Stealing Deposits: Deposit Insurance,Risk‐Taking,and the Removal of Market Discipline in Early 20th‐Century Banks

Deposit insurance reduces liquidity risk but can increase insolvency risk by encouraging reckless behavior. Several U.S. states installed deposit insurance laws before the creation of the Federal Deposit Insurance Corporation, and those laws applied only to some depository institutions within those states. These experiments present a unique testing ground for investigating the effect of deposit insurance. We show that deposit insurance removed market discipline constraining uninsured banks. Taking advantage of World War I's rise in world agricultural prices, insured banks increased their insolvency risk and competed aggressively for deposits. When prices fell after the war, the insurance systems collapsed and suffered high losses.     

Exchange risk and universal returns: A test of international arbitrage pricing theory

According to the international arbitrage pricing theory (IAPT) posited by Solnik (1983), currency movements affect assets' factor loadings and associated risk premiums. Based on a novel universal return decomposition, we propose an empirical model to test this proposition and perform tests using U.S. stock returns in the period 1975–2008. Our results confirm that currency movements significantly affect the market betas of a large proportion of stocks. Further cross-sectional tests indicate that currency movements affecting the market factor are significantly priced in stock returns. Based on these and other findings, we conclude that Solnik's IAPT is supported. An important implication of our findings is that exchange rate risk can broadly affect stock returns through both factor loading and residual factor channels.     

Perks and the informativeness of stock prices in the Chinese market

While the literature shows that perks can affect firm values positively or negatively, we argue that firms with higher perks are more likely to be associated with a lower quality of financial reporting, which, in turn, can affect the informativeness of stock prices. Based on hand-collected data on perks from Chinese listed firms, we find that firms with lower perks are associated with higher informativeness of stock prices (or lower R-square). Moreover, the positive association between perks and R-square is shown to be weaker for firms with higher financial reporting quality through audit and earnings quality measures.     

Gathering Data for Archival,Field, Survey,and Experimental Accounting Research

In the published proceedings of the first Journal of Accounting Research Conference, Vatter [1966] lamented that “Gathering direct and original facts is a tedious and difficult task, and it is not surprising that such work is avoided.” For the fiftieth JAR Conference, we introduce a framework to help researchers understand the complementary value of seven empirical methods that gather data in different ways: prestructured archives, unstructured (“hand‐collected”) archives, field studies, field experiments, surveys, laboratory studies, and laboratory experiments. The framework spells out five goals of an empirical literature and defines the seven methods according to researchers’ choices with respect to five data gathering tasks. We use the framework and examples of successful research studies in the financial reporting literature to clarify how data gathering choices affect a study's ability to achieve its goals, and conclude by showing how the complementary nature of different methods allows researchers to build a literature more effectively than they could with less diverse approaches to gathering data.     

Credit Rationing,Income Exaggeration,and Adverse Selection in the Mortgage Market

We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low‐doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low‐doc loan product would result in credit rationing against self‐employed borrowers.     

Effects of frequent information disclosure: the case of daily net asset value reporting for closed-end investment companies

There are two competing hypotheses regarding the effects of increased financial disclosure. One states that increased disclosure leads to decreased information asymmetry and more efficient pricing resulting in reduced bid-ask spreads, volatility and illiquidity. The other says that increased disclosure places additional burdens on traders leading to increased transactions costs and volatility. This paper examines the effects of more-frequent reporting for the case of closed-end funds that voluntarily changed their net-asset-value reporting from weekly to daily beginning in 1998. Multivariate analyses indicate a decrease in asymmetric information following initiation of daily reporting as evidenced by lower spreads, greater transactions volume, reduced volatility and decreased illiquidity. We conclude that closed-end fund daily net-asset-value reporting provides an example of information disclosure that provides useful information to investors and reduces information asymmetry.     

Life Expectancy in 2040: What Do Clinical Experts Expect?

We use expert clinical and public health opinion to estimate likely changes in the prevention and treatment of important disease conditions and how they will affect future life expectancy. Focus groups were held including clinical and public health faculty with expertise in the six leading causes of death in the United States. Mortality rates and life tables for 2040 were derived by sex and age. Life expectancy at age 20 and 65 was compared to figures published by the Social Security Administration and to estimates from the Lee-Carter method. There was agreement among all three approaches that life expectancy at age 20 will increase by approximately one year per decade for females and males between now and 2040. According to the clinical experts, 70% of the improvement in life expectancy will occur in cardiovascular disease and cancer, while in the last 30 years most of the improvement has occurred in cardiovascular disease. Expert opinion suggests that most of the increase in life expectancy will be attributable to the already achieved reduction in smoking rates, especially for women.     

Non-technical skills for managing risk and performance in financial trading

Recent large-scale failures in financial institutions have been found to be caused, in-part, by human factors-related issues in financial trading. In other environments where risk management and performance are intertwined, a human factors approach is often adopted to understand how the ‘non-technical skills (NTS)’ (leadership (LD), decision-making (DM), situation awareness (SA), teamwork) of organisational actors influence outcomes. Yet, to date, there has been minimal application of human factors research in financial trading. This study (i) identifies ‘real-world’ (i.e. non-laboratory) research studies investigating the NTS important for performance in financial trading, (ii) examines and synthesises data on the NTS found to underpin good or poor performance and (iii) considers the quality and coverage of research investigating NTS in financial trading, and identifies potential areas for future research. Nineteen studies were identified through a systematic literature search and then content-analysed for associations between NTS and performance in financial trading. The review found a range of decision-making (e.g. heuristics and biases, intuitive DM, emotional regulation) and LD skills (e.g. setting standards, monitoring behaviour, encouraging speaking-up) to have been identified as important for managing risk and performance in financial trading environments. Furthermore, SA (e.g. information search and assessment strategies, vigilance, identifying ‘noise’ data) and teamwork (e.g. avoiding ‘role’ conflict, communication between traders) were found to be important, yet remain less explored within the literature, and should be the focus of future research. NTS appear essential for effective risk management within the financial sector, yet further field research is required to examine the context-relevant behaviours that underpin safe activity. This will facilitate the development of evidence-based systems for assessing and training NTS competencies.     

On an efficient multiple time step Monte Carlo simulation of the SABR model

In this paper, we will present a multiple time step Monte Carlo simulation technique for pricing options under the Stochastic Alpha Beta Rho model. The proposed method is an extension of the one time step Monte Carlo method that we proposed in an accompanying paper Leitao et al. [Appl. Math. Comput. 2017, 293, 461–479], for pricing European options in the context of the model calibration. A highly efficient method results, with many very interesting and nontrivial components, like Fourier inversion for the sum of log-normals, stochastic collocation, Gumbel copula, correlation approximation, that are not yet seen in combination within a Monte Carlo simulation. The present multiple time step Monte Carlo method is especially useful for long-term options and for exotic options.