that the IVOL anomaly is strong and pervasive after we exclude stocks most susceptible to market microstructure noise — such as microcap stocks, penny stocks, and stocks with strong short-term return reversal. These results are robust to equal-weighting or value-weighting stocks in the IVOL portfolios. Our findings suggest that rather than being the cause of the anomaly, market microstructure noise actually weakens the IVOL anomaly.     

Long‐Term post‐merger announcement performance. A case study of Australian listed real estate

This study examines the long‐term postmerger performance of Australian Real Estate Investment Trusts (A‐REITs). The A‐REIT sector is used as a case study being less vulnerable to agency issues due to its regulatory structure (Eichholtz and Kok, 2008; Ratcliffe et al., 2009). Research on conventional firms has shown, on average, shareholders are worse off in the long run (Alexandridis et al., 2012). In contrast, we find that shareholders experience significantly positive abnormal returns, after accounting for the financial crisis. This outcome suggests that when managers are restricted with the use of retained earnings and the type of investment, they may be less susceptible to hubris and/or agency issues.     

Aggregation Bias in Estimates of Conditional Conservatism: Theory and Evidence

This paper documents a study about the influence of the aggregation effect on the estimates of models based on the original Basu model – specifically the Ball, Kothari and Nikolaev model (Ball et al., 2013b). We provide an analytical study of the effect, showing that it can produce two biases: an omitted‐variable bias and a truncated‐sample bias. Using separate proxies for good and bad news for each company and year, we estimate the empirical sign and magnitude of those biases. Our results show that the estimates of conditional conservatism based on regressions of (unexpected) earnings on (unexpected) returns, as in the paper by Ball et al., are contaminated by substantial aggregation bias. More specifically, the aggregation effect causes these models to underestimate good‐news timeliness and overestimate bad‐news timeliness, thereby overestimating differential timeliness. Moreover, when we use proxies that provide better control for the aggregation effect, the differential timeliness coefficient tends to 0, showing that the influence of conditional conservatism on the returns–earnings relationship is, at best, marginal.     

Are Some Forecasters Really Better than Others? A Note*

In this paper, we use bootstrap approach to test the null hypothesis that all forecasters in the U.S. Surveys of Professional Forecasters (SPF) have equal ability. Our bootstrap procedure captures any potential cross-sectional and serial correlation in the forecast errors while preserving the unbalanced nature of the panel data. Once we account for the presence of cross-sectional and serial correlation in the forecast errors while resampling, we find convincing evidence that some individuals really are better than others—this is in sharp contrast to the findings of D'Agostino et al. (2012).     

Rating systems,procyclicality and Basel II: an evaluation in a general equilibrium framework

The introduction of Basel II has raised concerns about the potential impact of risk-sensitive capital requirements on the business cycle. Several approaches have been proposed to assess the procyclicality issue. In this paper, we adopt a general equilibrium model and conduct comprehensive analysis of different proposals. We set out a model that allows to evaluate different rating systems in relation to the procyclicality issue. Our model extends previous models by analysing the effects of different rating systems on banks’ portfolios (as in Catarineu et al. in Econ Theory 26:537–557, 2005) and the contagion effects relevant to financial stability (as in Goodhart et al. in Ann Finance 1:197–224, 2005). The paper presents comparative statics results comparing a cycle-dependent and a neutral rating system from the point of view of banks profit maximization. Our results suggest that banks’ preferences about point in time or through the cycle rating systems depend on the banks’ characteristics and on the business cycle conditions in terms of expectations and realizations.     

Nominal GDP Targeting with Heterogeneous Labor Supply

We study nominal gross domestic product (GDP) targeting as optimal monetary policy in a model with a credit market friction following Azariadis et al. (2018), henceforth ABSS. We extend the ABSS framework to allow for heterogeneous labor supply. We show that nominal GDP targeting continues to characterize optimal monetary policy in this setting. We also analyze the incomplete markets equilibrium that exists when the monetary policymaker pursues a suboptimal policy, and show how an extension to more general preferences can limit the ability of the policymaker to provide full insurance to households in this setting.     

A re-examination on dissecting the purchasing power parity puzzle

The purpose of this paper is to examine the source of a real exchange-rate adjustment based on the impulse-response function constructed from local projections when the true data-generating process (DGP) is unknown. This work extends the local-projection method proposed by Jordà [2005. Estimation and inference of impulse responses by local projections. American Economic Review 95, 161-182] to allow for variables that are I(1) and exhibit cointegration. Our paper shows that nominal exchange-rate adjustments dominate in the reversion toward PPP regardless of a nominal exchange-rate shock or a price shock. It is also shown that the half-life of real exchange rates is close to that of nominal exchange rates. Since these results are consistent with those of Cheung et al. [Cheung, Y.W., Lai, K.S., Bergman, M., 2004. Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments. Journal of International Economics 64, 135-150], we therefore conclude that their main findings are robust to possible misspecifications in the true DGP.