Research articles for the 2019-05-01

An Evaluation of Investment Performance of Private Life Insurance Industry in India
Ashraf, S. Husain,Kumari, Nikita
Data Envelopment Analysis (DEA) model is used to provide valuable information on investment efficiency of private life insurance industry in India. This study utilizes two inputs (shareholders’ investments and policyholders’ investments) and two outputs (net returns on investments to the shareholders and net returns on investments to the policyholders). This study focuses upon 20 private life insurance companies operating in India over a period of 4 years from 2010-11 to 2013-14. Since this study attempts to maximize output, an output oriented DEA model is used. The study finds that investment efficiency of private life insurance industry has improved on Banker, Charnes and Cooper (BCC) model and Charnes, Cooper and Rhodes (CCR) model. The study further highlights that during all years under study, 15% to 40% life insurance companies have been found on the CRS frontier and 40% to 60% life insurance companies have been found on the VRS frontier. With regard to scale efficiency issues, 15% to 40% companies have been operated at their most productive scale over the study period.

Analyzing Dependent Variables with Multiple Surrogates in Financial Performance Research
Enyi, Enyi Patrick
Accounting and finance-based researchers often use multiple surrogates to capture the properties of a dependent variable (DV) when studying its predictive relationship with predictors. This often fail to directly connect the study results with the major objective of the research. This paper compares the existing practice with a plausible and less complicated alternative. Using logistic regression, the study converted the a priori expectations of 30 Ph.D research theses in finance and accounting with four dependent surrogates into a probabilistic log values and compared them with the individual surrogate performance on the one hand and the surrogates geometric mean on the other hand. While the geometric mean revealed close connection with the theses’ probabilistic expectations (β = .278, t(30) = .695, R2 = .077, p > .10), the individual surrogates results showed singular and combined significant differences with the theses’ a priori expectations (Adj. R2 = .0291, F(4, 25) = 22.598, p < .05). The paper recommends unifying multivariate DVs with geometric means for better conclusion in financial performance relational studies

Asymptotic Filter Behavior for High-Frequency Expert Opinions in a Market with Gaussian Drift
Abdelali Gabih,Hakam Kondakji,Ralf Wunderlich

This paper investigates a financial market where stock returns depend on a hidden Gaussian mean reverting drift process. Information on the drift is obtained from returns and expert opinions in the form of noisy signals about the current state of the drift arriving at the jump times of a homogeneous Poisson process. Drift estimates are based on Kalman filter techniques and described by the conditional mean and covariance matrix of the drift given the observations. We study the filter asymptotics for increasing arrival intensity of expert opinions and prove that the conditional mean is a consistent drift estimator, it converges in the mean-square sense to the hidden drift. Thus, in the limit as the arrival intensity goes to infinity investors have full information about the drift.

Bankruptcy Prediction Model of Banks in Indonesia Based on Capital Adequacy Ratio
, Lis Sintha
Objective â€" The purpose of this study is to examine the influence of capital on bankruptcy banks. The hypothesis of this research is that capital has an effect on the bankruptcy of a bank.Methodology/Technique â€" This research examines financial reports between 2005-2014. An econometric model with a logistical regression analysis technique is used. In this study, capital is measured by CAR, taking into account credit risk; CAR by taking into account market risk; Ratio of Obligation to Provide Minimum Capital for Credit Risk and Operational Risk; Ratio of Minimum Capital Adequacy Ratio for Credit Risk, Operational Risk and Market Risk; Capital Adequacy Requirements (CAR).Findings â€" The results show that the capital adequacy ratio for market ratio and capital adequacy ratio for credit ratio and operational ratio support the research hypothesis and can form a logit model. The test results of CAR by taking into account credit risk, Minimum Capital Requirement Ratio for Credit Risk, Operational Risk and Market Risk and Minimum Capital Provision Obligations do not support the research hypothesis.Novelty â€" This paper contribute to bank bankruptcy prediction models based on time dimension and bank groups using financial ratios which are expected can influence bank in bankrupt condition.Type of Paper: Empirical.

Building Persistent Financial Performance
, Sri Mulyantini
Objective - The purpose of this study is to analyze profit persistence and the factors that influence it using secondary data from 39 banks listed on the Indonesian Stock Exchange in the form of pooled data, from 2008 to 2014.Methodology/Technique - This study uses a purposive sampling technique, resulting in a sample of 31 banks. Variable profit persistence of each bank reflects sustainable earnings towards the industry in the future. The model determinant factors of persistence profit were analyzed by normalization models as reference models, average models and growth models as exploration models.Findings - As a result, the persistence profit of banks listed on the Indonesian Stock Exchange tends to vary. Some banks have positive profit persistence (lambda) that reflects a competitive advantage in the long run. Other banks have a negative profit persistence, which reflects long-term competitive weakness.Novelty â€" The ability to access capital and funding has a significant effect on profit persistence, although the direction of its influence is negative. Other variables, namely the capability to access public funds, the ability to innovate and industrial factors, namely credit market share, have a significant effect on persistent profits, while the ability to maintain asset quality and efficiency has no significant effect on profit persistence in banks listed on the Indonesian Stock Exchange.Type of Paper - Empirical.

CEO Confidence Matters: The Real Effects of Short Sale Constraints Revisited
Jang, Juwon,Lee, Eunju
This paper investigates the role of managerial biases in the real effects of limits to arbitrage. In a natural experiment setting with Regulation SHO, we find that the lifting of short sale constraints leads to a significant decrease in CEO confidence for pilot firms, and this result is more pronounced for pilot firms with financial constraints and stronger corporate governance. We further find that the real effects of Regulation SHO documented in the literature are primarily driven by such decrease in CEO confidence. Underconfident CEOs of pilot firms tend to decrease corporate investments, reduce earnings management, and improve social performance and employee relations following the removal of short sale constraints. Overall, we identify CEO confidence as a psychological channel through which capital market frictions influence corporate decisions and CEO investment behavior.

Co-Movement and Volatility Transmission between Islamic and Conventional Equity Index in Bangladesh
Hasan, Dr. Md. Abu
Though the issues of co-movement and volatility transmission between Islamic and conventional stock indices have been extensively studied worldwide, this is the first study in reference to Bangladesh to the best of our knowledge. The broad objective of this paper is to investigate whether Islamic stock index provides more diversification benefits than the conventional index from the perspective of cointegration and volatility spillover employing ARDL bounds testing cointegration procedure and GARCH family models. This study uses daily conventional (DS30) and Islamic (DSES) indices from the Dhaka Stock Exchange over the period from 20 January 2014 to 25 June 2018. Typically longer series of data are used in stock market research; however, this study is constrained to take only four and a half years of daily data as Islamic stock index in Bangladesh launched only just in January 2014. The results from ARDL bounds testing and error correction modeling show that both the markets are interlinked in the short-run and long-run. Since two markets move together in the long and short-run, one can predict its future price using any of the index prices. Univariate GARCH(1,1) model finds evidence of volatility clustering in both index returns which have a tendency to last a long time. The results of the EGARCH(1,1) model reveal that both markets are more sensitive to the bad news than with good news. Employing a bivariate GARCH-BEKK model, we find the existence of significant volatility transmission from conventional to Islamic stock market in Bangladesh. Results of GARCH-CCC framework show the evidence of strong direct interconnections between the markets. Finally, we test the presence of time-varying correlation between markets applying the GARCH-DCC model, and the results reveal that correlations are not only conditional but also significantly time-varying. The result also shows that the correlation process is mean reverting. Therefore, we conclude that conventional and Islamic stock markets in Bangladesh do not offer any diversification benefits to investors having both indices in their portfolios. Hence, faith-based investors and portfolio managers should add in other categories of assets in their portfolios to mitigate risk.

Commitment in Waqf Development Through Cross-Sector Collaboration between Islamic Financial Institutions and State Islamic Religious Councils: Innovative Strategy of Value-Based Intermediation for Sustainability
, Siti Sara Binti Ibrahim,Halim Mohd Noor, Abd,Ismail, Shafinar,Arshad, Roshayani,Don, Mohd Ali Muhamad
Objective - Islamic Financial Institutions (IFIs) are founded upon principles of encouraging economic wellbeing for the betterment of society. Despite this, fresh measures are required to ascertain the sustainability of IFIs due to the deterioration recorded in annual rate growth levels that has slumped to 8.2% in 2016, compared to 24.2% in 2011. Similarly, waqf, which aims to contribute to socio-economic growth, appears to underperform due to inefficient management and lack of resources from State Islamic Religious Councils (SIRCs) in Malaysia. Therefore, growing attention is given to adding value to related operations so as to continuously expand without undermining their obligation towards societal welfare.Methodology/Technique - In responding to this issue, Value-Based Intermediation (VBI) through a cross-sector collaboration strategy has been proposed in this paper to streamline the investments of IFIs in executing their business responsibilities in a strategic manner, especially to generate sustainable socio-economic growth through waqf development projects. Nonetheless, in order to strategically perform in project collaboration for sustainability, strong commitment from IFIs and SIRCs is needed.Findings - A significantly positive relationship was discovered between the independent variables (affective commitment, normative commitment, and continuous commitment) and organisational sustainability.Novelty â€" The paper concludes with an assumption of the readiness of both organisations in effectively developing waqf projects, along with several recommendations for future studies in further contributing to the success of waqf development which will contribute to organisational sustainability.Type of Paper - Empirical.

Credit Rating Dynamics: Evidence from a Natural Experiment
Abidi, Nordine,Falagiarda, Matteo,Miquel-Flores, Ixart
This paper investigates the behaviour of credit rating agencies (CRAs) using a natural experiment in monetary policy. Specifically, we exploit the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. We show that after the launch of the policy, rating upgrades were mostly noticeable for bonds initially located below, but close to, the eligibility frontier. In line with the theory, rating activity is concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Complementing the evidence on the effectiveness of non-standard measures, our findings contribute to better assessing the consequences of the explicit (but not exclusive) reliance on CRAs ratings by central banks when designing monetary policy.

Effect of Intervalling and Skewness on Portfolio Selection in Developed and Developing Markets
Prakash, Arun J.,Chang, Chun-Hao,Dupoyet, Brice V.
Based on several research studies and in particular the theoretical study of Prakash, de Boyrie, Hamid and Smyser (1997), it is known that the variance as well as the skewness of the probability distribution of rates of return increases if the investors’ investment interval increases. In the present study, using the portfolio selection procedure developed by Lai (1991) under the presence of skewness and subsequently used by Chunhachinda, Dandapani, Hamid and Prakash (1997) and Prakash, Chang and Pactwa (2003), we find that the selection of investment interval (e.g. daily, weekly vs. monthly) significantly changes not only the optimal allocation of weights, but also the number of markets selected in the portfolio.

Fast Calculation of Credit Exposures for Barrier and Bermudan options using Chebyshev interpolation
Kathrin Glau,Ricardo Pachon,Christian Pötz

We introduce a new method to calculate the credit exposure of Bermudan, discretely monitored barrier and European options. Core of the approach is the application of the dynamic Chebyshev method of Glau et al. (2019). The dynamic Chebyshev method delivers a closed form approximation of the option prices along the paths together with the options' delta and gamma. Key advantage is the polynomial structure of the approximation, which allows us a highly efficient evaluation of the credit exposures, even for a large number of simulated paths. The approach is highly flexible in the model choice, payoff profiles and asset classes. We compute the exposure profiles for Bermudan and barrier options in three different equity models and compare them to the profiles of European options. The analysis reveals potential shortcomings of common simplifications in the exposure calculation. The proposed method is sufficiently simple and efficient to avoid such risk-bearing simplifications.

Firm Value, Firm Size and Income Smoothing
Susanto, Yulius Kurnia,Pradipta, Arya
Objective - Income smoothing is a form of earnings manipulation to show that the company's performance is good. Income smoothing can be detrimental to investors, because investors do not know the real financial position and fluctuations of the company. Management of the company engage in income smoothing because investors tend to focus only on the amount of profit reported without regard to the process of generating profits. The purpose of this research is to obtain empirical evidence about the effect of firm value and size on income smoothing.Methodology/Technique - The sample of the research includes manufacturing companies listed on the Indonesian Stock Exchange from 2014-2016. The samples were determined using a purposive sampling method and there are 51 companies that meet the criteria used. This research uses a logistic regression method for data analysis.Findings - The results of the research show that the effect of firm value on income smoothing is positive and significant. Meanwhile, the effect of firm size on income smoothing is negative and significant. Companies that create value in the eyes of investors will try to retain their investors by engaging in income smoothing. Income smoothing will convince investors to invest in the company. Meanwhile, large companies that are convinced that investors will continue to invest do not typically engage in income smoothing.Novelty â€" This study proves that, in the context of agency theory, the principal's desires are not often aligned with the wishes of management which can give rise to agency costs, one of which occurs as a result of income smoothing. Further, firm size can minimize opportunist income smoothing actions.Type of Paper - Empirical.

How Do Small-Dollar, Nonbank Loans Work?
Miller, Thomas
Millions of Americans rely on small-dollar, non-bank-supplied credit products: payday, pawn, vehicle title, and personal installment loans from finance companies. Many features of these vital products, however, are not well understood. This book contains explanations of how these loans work, what features they share, and how they differ. Readers seeking to understand these products might learn something surprising. For example, pawn transactions are not loans in the traditional sense; interest rate caps influence the size of installment loans; and the length of a payday loan affects its annualized interest rate. This objective guide is a must-read resource for legislators, regulators, journalists, and anyone else who cares about access to, and regulation of, small-dollar credit.

Institutional Design of Pension Systems and Individual Behavior: How do Households Respond?
Herrerias, Renata,Zamarripa, Guillermo
Mexico introduced a Defined Contribution (DC) Pension System in 1997. We analyzed the behavior of affiliated workers under the institutional design of the reformed system. Before the reform, 75% of affiliated workers could receive a lifetime annuity upon retirement; we project that under the new rules only 30% of participants will be able to transform savings into pension income. Furthermore, participation is positively related to income and privileged workers (males, living in richer regions and having a mortgage). The new institutional design is not entirely serving as a pension system and may not prevent poverty at old age.

Internationalization and Corporate Governance of Indian Family Owned Business Groups
S., Subramanian
Purpose: The purpose of this paper is to study the relationship between corporate governance practices and Internationalization in the context of family-owned business groups in India.Design: Comparative case study method is used to understand the above-said relationship using four family-owned business groups in India.Findings: The ownership concentration negatively influences the internationalization. Overall, good corporate governance practices have a positive influence on group internationalization. Research implications: This paper provides detailed discussions based on the case study research which would help the future research work on the relationship between corporate governance practices and internationalization. Originality/value: The existing literature in this field in the context of emerging markets are inconclusive. Hence this paper uses the case study method to understand the relationship better.

Is Greece’s Exit From the Rescue Programmes Successful? Lessons for Bulgaria
Bobeva, Daniela
The literature dedicated to the impact of Greek crisis on European economy focuses mainly on the fiscal and debt aspects. Regional and bilateral effects are not in the focus. This article offers a non-conventional diagnosis of the causes and nature of Greek crisis as a result of structural rather than fiscal factors, as more European than specific Greek crisis. The author argues that the European lessons from this case are not well perceived and learned. The article analyses the state of Greek economy after the completion of the rescue programmes and the challenges ahead that may further affect the neighbouring countries and particularly Bulgaria. The Greek economy lost its role as an important driver for economic growth and reforms before the crisis in the region. The study identifies the main channels through which both positive and negative impulses to the neighbouring economies occur.

Mapping Bank Securities across Euro Area Sectors: Comparing Funding and Exposure Networks
Hüser, Anne-Caroline,Kok, Christoffer
We present new evidence on the structure of euro area securities markets using a multilayer network approach. Layers are broken down by key instruments and maturities as well as the secured nature of the transaction. This paper utilizes a unique dataset of banking sector crossholdings of securities to map these exposures among banks and economic and financial sectors. We can compare and contrast funding and exposure networks among banks themselves and of banks, non-banks and the wider economy. The analytical approach presented here is highly relevant for the design of appropriate prudential measures, since it supports the identification of counterparty risk, concentration risk and funding risk within the interbank network and the wider macro-financial network.

On the Optimal Design of the Randomized Unbiased Monte Carlo Estimators
Cui, Zhenyu,Lee, Chihoon,Zhu, Lingjiong,Zhu, Yunfan
In recent literature, a new class of unbiased Monte Carlo estimators have been proposed, which is based on truncating a telescopic representation of the expectation of a functional of the stochastic process at an independent random level. The generality of the method lies in that it can translate any sequence of asymptotically unbiased estimators into a truly unbiased estimator. However, since any independent truncation level can lead to an unbiased estimator, its optimal choice is crucial for the successful implementation of this unbiased Monte Carlo method in financial engineering applications. We develop a novel efficient algorithm to locate the optimal distribution of the random truncation level in general, which answers positively an open question posted in Rhee and Glynn (2015), and we rigorously establish the convergence and optimality of the algorithm and derive its exact complexity. Our algorithm has a much lower complexity as compared to the literature, and numerical examples confirm our findings. The proposed algorithm is shown to be also applicable to optimization problems arising in contextual areas of supply chain management.

Optimum Allocation of Weights to Assets in a Portfolio: The Case of Nominal Annualisation Versus Effective Annualisation of Returns
Prakash, Arun J.,Chang, Chun-Hao,Dupoyet, Brice V.
Since the introduction of modern portfolio theory by Roy (1952), Markowitz (1952) and Sharpe (1964) about half a century ago, the allocation of investment weights among various assets in a portfolio is one of the most important areas of research in finance. However, we are not aware of any study that has compared the allocation problem under nominally annualised versus effectively annualised returns. In this paper, we empirically examine the effect of effective annualisation on the variance and skewness of the rates of return probability distribution and the allocation of weights to assets in the portfolio. Our empirical findings conclude that the method of annualisation drastically affects the variance and skewness as well as the allocation of weights to the assets in the portfolio.

Regulación prudencial e información financiera en la banca española: 1995-2015 (Prudential Regulation and Financial Information in Spanish Banks: 1995â€"2015)
Marín Hernández, Salvador ,Gras Gil, Ester,Ortiz Martínez, Esther
Spanish Abstract: En este trabajo pretendemos comprobar si los cambios en la regulación financiera prudencial en España en el período 1995-2015 han tenido efectos en la estabilidad financiera y si esta puede valorarse con el comportamiento de las variables Zscore y LLP en el caso español, al igual que se realiza en otras realidades internacionales. Para ello abordamos el análisis de la implantación de la provisión estadística o dinámica en el año 2000 y la adopción de Basilea en 2008. La muestra analizada está compuesta por 48 bancos españoles. Como principales conclusiones aportamos evidencias de que los cambios que se han producido en la regulación financiera prudencial en España no pueden ser analizados e interpretados adecuadamente con el comportamiento de las variables Zscore y LLP, para ese período, ya que en este contexto no son un buen indicador de la mayor o menor estabilidad financiera por las interferencias del regulador bancario español.English Abstract: In this paper we seek to ascertain whether the changes in prudential financial regulation in Spain in the period 1995â€"2015 have had an effect on financial stability and whether this can be assessed for Spain from the behavior of the z-score and the LLP variables, as has been done elsewhere. We analyze the implementation of the statistical or dynamic provision in 2000 and also the adoption of the Basel II agreement in 2008. The sample analyzed comprises 48 Spanish banks. As our main conclusions, we provide evidence that the changes that have taken place in prudential financial regulation in Spain cannot be adequately analyzed and interpreted with the behavior of the z-score and LLP variables for that period, since in this context they are not good indicators of greater or lesser financial stability due to interference from the Spanish banking regulator.

Smart Investments by Smart Money: Evidence from Acquirers’ Projected Synergies
Ismail, Ahmad,Khalil, Samer,Safieddine, Assem,Titman, Sheridan
Institutional investors tend to accumulate the shares of firms that announce acquisitions. The tendency to accumulate shares is stronger when the acquirer discloses synergy forecasts, and it is especially strong when the disclosed synergies are higher. This evidence is consistent with the idea that institutional investors are attracted to situations where their superior access to management and analysts provides an information advantage. Indeed, this tendency to accumulate information sensitive shares is especially strong for hedge funds, which tend to have the greatest information advantage. Moreover, stock prices respond favorably in the quarter following the acquisition announcement when higher institutional holdings are revealed.

Statistical Learning for Probability-Constrained Stochastic Optimal Control
Alessandro Balata,Michael Ludkovski,Aditya Maheshwari,Jan Palczewski

We investigate Monte Carlo based algorithms for solving stochastic control problems with probabilistic constraints. Our motivation comes from microgrid management, where the controller tries to optimally dispatch a diesel generator while maintaining low probability of blackouts. The key question we investigate are empirical simulation procedures for learning the admissible control set that is specified implicitly through a probability constraint on the system state. We propose a variety of relevant statistical tools including logistic regression, Gaussian process regression, quantile regression and support vector machines, which we then incorporate into an overall Regression Monte Carlo (RMC) framework for approximate dynamic programming. Our results indicate that using logistic or Gaussian process regression to estimate the admissibility probability outperforms the other options. Our algorithms offer an efficient and reliable extension of RMC to probability-constrained control. We illustrate our findings with two case studies for the microgrid problem.

The Total Expense Ratio: The Reality of Distribution Fees 'Behind the Mutual Fund Curtain'
Haslem, John A.
This study uses the portion of a new Total Expense Ratio construct that discloses the reality of adviser/distributor payments of hidden distribution fees to sales brokers "behind the mutual fund curtain". Distribution fees consist of dealer (broker) concessions, accounts servicing (12b-1 fees), types of revenue sharing payments, and soft-dollar trades. Distribution fees are one of four categories in the Total Expense Ratio, the others being (1) management fees, (2) "other" expenses, and (3) transaction costs. Adoption of the complete Total Expense Ratio with normative transparency of disclosure followed by prohibition of 12b-1 fees, revenue sharing payments, and soft-dollar trading requires strong action by fund independent directors, the fund industry, the fund industry, most importantly, by Congress and the SEC.Only a few fund advisers are likely to join in this effort to change their very profitable status quo. However, as the article maintains, fund shareholders deserve to receive their "fiduciary protections" under the law at the TER may be useful in the regard.

Underwriting Efficiency of Non-Life Insurance Industry in India
Kumari, Nikita
Purpose: Insurance companies earn their profits through underwriting of premium from various policies and investing in various securities. If, premiums collected will not be adequate to cover the cost of coverage, insurance companies will confront underwriting loss. The purpose of this paper is to assess underwriting efficiency of non-life insurance industry in India.D:esign/methodology/approach: DEA models have been applied on two inputs (Share Capital and Total Investment) and three outputs (Profit, Net Premium and Investment Income). This study focuses upon nineteen non-life insurance companies operating in India over a period of five years from 2011-12 to 2015-16. Findings: Underwriting efficiency of non-life insurance industry has declined on both BCC model and CCR model from 2011-12 to 2014-15. However, it slightly improved in the year 2015-16. The study further highlights that during all years under study, four (21 per cent) to eight (42 per cent) non-life insurers have been found on the CRS frontier and seven (37 per cent) to twelve (63 per cent) non-life insurers have been found on the VRS frontier. With regard to scale efficiency issues, four (21 per cent) to eight (42 per cent) companies have been operated at their most productive scale over the study period. Research limitations/implications: Paper has successfully developed underwriting model for insurance companies. Taking clue from findings, insurance companies could deal with various underwriting related challenges in their respective companies. Originality/value: The paper uses DEA models to assess underwriting efficiency of insurance companies not discusses so far in previous studies.