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Funds investing in illiquid assets report returns with spurious autocorrelation. Consequently, investors need to unsmooth these funds' returns when evaluating their risk exposures. We show that funds with similar investments share a common source of spurious autocorrelation not fully resolved by traditional unsmoothing methods and thereby leading to underestimation of systematic risk. Thus, we propose a generalized unsmoothing technique and apply it to hedge funds and private commercial real estate funds. Our method significantly improves the measurement of funds' risk exposures and risk-adjusted performance, especially for highly illiquid funds. Overall, the average illiquid fund alpha is lower than previously thought. (JEL G11, G12, G23) [ABSTRACT FROM AUTHOR]

The classic view assumes banks prioritize immediate repayment by selling assets until default. We endogenize run frequency and study how general settlement rules trade off liquidity provision net of fire sale losses against induced run incentives. Panic runs are eliminated when all illiquid assets are sold under orderly resolution, but liquidity provision in a run is minimal. When suspension after some fire sales is followed by immediate liquidation, run frequency falls then rises in suspension delay. Thus, optimal suspension may require some sale of illiquid assets, in contrast to MMF norms. Ex post discretion induces excessive liquidation and more frequent runs. (JEL D8, G21) [ABSTRACT FROM AUTHOR]

Since the Global Financial Crisis, central banks have created an environment in which risk taking and leveraging were the predominant strategies in the markets. Unprecedented central bank stimulus has led to market dynamics in which the availability of market liquidity has replaced the fundamentals of the economy as a driver of investment returns. The COVID crisis ended a 40-year period of low inflation, declining interest rates, and decreasing macro volatility in developed markets. The rise of inflation changed the market dynamics, and the diversification effect between liquid bonds, credit, and equity markets weakened significantly. As the investment market has become less diversified, it has become necessary to find new sources of diversification in portfolios. The author proposes a functional framework for asset allocation under uncertainty of correlation regimes. The functional categories for the asset classes in a portfolio are return-seeking assets, diversifiers, and tail risk hedges. The framework exploits the characteristics of defensive and diversifying alternative risk premium strategies, as well as the artificial diversification effect of illiquid asset classes. [ABSTRACT FROM AUTHOR]

Illiquid assets require a return premium; illiquidity is also a limit‐to‐arbitrage. We find that Amihud's illiquidity premium is significantly higher among underpriced stocks than among overpriced stocks. Excluding the most mispriced stocks leads to a higher and more reliably estimated illiquidity premium. Amihud's illiquidity measure is positively correlated with overpricing, consistent with arbitrage asymmetry, while inconsistent with Lou and Shu's contention that the return premium associated with the Amihud measure reflects mispricing rather than compensation for illiquidity. Our results demonstrate that it is important to account for their role as limits‐to‐arbitrage when evaluating the pricing of illiquidity measures. [ABSTRACT FROM AUTHOR]

Open-end mutual funds can use redemption in kind to satisfy investor redemptions by delivering securities instead of cash. We find that funds that reserve their rights to redeem in kind experience less redemption after poor performance. Evidence from actual in-kind transactions reveals several unique mechanisms for redemption in kind to mitigate fund runs, including the delivery of more illiquid stocks and stocks with greater tax overhang. Funds suffer less from the adverse impact of outflows on their performance. However, redeeming investors bear significant liquidation costs when they sell securities, costs associated with destabilization in the prices of these securities. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

The recent integration of digital technology and financial services has given rise to the newly emerging modality of digital finance. However, does digital finance improve the efficiency of financial services while influencing the investment behavior of brick-andmortar businesses? With the help of the data about Chinese listed companies, this paper uses multiple regression analysis, instrumental variables, and other methods to empirically test whether and how digital finance affects the financial asset allocation decisions of brick-and-mortar enterprises. The findings suggest that digital finance has a galvanizing effect on financial asset allocation. However, this effect mainly stems from the fact that firms allocate more illiquid financial assets and has a dampening effect on liquid financial assets. Path analysis shows that easing financing constraints is a causal pathway through which digital finance dampens firms’ liquid financial asset allocation. Moreover, rising risk exposure levels partially mediate the stimulus of digital finance, motivating firms to allocate illiquid financial assets. This paper contributes to the research on the economic consequences of digital finance and provides policy recommendations on how digital finance can better serve the real economy. [ABSTRACT FROM AUTHOR]

This paper examines the effects of macro-financial shocks on bank liquidity creation in Mongolia, a developing and commodity-exporting economy, using a structural Bayesian vector autoregression (SBVAR). Ten structural shocks (three external and seven domestic shocks) are identified using a triangular factorization. The main results are (i) the measured bank liquidity creation (as a share of total assets) is procyclical and negatively correlated with the liquidity coverage ratio in the banking sector; (ii) external shocks (the US monetary policy, Chinese economic activity, and changes in the global commodity market) have statistically significant and economically major effects on the liquidity creation. Lending rate, NPL ratio, foreign exchange reserves, and competition in the banking sector are key domestic determinants of liquidity creation; (iii) liquidity creation's main components respond differently to the US federal funds rate and lending rate shocks. External and financial shocks have contributed to the liquidity creation passing through movements in (illiquid assets + liquid liabilities) component; (iv) monetary policy can be an effective counter-cyclical policy instrument in stabilizing the economic and financial cycles. [ABSTRACT FROM AUTHOR]

In 1952, Harry Markowitz published "Portfolio Selection" and introduced mean–variance optimization. The importance of that article goes beyond mean–variance optimization as a practical tool for portfolio choice. From a technical point of view, mean–variance optimization continues to provide the foundation for building additional tools, used across a range of application areas not foreseen by Markowitz. We present two simple illustrations, addressing the problems of saving for retirement and the theoretical return premium on illiquid assets. In each case, an approach via mean–variance optimization provides useful insights and practical guidance alongside the existing literature, despite being technically much simpler. [ABSTRACT FROM AUTHOR]

In the dynamic sphere of financial markets, hedge funds have emerged as a critical force, navigating through volatility with advanced risk management techniques yet grappling with the challenges posed by illiquid assets. This study aims to transcend traditional option pricing models, which struggle under the complexities of hedge fund investments, by exploring the applicability of machine learning in financial risk management. Leveraging Deep Neural Networks (DNNs) and Long Short-Term Memory (LSTM) cells, the research introduces a model-free, data-driven approach for discrete-time hedging problems. Through a comparative analysis of simulated data and the implementation of LSTM architectures, the paper elucidates the potential of these machine learning techniques to enhance the precision of risk assessments and decision-making processes in hedge fund investments. The findings reveal that DNNs and LSTMs offer significant advancements over conventional models, effectively capturing long-term dependencies and complex patterns within financial time series data. Consequently, the study underscores the transformative impact of machine learning on the methodologies employed in financial risk management, proposing a novel paradigm that promises to mitigate the intricacies of hedging illiquid assets. This research not only contributes to the academic discourse but also paves the way for the development of more adaptive and resilient investment strategies in the face of market uncertainties. [ABSTRACT FROM AUTHOR]

This article reviews the amount of systematic risk that exists within private capital investments through the methodology of lagged betas. The author extends the lagged beta research beyond private equity and venture capital to other illiquid asset classes, including secondary private equity, private credit, and private real estate investing. He finds that considerable amounts of market risk, growth exposure, and small-cap factor risk are embedded across the illiquid asset classes. In addition, he notes that private capital managers have significant discretion as to when and how they mark to market or mark to model the value of their investment portfolios. This discretion allows private capital managers to smooth their return profile and, effectively, amortize the volatility embedded in their private investments. The author demonstrates, using lagged betas, how to un-smooth private capital returns to better estimate their latent volatility and their higher correlation with traditional asset classes. [ABSTRACT FROM AUTHOR]

This article begins with a discussion of private fund performance metrics and turns to the closely related topic of performance benchmarking, a crucial issue in light of the widely held belief that private equity and venture capital investments outperform publicly traded assets. The authors then discuss how to estimate the alpha and beta of private investment funds and move onto a second set of topics concerned with portfolio construction and risk management. They examine the distorting effects that serially correlated return streams can have on risk analysis and asset allocation decisions and finally conclude with a discussion of practical remedies that allocators can employ to mitigate the risks of owning long-dated illiquid assets. [ABSTRACT FROM AUTHOR]

We solve a flexible model that captures transactions costs and infrequencies of trading opportunities for illiquid assets to better understand the shadow costs of illiquidity for different origins of asset illiquidity and heterogeneous investor types. We show that illiquidity that results in suboptimal asset allocation carries low shadow costs, whereas these costs are high when illiquidity restricts consumption. As a result, the shadow costs are high for short-term investors, investors who face substantial liquidity shocks, and investors who desire to allocate a large fraction of their wealth to illiquid assets. [ABSTRACT FROM AUTHOR]

In this paper, we propose to consider the dependence structure of the trade/no trade categorical sequence of individual illiquid stocks returns. The framework considered here is wide as constant and time-varying zero returns probability are allowed. The ability of our approach in highlighting illiquid stock's features is underlined for a variety of situations. More specifically, we show that long-run effects for the trade/no trade categorical sequence may be spuriously detected in presence of a non-constant zero returns probability. Monte Carlo experiments, and the analysis of stocks taken from the Chilean financial market, illustrate the usefulness of the tools developed in the paper. [ABSTRACT FROM AUTHOR]

In a stochastic economy with uninsurable endowment risk, we establish a condition under which hyperbolic‐discounting consumers commit to a future consumption path using both illiquid assets and borrowing constraints as commitment devices. There is the possibility that a state‐dependent commitment can be adopted as an equilibrium consumption strategy. On a path leading to low future endowment, the current self can commit to its own optimal consumption path, which is undesirable for future selves. In contrast, along the path with a high future endowment, the current self cannot make a commitment and must accept a consumption allocation that future selves will revise. Thus, depending on what stochastic state will arise, people cannot fully utilize the available commitment devices in risky situations. [ABSTRACT FROM AUTHOR]

Purpose: This study aims to demonstrate and measure the impact of liquidity shocks on a bank's solvency, especially when the bank does not hold sufficient liquid assets. Design/methodology/approach: The proposed model is an extension of Merton's (1974) model. It assesses the bank's probability of default over one or two (short) periods relative to liquidity shocks. The shock scenarios are materialised by different net demands for the withdrawal of funds (NDWF) and may lead the bank to sell illiquid assets at a depreciated value. We consider the possibility of second-round effects at the beginning of the second period by introducing the probability of their occurrence. This probability depends on the proportion of illiquid assets put up for sale following the initial shock in different dependency scenarios. Findings: We observe a positive relationship between the initial NDWF and the bank's probability of default (particularly over the second period, which is conditional on the second-round effects). However, this relationship is not linear, and a significant proportion of liquid assets makes it possible to attenuate or even eliminate the effects of shock scenarios on bank solvency. Practical implications: The proposed model enables banks to determine the necessary level of liquid assets, allowing them to resist (i.e. remain solvent) different liquidity shock scenarios for both periods (including eventual second-round effects) under the assumptions considered. Therefore, it can contribute to complementing or improving current internal liquidity adequacy assessment processes (ILAAPs). Originality/value: The proposed microprudential approach consists of measuring the impact of liquidity risk on a bank's solvency, complementing the current prudential framework in which these two topics are treated separately. It also complements the existing literature, in which the impact of liquidity risk on solvency risk has not been sufficiently studied. Finally, our model allows banks to manage liquidity using a solvency approach. [ABSTRACT FROM AUTHOR]

We use stochastic dynamic programming to design and solve an extended structural setting for which the illiquidity of the firm's assets under liquidation is interpreted as an intangible corporate security. This asset tends to reduce bond values, augment yield spreads, and, thus, partially explain the credit-spread puzzle. To assess our construction, we provide a sensitivity analysis of the values of corporate securities with respect to the illiquidity parameter. [ABSTRACT FROM AUTHOR]

In this paper, I analyze the joint design of capital requirements and fair value reporting rules for financial institutions with illiquid assets. I specifically examine how prudential regulation aimed at solving agency problems affects financial institutions' incentives to use Level 2 versus Level 3 fair value reporting, as well as financial stability. Crucially, Level 3 reporting allows financial institutions to use their private information, whereas Level 2 fair values are only measured with public information. Interestingly, my analysis shows regulators may leave to financial institutions the discretion to report illiquid assets at Level 2 or Level 3. Financial institutions then report at Level 3 only if they have good private information about the assets' quality. Moreover, prudential rules that only rely on Level 2 fair values may be efficient at solving agency problems within financial institutions but may also decrease financial stability. By contrast, prudential rules that leave to financial institutions the discretion to report illiquid assets at Level 2 or Level 3 while relaxing capital requirements may increase financial stability. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by the H2020 European Research Council [Grant 669217]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4692. [ABSTRACT FROM AUTHOR]

How do corporate bond mutual funds manage liquidity to meet investor redemptions? We show that during tranquil market conditions, these funds tend to reduce liquid asset holdings to meet redemptions, temporarily increasing relative exposures to illiquid asset classes. When aggregate uncertainty rises, however, they tend to scale down their liquid and illiquid assets proportionally to preserve portfolio liquidity. This fund-level dynamic management of liquidity appears to affect the broad financial market: Redemptions from the corporate bond fund sector lead to more corporate bond selling during high-uncertainty periods, which generates price pressures and predicts strong return reversals. [ABSTRACT FROM AUTHOR]

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small. [ABSTRACT FROM AUTHOR]

Intermediation in private equity involves illiquid investments, professional investors, and high information asymmetry. We use this unique setting to empirically evaluate theoretical predictions regarding intermediation. Using placement agents has become nearly ubiquitous, but agents are associated with significantly lower abnormal returns in venture and real estate funds, consistent with investor capture and influence peddling. However, returns are higher for buyout funds employing a top-tier agent and for first-time real estate and venture funds employing an agent, and are less volatile for agent-affiliated funds, consistent with a certification role. Our results suggest heterogeneous motives for intermediation in the private equity industry. [ABSTRACT FROM AUTHOR]

Subdiffusions appear as good candidates for modeling illiquidity in financial markets. Existing subdiffusive models of asset prices are indeed able to capture the motionless periods in the quotes of thinly-traded assets. However, they fail at reproducing simultaneously the jumps and the time-varying random volatility observed in the price of these assets. The aim of this work is hence to propose a new model of subdiffusive asset prices reproducing the main characteristics exhibited in illiquid markets. This is done by considering a stochastic volatility jump model, time changed by an inverse subordinator. We derive the forward fractional partial differential equations (PDE) governing the probability density function of the introduced model and we prove that it leads to an arbitrage-free and incomplete market. By proposing a new procedure for estimating the model parameters and using a series expansion for solving numerically the obtained fractional PDE, we are able to price various European-type derivatives on illiquid assets and to depart from the common Markovian valuation setup. This way, we show that the introduced subdiffusive stochastic volatility jump model yields consistent and reliable results in illiquid markets. [ABSTRACT FROM AUTHOR]

Blockchain technology, cryptocurrencies, stablecoins and nonfungible tokens (NFTs) continue to invade financial markets. Whether through partnerships between financial institutions and tech firms or through in-house initiatives at some of the nation's largest banks, blockchain-based products, services, and transactional structures are a major point of interest. In a recent work by Steven Schwarcz, the growing NFT market is analyzed using the traditional tools of structured finance. Creating a new conceptual model called non-cash-flow monetizations, Schwarcz reveals the risks to investors and markets if the tokenization of nontraditional and largely illiquid assets proliferates. Having identified the potential harms, he offers a package of regulatory solutions grounded in public law frameworks, which might mitigate, though not completely eliminate, these potential downsides. In this Response, we review Schwarcz's article and highlight how its insights advance the understanding of novel blockchain-based transactions and their disruption of the existing financial landscape. Additionally, we provide an analysis of the private law dimension of non-cash-flow monetizations--a perspective we believe is absent from much of the public discourse and relevant academic literature. [ABSTRACT FROM AUTHOR]

This paper explores how corporate financial portfolio influences distress risk. We define distress risk as a dummy variable determined by whether firms need external subsidies to repay the interest payable. Spanning our analysis with 3,698 listed firms in China between 2007 and 2019, our findings are twofold. First, financial portfolio is associated with less distress risk. Second, the impact is more pronounced for firms with higher levels of liquidity of financial portfolio. We provide evidence that corporate financial portfolio prevents distress risk by reducing financial expenses and by improving investment income. Our findings post a challenge to the existing view in China that financial portfolio would harm corporate operation. The implication is that companies could allocate more liquid financial assets than illiquid ones to mitigate forewarned risk. [ABSTRACT FROM AUTHOR]

We develop a tractable model of systemic bank runs. The market‐based banking system features a two‐layer structure: banks with heterogeneous fundamentals face potential runs by their creditors while they trade short‐term funding in the asset (interbank) market in response to creditor withdrawals. The possibility of a run on a particular bank depends on its assets' interim liquidation value, and this value depends endogenously in turn on the status of other banks in the asset market. The within‐bank coordination problem among creditors and the cross‐bank price externality feed into each other. A small shock can be amplified into a systemic crisis. [ABSTRACT FROM AUTHOR]

Firms that buy assets in fire sales earn excess returns that are 2 percentage points higher than in regular acquisitions. The mechanism behind this result is the sellers' reduced bargaining power. We find no difference in real effects or in the combined returns for buyers and sellers between fire sales and regular acquisitions, suggesting that the quality of the match is similar in both types of transactions. The externalities of fire sales for other stakeholders are limited. These results indicate that the welfare losses associated with fire sales are smaller than previously thought. Received December 17, 2015; editorial decision November 20, 2018 by Editor Itay Goldstein. [ABSTRACT FROM AUTHOR]

The Investment Company Act of 1940 restricts interfund lending and borrowing within a mutual fund family, but families can apply for regulatory exemptions to participate in such transactions. We find that the monitoring mechanisms and investment restrictions influence the family's decision to apply for the interfund lending programs. We document several benefits of such programs for equity funds. First, participating funds reduce cash holdings and increase investments in illiquid assets. Second, fund investors exhibit less run-like behavior. Third, it helps mitigate asset fire sales after extreme investor redemptions. Offsetting these benefits, money market funds in participating families experience investor outflows. Received May 26, 2018; editorial decision November 27, 2018 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

We model asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's privately optimal encumbrance choice balances the benefit of expanding profitable, yet illiquid, investment funded by cheap long-term senior secured debt, against the cost of greater fragility from runs on unsecured debt. We derive testable implications about encumbrance ratios. The introduction of deposit insurance or wholesale funding guarantees induces excessive encumbrance and fragility. Limits on asset encumbrance or Pigovian taxes eliminate such risk-shifting incentives. Our results shed light on prudential policies currently being pursued in several jurisdictions. Received September 9, 2017; editorial decision July 28, 2018 by Editor Philip Strahan. [ABSTRACT FROM AUTHOR]

In this paper we discuss the concept of the cost‐of‐capital (CoC) rate for an insurance company as an equilibrium in the economic triangle of policyholders, shareholders, and the regulator. This provides a possible rationalization and an economic foundation for a quantity that is widely used in practice but whose value is typically neither technically nor economically well justified. We show how it can be well founded in such a triangular equilibrium. Under a simple one‐period model and a valuation procedure of a two‐price economy for illiquid assets we provide a corresponding economic‐theoretical quantification for the CoC rate. The resulting rates are illustrated by a number of concrete numerical examples. [ABSTRACT FROM AUTHOR]

I develop a model where banks play a central role in monetary policy transmission. By credibly committing to repayment, banks can perform liquidity transformation. Illiquid assets may pay a liquidity premium because they allow banks to create liquid assets. The policy analysis discusses how the monetary authority can affect nominal rates and inflation when the fiscal authority follows nominal or real debt targets. A main result is that under a nominal debt target, the monetary authority is only able to increase inflation at the zero‐lower bound by issuing money via lump‐sum transfers, while doing so via bond purchases is ineffective. [ABSTRACT FROM AUTHOR]

We consider a long‐term portfolio choice problem with two illiquid and correlated assets, which is associated with an eigenvalue problem in the form of a variational inequality. The eigenvalue and the free boundaries implied by the variational inequality correspond to the portfolio's optimal long‐term growth rate and the optimal trading strategy, respectively. After proving the existence and uniqueness of viscosity solutions for the eigenvalue problem, we perform an asymptotic expansion in terms of small correlations and obtain semi‐analytical approximations of the free boundaries and the optimal growth rate. Our leading order expansion implies that the free boundaries are orthogonal to each other at four corners and have C1 regularity. We propose an efficient numerical algorithm based on the expansion, which proves to be accurate even for large correlations and transaction costs. Moreover, following the approximate trading strategy, the resulting growth rate is very close to the optimal one. [ABSTRACT FROM AUTHOR]

In this study, we investigate the BTC price time-series (17 August 2010–27 June 2021) and show that the 2017 pricing episode is not unique. We describe at least ten new events, which occurred since 2010–2011 and span more than five orders of price magnitudes ($US 1 –$US 60k). We find that those events have a similar duration of approx. 50–100 days. Although we are not able to predict times of a price peak, we however succeed to approximate the BTC price evolution using a function that is similar to a Fibonacci sequence. Finally, we complete a comparison with other types of financial instruments (equities, currencies, gold) which suggests that BTC may be classified as an illiquid asset. [ABSTRACT FROM AUTHOR]

An optimal asset allocation problem involving restrictions on liquidity is studied in this article. The portfolio consists of liquid and illiquid asset. The portfolio is only allowed to rebalance at particular times. An investor tries to maximize the total utility of a hyperbolic absolute risk aversion function depending on the consumption, which is sourced only from the liquid asset. The optimal policies of the consumption, investment, and allocation are derived. A numerical approximation scheme is developed to show the optimal allocation policy in our model is path-dependent. Paths of the value function and other optimal controls are illustrated to validate our results. [ABSTRACT FROM AUTHOR]

Purpose: Through portfolio diversification, the author identifies the risk sharing deposit contract in a three-period model that maximizes the ex ante expected utility of depositors. Design/methodology/approach: In this paper, the author extends the study by Allen and Gale (1998) by adding a long-term riskless investment opportunity to the original portfolio of a short-term liquid asset and a long-term risky illiquid asset. Findings: Unlike Allen and Gale, there are no information-based bank runs in equilibrium. In addition, the model can improve consumers' welfare over the Allen and Gale model. The author also shows that the bank will choose to liquidate the cheaper investments, in terms of the gain-loss ratios for the two types of existing long-term assets, when there is liquidity shortage in some cases. Such a policy reduces the liquidation cost and enables the bank to meet the outstanding liability to depositors without large liquidation losses. Originality/value: The author believe that the reader would be interested in this article because it is relevant to real world where depositors rush to withdraw their deposits from a bank if there is negative information about future prospect of the bank asset portfolio and bank investment. Economists and financial analysts need to determine the suitable mechanism to improve the stability of the bank and the depositor welfare. [ABSTRACT FROM AUTHOR]

Since the global financial crisis, banking regulations have become more stringent and complex. In particular, capital and liquidity adequacy requirements have been discussed extensively in various contexts. This study constructs a general equilibrium model that incorporates banks and households that hold both liquid and illiquid assets to compare the economic effects of capital and liquidity adequacy requirements. Simulations show that liquidity regulation in the style of current the Basel Accord, as well as capital regulation, reduces the probability of financial crisis after a recession, not only by restricting banks' leverage, but also by aiding the recovery of asset prices. [ABSTRACT FROM AUTHOR]

This paper examines how uncertainty affects corporate investment under varying degrees of asset redeployability. We develop new measures of asset redeployability by accounting for the usability of assets within and across industries. We identify plausibly exogenous shocks to economic uncertainty by using major economic and political events. We find that after an increase in uncertainty, firms using less redeployable capital reduce investment more. More redeployable assets exhibit higher recovery rates and are traded more actively in secondary markets. Overall, our results suggest that frictions in redeploying assets affect liquidation values and therefore make firms cautious about investment decisions under uncertainty. [ABSTRACT FROM AUTHOR]

Background--The new accounting practice of uforest carbon sinks and their transactions" under the cap-and-trade mechanism does not exist corresponding accounting standards at home and abroad, and a scientific and reasonable carbon sink accounting system is required. As the primary link of accounting, accounting recognition has become the first problem to be solved in the construction of forest carbon sink accounting system. ⑵ Methods--The data of this paper mainly comes from the CCER Forestry Carbon Sink Project Design Document (PDD) of China Voluntary Emission Reduction Trading Information Platform, and adopts the normative research method. On the basis of combing the relevant literature of forest carbon sink accounting at home and abroad, this paper examines the particularity of forest carbon sink and its impact on accounting recognition, and further studies the accounting recognition time point, accounting recognition type, accounting recognition method and the specific accounting treatment of forest carbon sink economic business. (3) Results--① Forest carbon sinks have their particularity compared with general assets and carbon emission rights quotas of enterprises. Forest carbon sinks trading is a carbon credit transaction generated under the cap- and-trade mechanism, which is essentially a carbon emission rights transaction. ② As a derivative of forest assets, the accounting recognition of forest carbon sinks should be based on the ownership relationship. When the ownership relationship between forest carbon sinks and forest assets is inconsistent, only accounting recognition of forest carbon sinks should be carried out separately. When the two ownerships are the same, forest carbon sinks and forest assets should be recognized as an organic whole in accounting recognition. ③ Forest carbon sinks are "certified emission reductions" successfully issued by the National Development and Reform Commission, which makes forest carbon sinks reach a predetermined usable state and have the ability to trade. This also gives forest carbon sinks the exclusive rights or other rights of the holders, so that they can occupy, employ and dispose of the resources and obtain future economic benefits. This means that the certified emission reduction of forest carbon sinks officially becomes an asset, so the issuance link of certified emission reduction of carbon sink projects should be used as the confirmation point of forest carbon sink assets. ④ Forest carbon sinks owned by the holders of forest carbon sinks are more in line with the nature of illiquid assets. The purpose of holding forest carbon sinks is mainly to obtain economic benefits of forest carbon sinks or reduce additional losses so that they have the nature of investment. Therefore, forest carbon sinks should be recognized as' investment carbon emission rights assets' in the type of confirmation. ⑤ As an asset of an enterprise's investment nature, forest carbon sinks are determined to be invested, that is, they are designed to invest a certain amount of cash in order to obtain more cash inflows, which means that the use of fair value measurement of forest carbon sinks can better reflect their intrinsic value. Therefore, the fair value measurement model can be considered in the recognition criteria of forest carbon sinks. ⑷ Conclusions and Discussions--The accounting recognition of forest carbon sinks should start from the property rights protection of enterprise stakeholders. Under the framework of carbon emission rights accounting standard system, the ownership of property rights should be defined through the ownership relationship between forest carbon sinks and forest assets, and the rules for accounting recognition of forest carbon sinks should be established according to the internal relationship between carbon property rights and carbon financial rights, to form a set of carbon emission rights accounting system covering forest carbon sink development, trading and offset. [ABSTRACT FROM AUTHOR]

This article addresses the problem of pricing European options when the underlying asset is not perfectly liquid. A liquidity discounting factor as a function of market-wide liquidity governed by a mean-reverting stochastic process and the sensitivity of the underlying price to market-wide liquidity is firstly introduced, so that the impact of liquidity on the underlying asset can be captured by the option pricing model. The characteristic function is analytically worked out using the Feynman–Kac theorem and a closed-form pricing formula for European options is successfully derived thereafter. Through numerical experiments, the accuracy of the newly derived formula is verified, and the significance of incorporating liquidity risk into option pricing is demonstrated. [ABSTRACT FROM AUTHOR]

Despite an important role of collateralized borrowing in corporate finance and financial economics, there has been little empirical research that systematically documents the prevalence and correlates of collateralized borrowing across countries. We filled this gap by investigating firms' collateralized borrowing in 131 countries between 2005–2017 using the World Bank Enterprise Surveys. Overall, 77% of loans require collateral, and the median loan‐to‐collateral value is 60%. While small firms and loans from non‐bank financial institutions are less often associated with collateral, when collateral is pledged, the type of collateral assets is strongly correlated with the loan‐to‐value ratio. When more illiquid and indivisible assets such as land and buildings are pledged as collateral, higher collateral value is required. [ABSTRACT FROM AUTHOR]