EDITORIAL STATEMENT IN HONOR OF PROFESSOR MICHAEL MCALEER

It is with profound sadness that we write this statement for the former editor of this journal, our colleague and friend, Michael McAleer. Mike passed away peacefully on July 8, 2021, and he will be sorely missed by his vast number of colleagues and friends. Mike served on the editorial board of the Annals of Financial Economics (AFE) for more than 16 years and was the Editor-in-Chief since 2016. Mike was a wonderful friend, colleague, and mentor to all that knew him, and provided countless hours of service to AFE. He touched our lives deeply and was ever ready to lend a hand in any way he could, whether through his vast knowledge of econometrics, his willingness to work together on research projects, his efforts on behalf of this journal, or his contagious joie de vivre. We will miss him greatly. In the remainder of this editorial, we include a short biography, as well as a number of statements from co-authors, colleagues and friends of Mike.

ARBITRAGEUR BEHAVIOR IN SENTIMENT-DRIVEN ASSET-PRICING

This study aims to model arbitrageur behavior in a sentiment-driven capital asset-pricing model under the premise of reflecting a more detailed decomposition of investor types in the equity markets. We explore the behavior and the impact of arbitrageur behavior, particularly, on pricing and on key financial ratios. We observe that the prevalence of the arbitrageur counteracts the effects of unsophisticated investors, resulting in a lower volatility of the price–dividend ratio, lower predictive power of changes in consumption for future price changes and lower equity premium. Thus, the results of our research allow us to conjecture that the extrapolation bias in the prices is lowered.

NON-CENTRAL MOMENTS OF THE TRUNCATED NORMAL VARIABLE IN FINANCE

This paper computes the Non-central Moments of the Truncated Normal variable, i.e. a Normal constrained to assume values in the interval with bounds that may be finite or infinite. We define two recursive expressions where one can be expressed in closed form. Another closed form is defined using the Lower Incomplete Gamma Function. Moreover, an upper bound for the absolute value of the Non-central Moments is determined. The numerical results of the expressions are compared and the different behavior for high value of the order of the moments is shown. The limitations to the use of Truncated Normal distributions with a lower negative limit regarding financial products are considered. Limitations in the application of Truncated Normal distributions also arise when considering a CRRA utility function.

STRATEGIC INTERACTIONS AND NEGATIVE OIL PRICES

This paper argues on theoretical grounds that the negative oil prices event on April 20, 2020, was mainly due to the strategic interactions among some active traders on both sides of the futures contract. We present a three-player game of futures trading in which a continuum range of negative price can be supported as (strong) Nash equilibrium, yet none of those constitutes an [Formula: see text]-equilibrium originally developed by Ma (2009). We further propose the notion of coalition-with-side-payment as a solution concept for the environment where strategic interactions and transfer payments among players are allowed. Our model captures the mechanism underlying futures price manipulation, and its predictions largely agree with the observations on that day, which are beyond the scope of demand–supply and physical delivery narratives.

INVESTOR SENTIMENT CONNECTEDNESS: EVIDENCE FROM LINEAR AND NONLINEAR CAUSALITY APPROACHES

This paper provides a novel perspective in determining the Granger causality of sentiment across the US, Latin America, Eurozone, Japan and Asia (excluding Japan), based on monthly data covering the period of January 2003–November 2017. Using a survey-based sentiment index of “sentix”, our results suggest strong evidence of nonlinearity and structural breaks making the use of linear causality models unreliable. Using a kernel-based multivariate nonlinear causality test, we find that causality runs from Eurozone to the US, Asia and Japan, with Japan also causing the Eurozone sentiment, and Latin America causing the Japanese sentiment. Interestingly, when we apply rolling estimations to detect time-varying causality for the cases of Eurozone and the US, Eurozone and Asia, Eurozone and Japan and Latin America and Japan, the results suggest evidence of bidirectional spillovers during certain months of the recent global financial crisis, and thereafter. Overall, our findings indicate that the sentiments of Japan, Asia and the US are related quite strongly with that of the Eurozone, as well as the sentiments of Japan and Latin America.

UNIVERSAL RISK BUDGETING

I juxtapose Cover’s vaunted universal portfolio selection algorithm ([Cover, TM (1991). Universal portfolios. Mathematical Finance, 1, 1–29]) with the modern representation of a portfolio as a certain allocation of risk among the available assets, rather than a mere allocation of capital. Thus, I define a Universal Risk Budgeting scheme that weights each risk budget, instead of each capital budget, by its historical performance record, á la Cover. I prove that my scheme is mathematically equivalent to a novel type of [Cover, TM and E Ordentlich (1996). Universal portfolios with side information. IEEE Transactions on Information Theory, 42, 348–363] universal portfolio that uses a new family of prior densities that have hitherto not appeared in the literature on universal portfolio theory. I argue that my universal risk budget, so-defined, is a potentially more perspicuous and flexible type of universal portfolio; it allows the algorithmic trader to incorporate, with advantage, his prior knowledge or beliefs about the particular covariance structure of instantaneous asset returns. Say, if there is some dispersion in the volatilities of the available assets, then the uniform or Dirichlet priors that are standard in the literature will generate a dangerously lopsided prior distribution over the possible risk budgets. In the author’s opinion, the proposed “Garivaltis prior” makes for a nice improvement on Cover’s timeless expert system, that is properly agnostic and open to different risk budgets from the very get-go. Inspired by [Jamshidian, F (1992). Asymptotically optimal portfolios. Mathematical Finance, 2, 131–150], the universal risk budget is formulated as a new kind of exotic option in the continuous time Black–Scholes market, with all the pleasure, elegance, and convenience that entails.

DRAWBACKS IN THE 3-FACTOR APPROACH OF FAMA AND FRENCH (2018)

This paper features a statistical analysis of the monthly three factor Fama/French return series. Rolling OLS regressions explore the relationship between the 3 factors, using data from July 1926 to June 2018, available on French’s website. The results suggest there are significant and time-varying relationships between the factors. A sub-sample from July 1990 to July 2018 is used to analyze the three series using two-stage least squares and the Hausman test to check for issues related to endogeneity. The empirical results suggest that the factors, when combined in OLS regression analysis, as suggested by Fama and French (2018), are likely to suffer from endogeneity. Ramsey’s RESET tests suggest a nonlinear relationship exists between the three series. We use two instruments to estimate the market betas, and compare them to betas estimated not using instruments. Non-parametric tests of the two sets of betas suggest significant differences. The results suggest that using these factors in linear regression analysis, as recommended by Fama and French [(2018). Choosing factors. Journal of Financial Economics, 128(2), 234–252] is problematic in that the estimated coefficients are highly sensitive to the correct model specification.

GEOPOLITICAL RISKS AND THE HIGH-FREQUENCY MOVEMENTS OF THE US TERM STRUCTURE OF INTEREST RATES

We use daily data for the period 25th November 1985 to 10th March 2020 to analyze the impact of newspapers-based measures of geopolitical risks (GPRs) on United States (US) Treasury securities by considering the level, slope and curvature factors derived from the term structure of interest rates of maturities covering 1 to 30 years. No evidence of predictability of the overall GPRs (or for threats and acts) is detected using linear causality tests. However, evidence of structural breaks and nonlinearity is provided by statistical tests performed on the linear model, which indicates that the Granger causality cannot be relied upon, as they are based on a misspecified framework. As a result, we use a data-driven approach, specifically a nonparametric causality-in-quantiles test, which is robust to misspecification due to regime changes and nonlinearity, to reconsider the predictive ability of the overall and decomposed GPRs on the three latent factors. Moreover, the zero lower bound situation, visible in our sample period, is captured by the lower quantiles, as this framework allows us to capture the entire conditional distribution of the three factors. Using this robust model, we find overwhelming evidence of causality from the GPRs, with relatively stronger effects from threats than acts, for the entire conditional distribution of the three factors, with higher impacts on medium- and long-run maturities, i.e., curvature and level factors, suggesting the predictability of the entire US term structure based on information contained in GPRs. Our results have important implications for academics, investors and policymakers.

CORPORATE VALUATION SPURRED BY INFORMATION TRANSPARENCY IN AN EMERGING ECONOMY

The stock price crash can result from lacking information transparency, especially in emerging economies characterized by weak corporate governance and high volatility. This study approaches corporate information transparency through the crash risk of stock prices on the Vietnamese market, develops a model that reflects the effect of information disclosure on corporate valuation, and employs two-step system generalized method of moments (S-GMM) estimation for panel data to deal with endogenous problems. This paper finds that the crash risk of stock price, referred to as the low level of information disclosure, creates a significantly negative effect on corporate valuation, expressing that information asymmetry causes serious issues for corporate prospects in the context of an emerging economy. Thus, corporates are suggested to enrich their information disclosure through periodic reports as a crucial mechanism to improve their transparency, reduce stock price crash risk, and enhance their valuation. This study also proposes related recommendations to enhance corporate governance and finance supervisory to maintain sustainability in the future.

EVALUATING THE EFFICIENCY OF VIETNAM BANKS USING DATA ENVELOPMENT ANALYSIS

Efficiency is a topic of great interest because its applications are diverse and rich. It is applied greatly in all scientific disciplines, especially accounting for a very large proportion in economics, finance and accounting. The main objective in this paper is to analyze the effectiveness of banks in Vietnam. In order to investigate this issue, there are several implements to examine bank effectiveness where the data envelopment analysis (DEA) method is widely used. This paper presents details of the DEA method. Using the data collected from banks in Vietnam for the period 2014–2017, the approach is executed to investigate issues of technical efficiency, resource analysis and business efficiency of banks in Vietnam.