CAFIN publishes four new working papers

October 29, 2015

The Center for Analytical Finance (CAFIN) publishes four new working papers on the website.

Adding to the center's cutting-edge research is "Emergence of Networks and Market Institutions in a Large Virtual Economyy" by Curtis Kephart, Daniel Friedman and Matt Baumer. This is the 16th paper the center has published.

The abstract reads: "A complete set of transactions, more than 40 million within a 1.8 year span, allows us to track the evolution of the trader network and the goods network in an on-line trading community. The computer platform was designed to make barter exchange as attractive as possible; money was not part of the design and all players were created equal. Yet, within weeks, several specific goods began to emerge as media of exchange, and not long after that various sorts of specialized traders began to appear. We track their progress using network-theoretic metrics such as node strength, assortativity, betweenness and closeness. By the end of our sample, virtually all trade was money-mediated and market makers played a major role." The working paper can be downloaded here.

"Bayesian mixture modelling for spectral density estimation" by Annalisa Cadonna, Athanasios Kottas and Raquel Prado is the 17th paper the center has published.

The abstract reads: "TWe develop a Bayesian modelling approach for spectral densities, built from a local Gaussian mixture approximation to the Whittle log-likelihood. The implied model for the log-spectral density is a mixture of linear functions with frequency-dependent logistic weights, which allows for general shapes for smooth spectral densities. The proposed approach facilitates efficient posterior simulation as it casts the spectral density estimation problem in a mixture modelling framework for density estimation. It also sets the stage for hierarchical extensions for spectral analysis of multiple time series. The methodology is illustrated with synthetic and real data sets." The working paper can be downloaded here.

Also published is "Lemon or Cherry? The Value of Texts in Debt Crowdfunding" by Qiang Gao and Mingfeng Lin.

The abstract reads: "Peer-to-peer (P2P) lending, as a form of debt-based crowdfunding, has received much attention in the past several years. Text, in particular, is a prevalent feature but much less understood. While there have been some studies on the role of text in this context, these studies typically consider text as a control variable, and use small, manually coded samples. Our study is one of the first to use a scalable approach to examine the informational value of texts borrowers write when requesting funds in debt crowdfunding. We first examine data from exogenous events on Prosper.com, and show that investors indeed consider textual descriptions when investing. Then, we show that text features can indeed explain and predict loan default, using both explanatory and predictive models. Finally, we show that investors correctly interpret the informational value of some, but not all, features of texts. Our study points to opportunities for efficiency improvement not yet documented in the crowdfunding literature, and has implications for researchers, platform owners, and regulators." This is 18th working paper and can be downloaded here.

The 19th working paper is "Market Mechanisms in Online Crowdfunding."

The abstract reads: "Online crowdfunding has emerged as an appealing new channel of financing in recent years. A fundamental but largely unanswered question in this nascent industry is the choice of market mechanisms, i.e., how the supply and demand of funds are matched, and the terms (price) at which transactions will occur. Two of the most popular such mechanisms are auctions (where the \crowd" determines the price of the transaction through an auction process) and posted prices (where the platform determines the price). While crowdfunding platforms typically use one or the other, there is little systematic research on the implications of such choices for the behavior of market participants, transaction outcomes, and social welfare. We address this question both theoretically and empirically in the context of debt-based crowdfunding. We first develop a game-theoretic model that yields empirically testable hypotheses, taking into account the incentive of the crowdfunding platform. We then test these hypotheses by exploiting a regime change from auctions to posted prices on one of the largest debt-based crowdfunding platforms. Consistent with our hypotheses, we find that under platform-mandated posted prices, loans are funded with higher probability, but the pre-set interest rates are higher than borrowers' starting interest rates in auctions. More important, all else equal, loans funded under the posted-price regime are more likely to default, thereby undermining lenders' returns on investment and their surplus from trading. Although platform-mandated posted prices may be faster in originating loans, auctions that rely on the “crowd” to discover prices are not necessarily inferior in terms of overall social welfare." Download the paper here.

All working papers, currently 19 in total, can be viewed on the CAFIN website here. The Center for Analytical Finance is a group of researchers whose aim is to solve real-world problems of finance in a globalized financial system.

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