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Through a survey and analyses of observational data, we provide systematic evidence that institutional investors value and demand climate risk disclosures. The survey reveals the investors have a strong demand for climate risk disclosures, and many actively engage their portfolio firms for improvements. Empirical analyses of holdings data corroborate this evidence by showing a significantly positive association between climate-conscious institutional ownership and better firm-level climate risk disclosure. We establish further evidence of institutional investors’ influence on firms’ climate risk disclosures by examining a shock to the climate risk disclosure demand of French institutional investors (French Article 173).

This study examines liquidity and cost of capital effects around voluntary and mandatory IAS/IFRS adoptions. In contrast to prior work, we focus on the firm-level heterogeneity in the economic consequences, recognizing that firms have considerable discretion in how they implement the new standards. Some firms may make very few changes and adopt IAS/IFRS more in name, while for others the change in standards could be part of a strategy to increase their commitment to transparency. To test these predictions, we classify firms into ‘label’ and ‘serious’ adopters using firm-level changes in reporting incentives, actual reporting behavior, and the external reporting environment around the switch to IAS/IFRS. We analyze whether capital-market effects are different across ‘serious’ and ‘label’ firms. While on average liquidity and costs of capital often do not change around voluntary IAS/IFRS adoptions, we find considerable heterogeneity: ‘Serious’ adoptions are associated with an increase in liquidity and a decline in cost of capital, whereas ‘label’ adoptions are not. We obtain similar results when classifying firms around mandatory IFRS adoption. Our findings imply that we have to exercise caution when interpreting capital-market effects around IAS/IFRS adoption as they also reflect changes in reporting incentives or broader changes in firms’ reporting strategies, and not just the standards.

Assessing the predictive ability of behavioral finance theories using out-of-sample data is important. Without predictive tests, the risk of overfitting theory to data is large considering the potentially boundless set of psychological biases underlying the behavioral explanations for observed security price behavior. We test pricing effects attributed to a central psychological bias, representativeness, which underlies many behavioral-finance theories. This bias influences individuals beliefs about future outcomes based on how closely past outcomes represent certain categories. To produce out-of-sample tests, we use accounting performance to identify these categories and test the idea that investors misclassify firms and thus systematically misprice them. Evidence fails to suggest that trends and sequences of accounting performance, as a proxy for representativeness bias, influence investor expectations to generate return predictability.

This new and comprehensive database on the regulation and supervision of banks in 107 countries should better inform advice about bank regulation and supervision and lower the marginal cost of empirical research. International consultants on bank regulation and supervision for developing countries often base their advice on how their home country does things, for lack of information on practice in other countries. Recommendations for reform have tended to be shaped by bias rather than facts. To better inform advice about bank regulation and supervision and to lower the marginal cost of empirical research, Barth, Caprio, and Levine present and discuss a new and comprehensive database on the regulation and supervision of banks in 107 countries. The data, based on surveys sent to national bank regulatory and supervisory authorities, are now available to researchers and policymakers around the world. The data cover such aspects of banking as entry requirements, ownership restrictions, capital requirements, activity restrictions, external auditing requirements, characteristics of deposit insurance schemes, loan classification and provisioning requirements, accounting and disclosure requirements, troubled bank resolution actions, and (uniquely) the quality of supervisory personnel and their actions. The database permits users to learn how banks are currently regulated and supervised, and about bank structures and deposit insurance schemes, for a broad cross-section of countries. In addition to describing the data, Barth, Caprio, and Levine show how variables may be grouped and aggregated. They also show some simple correlations among selected variables. In a companion paper ("Bank Regulation and Supervision: What Works Best") studying the relationship between differences in bank regulation and supervision and bank performance and stability, they conclude that: - Countries with policies that promote private monitoring of banks have better bank performance and more stability. Countries with more generous deposit insurance schemes tend to have poorer bank performance and more bank fragility. - Diversification of income streams and loan portfolios - by not restricting bank activities - also tends to improve performance and stability. (This works best when an active securities market exists.) Countries in which banks are encouraged to diversify their portfolios domestically and internationally suffer fewer crises. This paper - a product of Finance, Development Research Group, and the Financial Sector Strategy and Policy Department - is part of a larger effort in the Bank to compile data on financial regulation and supervision and the advise countries on what works best. The study was funded by the Bank's Research Support Budget under the research project "Bank Regulation and Supervision: What Works and What Does Not."

Multiple empirical studies have shown that Order Flow Imbalance has predictive power over the trading range. The PIN Theory (Easley et al. [1996]) reveals the Microstructure mechanism by which: – Market Makers adjust their trading range to avoid being adversely selected by Informed Traders. – Informed Traders reveal their future trading intentions when they alter the Order Flow. – Consequently, Market Makers’ trading range is a function of the Order Flow imbalance. VPIN is a High Frequency estimate of PIN, which can be used to detect the presence of Informed Traders, monitor liquidity conditions and forecast microstructural volatility.

We examine asset class and factor premiums across inflationary regimes. As periods of deflation, high inflation and especially stagflation are relatively uncommon in recent history, we use a deep sample starting in 1875. Moderate inflation scenarios provide the highest returns across asset class and factor premiums. During deflationary periods, nominal returns are low, but real returns are attractive. By contrast, real equity and bond returns are negative during a high inflation regime, and especially so during times of stagflation. During these ‘bad times’ factor premiums are positive, which helps to offset part of the real capital losses.

• We offer the first empirical exploration of fixed indexed annuity returns based upon actual contracts that were sold and actual interest that was credited. • Annuity returns have been competitive with alternative portfolios of stocks and bonds. • Their design has limited the downside returns associated with declining markets. • They have achieved respectable returns in more robust equity markets. • Studies that have criticized FIAs are typically based on hypothesized crediting rate formulae, constant participation rates and caps, and unrealistic simulations of stock market and interest rate behavior. When actual policy data are used, the conclusions change. • Our study is exploratory, because although it is based on actual contracts and actual crediting rates, our policy data set is neither randomly selected nor comprehensive, based upon data provided by 15 FIA carriers.

We provide evidence for the effects of social norms on markets by studying "sin" stocks - publicly-traded companies involved in producing alcohol, tobacco, and gaming. We hypothesize that there is a societal norm to not fund operations that promote vice and that some investors, particularly institutions subject to norms, pay a financial cost in abstaining from these stocks. Consistent with this hypothesis, sin stocks are less held by certain institutions, such as pension plans (but not by mutual funds who are natural arbitrageurs), and less followed by analysts than other stocks. Consistent with them facing greater litigation risk and/or being neglected because of social norms, they outperform the market even after accounting for well-known return predictors. Corporate financing decisions and time-variation in norms for tobacco also indicate that norms affect stock prices. Finally, we gauge the relative importance of litigation risk versus neglect for returns. Sin stock returns are not systematically related to various proxies for litigation risk, but are weakly correlated to the demand for socially responsible investing, consistent with them being neglected.

We examine the risk-return characteristics of a rolling portfolio investment strategy where more than six thousand Nasdaq initial public offering (IPO) stocks are bought and held for up to five years. The average long-run portfolio return is low, but IPO stocks appear as longshots, as five-year buy-and-hold returns of 1,000 percent or more are somewhat more frequent than for non-issuing Nasdaq firms matched on size and book-to-market ratio. The typical IPO firm is of average Nasdaq market capitalization but has relatively low book-to-market ratio. We also show that IPO firms exhibit relatively high stock turnover and low leverage, which may lower systematic risk exposures. To examine this possibility, we launch an easily constructed low minus high (LMH) stock turnover portfolio as a liquidity risk factor. The LMH factor produces significant betas for broad-based stock portfolios, as well as for our IPO portfolio and a comparison portfolio of seasoned equity offerings. The factor-model estimation also includes standard characteristics-based risk factors, and we explore mimicking portfolios for leveragerelated macroeconomic risks. Because they track macroeconomic aggregates, these mimicking portfolios are relatively immune to market sentiment effects. Overall, we cannot reject the hypothesis that the realized return on the IPO portfolio is commensurable with the portfolio's risk exposures, as defined here.

More than 120 countries require or permit the use of International Financial Reporting Standards (‘IFRS’) by publicly listed companies on the basis of higher information quality and accounting comparability from IFRS application. However, the empirical evidence about these presumed benefits are often conflicting and fail to separate between information quality and comparability. In this paper we examine the effect of mandatory IFRS adoption on firms’ information environment. We find that after mandatory IFRS adoption consensus forecast errors decrease for firms that mandatorily adopt IFRS relative to forecast errors of other firms. We also find decreasing forecast errors for voluntary adopters, but this effect is smaller and not robust. Moreover, we show that the magnitude of the forecast errors decrease is associated with the firm-specific differences between local GAAP and IFRS. This finding suggests that it is IFRS adoption rather than a correlated unobservable factor that is causing forecast errors to decrease. Exploiting individual analyst level data and isolating settings where analysts would benefit more from either increased comparability or higher quality information, we document that the improvement in the information environment is driven both by information and comparability effects. These results suggest that mandatory IFRS adoption has improved the quality of information intermediation in capital markets and as a result firms’ information environment by increasing both information quality and accounting comparability.

In this paper we compare market prices of credit default swaps with model prices. We show that a simple reduced form model with a constant recovery rate outperforms the market practice of directly comparing bonds' credit spreads to default swap premiums. We find that the model works well for investment grade credit default swaps, but only if we use swap or repo rates as proxy for default-free interest rates. This indicates that the government curve is no longer seen as the reference default-free curve. We also show that the model is insensitive to the value of the assumed recovery rate.

The share value is the present value of the expected equity cash flows, and the two main components of equity cash flows are dividends and share repurchases.We focus on the evolution of dividends and share repurchases on the U.S. stock market, although we also provide some data about other countries.We show the evolution of the dividend yield of GE, Boeing and Coca-Cola.We compare the evolution of the yield on 30-year Government bonds and the dividend yield in the United States. Both yields have fallen in the last 30 years. We compare the evolution of the dividends per share of Coca-Cola and Pepsico with the earnings per share, and we calculate the expected dividend growth of Coca-Cola and Pepsico implicit in the market prices.

A basket is a set of instruments that are held together because its statistical profile delivers a desired goal, such as hedging or trading, which cannot be achieved through the individual constituents or even subsets of them. Multiple procedures have been proposed to compute hedging and trading baskets, among which balanced baskets have attracted significant attention in recent years. Unlike Principal Component Analysis (PCA) style of methods, balanced baskets spread risk or exposure across their constituents without requiring a change of basis. Practitioners typically prefer balanced baskets because their output can be understood in the same terms for which they have developed an intuition. We review three methodologies for determining balanced baskets, analyze the features of their respective solutions and provide Python code for their calculation. We also introduce a new method for reducing the dimension of a covariance matrix, called Covariance Clustering, which addresses the problem of numerical ill-conditioning without requiring a change of basis.

It is well established that value stocks outperform glamour stocks, yet considerable debate exists about whether the return differential reflects compensation for risk or mispricing. Under mispricing explanations, prices of glamour (value) firms reflect systematically optimistic (pessimistic) expectations; thus, the value/glamour effect should be concentrated (absent) among firms with (without) ex ante identifiable expectation errors. Classifying firms based upon whether expectations implied by current pricing multiples are congruent with the strength of their fundamentals, we document that value/glamour returns and ex post revisions to market expectations are predictably concentrated (absent) among firms with ex ante biased (unbiased) market expectations.

We discuss the notion of liquidity and liquidity risk within the financial system. We distinguish between three different liquidity types, central bank liquidity, funding and market liquidity and their relevant risks. In order to understand the workings of financial system liquidity, as well as the role of the central bank, we bring together relevant literature from different areas and review liquidity linkages among these three types in normal and turbulent times. We stress that the root of liquidity risk lies in information asymmetries and the existence of incomplete markets. The role of central bank liquidity can be important in managing a liquidity crisis, yet it is not a panacea. It can act as an immediate but temporary buyer to liquidity shocks, thereby allowing time for supervision and regulation to confront the causes of liquidity risk.

Bond yields today are well below and stock market valuations are well above their historical average. There are no historical periods in the United States where comparable low bond yields and high equity valuations have occurred simultaneously. Both current bond yields and stock values have been shown to predict near-term returns. Portfolio returns in the first decade of retirement have an outsize impact on retirement income strategies. Traditional Monte Carlo simulation approaches generally do not incorporate market valuations into their analysis. In order to simulate how retirees will fare in a low return environment for both stocks and bonds, we incorporate the predictive ability of current valuations to simulate its impact on retirement portfolios. We estimate bond returns through an autoregressive model that uses an initial bond yield value where yields drift in the future. We use the cyclically adjusted price-to-earnings (CAPE) ratio as an estimate of market valuation to predict short-run stock performance. Our simulations indicate that the safety of a given withdrawal strategy is significantly affected by the initial bond yield and CAPE value at retirement, and that the relative impact varies based on the portfolio equity allocation. Using valuation measures current as of April 15, 2013, which is a bond yield of 2.0% and a CAPE of 22, we find the probability of success for a 40% equity allocation with a 4% initial withdrawal rate over a 30 year period is approximately 48%. This success rate is materially lower than past studies and has sobering implications on the likelihood of success for retirees today, as well as how much those near retirement may need to save to ensure a successful retirement.

This paper compares the performance of three enhanced momentum strategies proposed in the literature: constant volatility-scaled momentum, constant semi-volatility-scaled momentum, and dynamic-scaled momentum. Using data for individual stocks from the U.S. and across 48 international countries, we find that all three approaches decrease momentum crashes and lead to higher risk-adjusted returns. However, in multiple factor comparison tests, no enhanced momentum strategy emerges as consistently superior. Finally, cross-country analyses relate momentum and the two constant volatility-scaled momentum returns to market dynamics, whereas dynamic-scaled momentum is significantly less affected, suggesting a reduced sensitivity to time-varying investor overconfidence.

The financial reporting and disclosure problems at Enron, as well as the high market valuations for its stock raise troubling questions about the performance of capital market intermediaries, regulators and governance experts whose are supposed to ensure the effective functioning of the stock market. This paper examines the functions of key capital market intermediaries and analyzes how their own governance and incentive problems may have contributed to Enron's rise and fall. We conclude by proposing system modifications to resolve the observed problems.

We document a rapid increase in retail trading in options in the U.S. Facilitated by payment for order flow (PFOF) from wholesalers executing retail orders, retail trading recently reached over 60% of the total market volume. Nearly 90% of PFOF comes from three wholesalers. Exploiting new flags in transaction-level data, we isolate wholesaler trades and build a novel measure of retail options trading. Our measure comoves with equity-based retail activity proxies and drops significantly during U.S. brokerage platform outages and trading restrictions. Retail investors prefer cheaper, weekly options, with the average bid-ask spread of a whopping 12.6%, and lose money on average.

This paper develops empirical implications of the Feltham and Ohlson [1995] model which relates a firm's market value to accounting data and their expected realizations. The key issue concerns how one conceptualizes/measures a firm's expected growth to explain its market value when the model also includes more basic accounting measures reflecting its current performance. It is shown that market value can be expressed in terms of, (i), financial assets (liabilities) with a coefficient of one, (ii), the expected change in operating earnings with a non-negative coefficient, (iii), the expected operating earnings with a positive coefficient, (iv), current (net) operating assets with a non-negative coefficient, and, (v), the expected change in (net) operating assets with a non-negative coefficient. One identifies the measure of a firm's expected growth by normalizing the last variable with current (net) operating assets. The variable will be relevant if and only if the accounting is conservative.

We use a residual income valuation model to compute a measure of the intrinsic value for the 30 stocks in the DJIA. As a departure from the current literature, we do not require price to equal intrinsic value at all times. Rather, we model the time-series relation between price and value as a co-integrated system, so that price and value are long-term convergent. In this framework, we show that superior empirical estimates of value will not only track price more closely, but also be better predictors of subsequent returns. We find that since 1978, traditional indicators of market value (e.g., B/P, E/P, and D/P) have had little predictive power for subsequent returns. In contrast, a V/P ratio based on the residual income model reliably predicts overall market returns over as short a time interval as one- month. Using a VAR simulation technique, we find this result is robust when we include B/P, D/P, and E/P in the regression, and continues to hold when we control for the ex ante default risk premium and term structure risk premium. Further analyses show both time-varying discount rates and forward-looking earnings information are important to the success of V/P.

The Sarbanes-Oxley Act (SOX) mandates management evaluation and independent audits of internal control effectiveness. The mandate is costly to firms but may yield benefits through lower information risk that translates into lower cost of equity. We use unaudited pre-SOX 404 disclosures and SOX 404 audit opinions to assess how changes in internal control quality affect firm risk and cost of equity. After controlling for other risk factors, we find that firms with internal control deficiencies have significantly higher idiosyncratic risk, systematic risk, and cost of equity. Our change analyses document that auditor-confirmed changes in internal control effectiveness (including remediation of previously disclosed internal control deficiencies) are followed by significant changes in the cost of equity that range from 50 to 150 basis points. Overall, our cross-sectional and inter-temporal change test results are consistent with internal control reports affecting investors' risk assessments and firms' cost of equity.

Homes exposed to sea level rise (SLR) sell for approximately 7% less than observably equivalent unexposed properties equidistant from the beach. This discount has grown over time and is driven by sophisticated buyers and communities worried about global warming. Consistent with causal identification of long horizon SLR costs, we find no relation between SLR exposure and rental rates and a 4% discount among properties not projected to be flooded for almost a century. Our findings contribute to the literature on the pricing of long-run risky cash flows and provide insights for optimal climate change policy.

The paper seeks to explore the role of green finance in achieving sustainable development goals through the case of China, and address some issues of sustainable finance and environmental, social and governance concerns of green finance by introducing the episodes of green finance in China. This paper aims to provide some viewpoints about the following questions: 1) What are the latest trends in green finance? 2) What are the main challenges to the development of green finance? 3) What are policy recommendations for the development of green finance? 4) What are the roles of both the public and private sectors in promoting green finance? This paper identifies the mainstream to sustainable bonds, diversification of green finance, transition of corporates’ business models, transparency and disclosure, and harmonizing taxonomy and measurement of green finance for the emerging trends of green finance. As the results, this paper recommends some policy measures for the private sector such as greening the banking system, greening the bond market, and greening institutional investors. This paper also suggests some policy initiatives for the public sector such as developing policies and capacity, promoting market transparency and governance, and promoting private-public partnership for diversifying resources of green finance.

We study the risk-reversal premium, where out-of-the-money puts are over-priced relative to out-of-the-money calls. This effect is driven by investors’ utility preferences which lead them to over-pay for the risk reduction benefits of long puts instead of valuing options on the basis of expected returns. Investors can exploit this implied skewness premium by trading standard, exchange-traded index options. We also show that including risk-reversals in an equity portfolio creates a better portfolio (as measured by Sharpe ratio) compared to a pure index position.