Research articles for the 2019-06-07
A 'Bad Beta, Good Beta' Anatomy of Currency Risk Premiums and Trading Strategies
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We test a two-beta currency pricing model that features betas with risk-premium news and real-rate news of the currency market. Unconditionally, beta with currency market risk-premium news is “bad†because of significantly positive price of risk (2.52% per year); beta with global real-rate news is “good†due to nearly zero or negative price of risk. The price of risk-premium beta risk is counter-cyclical, while the price of the real-rate beta risk is pro-cyclical. Most prevailing currency trading strategies either have excessive “bad beta†or too little “good beta,†failing to deliver abnormal performance. Our empirical results can be delivered by a no-arbitrage model with precautionary savings and a pricing kernel characterized by two separate global shocks.
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We test a two-beta currency pricing model that features betas with risk-premium news and real-rate news of the currency market. Unconditionally, beta with currency market risk-premium news is “bad†because of significantly positive price of risk (2.52% per year); beta with global real-rate news is “good†due to nearly zero or negative price of risk. The price of risk-premium beta risk is counter-cyclical, while the price of the real-rate beta risk is pro-cyclical. Most prevailing currency trading strategies either have excessive “bad beta†or too little “good beta,†failing to deliver abnormal performance. Our empirical results can be delivered by a no-arbitrage model with precautionary savings and a pricing kernel characterized by two separate global shocks.
A Spanish Financial Market Stress Indicator (FMSI)
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The relevance of systemic risk was highlighted by the economic and financial crisis starting in mid-2007. Supervisors and regulators recognised the need to improve the process of identification, management and mitigation of systemic risk. This paper introduces a Spanish Financial Market Stress Indicator (FMSI), similar to the “Composite Indicator of Systemic Stress†that Holló, Kremer and Lo Duca (2012) pro-posed for the euro area as a whole. This indicator, which represents a real-time measure of systemic risk, tries to quantify stress in the Spanish financial system and describes the contribution of each financial market segment (bond market, equity market, money market, financial intermediaries, forex markets and derivatives) to the total stress in the system. The methodology takes into account time-varying cor-relations between market segments. The study analyses the ability of the FMSI to identify past periods of high financial stress and presents two econometric approaches with the aim of classifying observations into different stress regimes and of determining if financial stress has a negative impact on the real economy.
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The relevance of systemic risk was highlighted by the economic and financial crisis starting in mid-2007. Supervisors and regulators recognised the need to improve the process of identification, management and mitigation of systemic risk. This paper introduces a Spanish Financial Market Stress Indicator (FMSI), similar to the “Composite Indicator of Systemic Stress†that Holló, Kremer and Lo Duca (2012) pro-posed for the euro area as a whole. This indicator, which represents a real-time measure of systemic risk, tries to quantify stress in the Spanish financial system and describes the contribution of each financial market segment (bond market, equity market, money market, financial intermediaries, forex markets and derivatives) to the total stress in the system. The methodology takes into account time-varying cor-relations between market segments. The study analyses the ability of the FMSI to identify past periods of high financial stress and presents two econometric approaches with the aim of classifying observations into different stress regimes and of determining if financial stress has a negative impact on the real economy.
A Study on Stock Price Reaction of Bonus Share Announcement
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Over the years, the corporate event announcement and its impact on stock price movement are one of the interesting and debatable issues among research scholars, analysts, fund managers and policy makers. The main objective of the study was to understand the impact of bonus share announcement. According to theory, there should not be any significant price movement on bonus share announcement because there is no effect on stockholder’s proportional ownership of stocks. But some of the literatures conclude that the earning announcement, bonus announcement and other events generate significant price impact. Total 44 bonus announcement made during the period of 1st January, 2011 to 31st December, 2011. From the 44 companies 33 companies fulfill all requirements for the study. The historical prices for the said period were collected from the BSE and NSE’s websites. The study found that Indian market is in semistrong form in long duration. But in short duration, investor can generate above average profit. The ASRV was found 1 for 31 days; it means Bonus share announcement information was perfectly absorbed within 31 days. There is negative correlation between the abnormal return of pre-announcement return and post-announcement return. The pre event period of -15 days positive return for the investors and after event it generate negative return. On the event day stocks does not generate abnormal return compare to market return.
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Over the years, the corporate event announcement and its impact on stock price movement are one of the interesting and debatable issues among research scholars, analysts, fund managers and policy makers. The main objective of the study was to understand the impact of bonus share announcement. According to theory, there should not be any significant price movement on bonus share announcement because there is no effect on stockholder’s proportional ownership of stocks. But some of the literatures conclude that the earning announcement, bonus announcement and other events generate significant price impact. Total 44 bonus announcement made during the period of 1st January, 2011 to 31st December, 2011. From the 44 companies 33 companies fulfill all requirements for the study. The historical prices for the said period were collected from the BSE and NSE’s websites. The study found that Indian market is in semistrong form in long duration. But in short duration, investor can generate above average profit. The ASRV was found 1 for 31 days; it means Bonus share announcement information was perfectly absorbed within 31 days. There is negative correlation between the abnormal return of pre-announcement return and post-announcement return. The pre event period of -15 days positive return for the investors and after event it generate negative return. On the event day stocks does not generate abnormal return compare to market return.
A Study on the Impact of Currency Fluctuation on FIIs Net Equity Investment & Indian Capital Market (BSE, NSE)
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The last twelve months have seen the Indian Rupee (INR) soaring to new highs against the Dollar (USD), and subsequently falling to new lows. This has been a key concern, with the INR rising notably from around INR 46.62/$ level in January 2010 to INR 52.26/$ currently. The dynamic linkage between exchange rate and stock prices is important from the viewpoint of recent large cross-boarder movement of funds. The present study focus on the effects of exchange rate fluctuation (Rs/$) on various segments of the Indian financial markets over the last 2 years during the global financial crisis. Using daily data from January 2010 to December 2011, it is found that there is no significant positive correlation between Rs/$ exchange rate and FIIs Net equity investment, BSE return and NSE return.
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The last twelve months have seen the Indian Rupee (INR) soaring to new highs against the Dollar (USD), and subsequently falling to new lows. This has been a key concern, with the INR rising notably from around INR 46.62/$ level in January 2010 to INR 52.26/$ currently. The dynamic linkage between exchange rate and stock prices is important from the viewpoint of recent large cross-boarder movement of funds. The present study focus on the effects of exchange rate fluctuation (Rs/$) on various segments of the Indian financial markets over the last 2 years during the global financial crisis. Using daily data from January 2010 to December 2011, it is found that there is no significant positive correlation between Rs/$ exchange rate and FIIs Net equity investment, BSE return and NSE return.
An Analyisis of the Heston Stochastic Volatility Model: Implementation and Calibration Using Matlab
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This paper analyses the implementation and calibration of the Heston Stochastic Volatility Model. We first explain how characteristic functions can be used to esti-mate option prices. Then we consider the implementation of the Heston model, showing that relatively simple solutions can lead to fast and accurate vanilla option prices. We also perform several calibration tests, using both local and global optimi-zation. Our analyses show that straightforward setups deliver good calibration re-sults. All calculations are carried out in Matlab and numerical examples are included in the paper to facilitate the understanding of mathematical concepts.
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This paper analyses the implementation and calibration of the Heston Stochastic Volatility Model. We first explain how characteristic functions can be used to esti-mate option prices. Then we consider the implementation of the Heston model, showing that relatively simple solutions can lead to fast and accurate vanilla option prices. We also perform several calibration tests, using both local and global optimi-zation. Our analyses show that straightforward setups deliver good calibration re-sults. All calculations are carried out in Matlab and numerical examples are included in the paper to facilitate the understanding of mathematical concepts.
Analysis of the Declarations of Conformity with the German Corporate Governance Code (Version February 2017)
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English Abstract: The Code Compliance Study 2019 examines the acceptance level of the current version of the German Corporate Governance Code (GCGC) within DAX and MDAX firms. The study analyses overall compliance, as well as the firms’ compliance behavior on the level of chapters, items and even single GCGC recommendations. In addition, the study examines the firms' governance quality based on four specially constructed governance indices that represent the key areas of governance (transparency, monitoring/control, incentives and diversity). Moreover, compliance behavior with respect to GCGC's suggestions as well as the relationship between firm characteristics and compliance levels is analyzed. Overall, the study presents a broad and comprehensive view on code compliance behavior of German listed firms. German Abstract: Die Studie analysiert und bewertet systematisch und umfassend die Akzeptanz der aktuellen, vierzehnten Fassung des Deutschen Corporate Governance Kodex (DCGK) durch DAX-und MDAX-Gesellschaften anhand der durch §161 AktG vorgeschriebenen Entsprechenserklärungen. Analysiert wird das grundsätzliche Niveau der Kodexakzeptanz, aber auch das Entsprechensverhalten der Gesellschaften auf Kapitel- und Ziffernebene, bis hin zur Analyse einzelner Empfehlungen. Darüber hinaus untersucht die Studie die Governance Qualität der Gesellschaften basierend auf vier eigens hierfür konstruierten Governance Indizes, welche die Kernbereiche Transparenz, Kontrolle/Überwachung, Anreizsysteme und Vielfalt abbilden. Ergänzt wird dies um Analysen hinsichtlich des Verhaltens bezüglich Kodexanregungen, des Zusammenhangs zwischen Complianceverhalten und Unternehmensgröße bzw. Eigentümerstruktur und einer Analyse der im Rahmen der Entsprechenserklärungen gegebenen Erläuterungen. Im Rahmen der Studie werden die bis 31. März 2019 veröffentlichten Entsprechenserklärungen (gemäß §161 AktG) der in DAX und MDAX notierten Gesellschaften analysiert. Die untersuchten Unternehmen repräsentieren zu Ende 2018 etwa 92 Prozent der Marktkapitalisierung des Prime Standard der Deutschen Börse, sodass die Studie einen umfassenden und gleichzeitig individuell- differenzierten Blick auf die marktrelevante Akzeptanz des DCGK in den größten deutschen Aktiengesellschaften vermittelt.
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English Abstract: The Code Compliance Study 2019 examines the acceptance level of the current version of the German Corporate Governance Code (GCGC) within DAX and MDAX firms. The study analyses overall compliance, as well as the firms’ compliance behavior on the level of chapters, items and even single GCGC recommendations. In addition, the study examines the firms' governance quality based on four specially constructed governance indices that represent the key areas of governance (transparency, monitoring/control, incentives and diversity). Moreover, compliance behavior with respect to GCGC's suggestions as well as the relationship between firm characteristics and compliance levels is analyzed. Overall, the study presents a broad and comprehensive view on code compliance behavior of German listed firms. German Abstract: Die Studie analysiert und bewertet systematisch und umfassend die Akzeptanz der aktuellen, vierzehnten Fassung des Deutschen Corporate Governance Kodex (DCGK) durch DAX-und MDAX-Gesellschaften anhand der durch §161 AktG vorgeschriebenen Entsprechenserklärungen. Analysiert wird das grundsätzliche Niveau der Kodexakzeptanz, aber auch das Entsprechensverhalten der Gesellschaften auf Kapitel- und Ziffernebene, bis hin zur Analyse einzelner Empfehlungen. Darüber hinaus untersucht die Studie die Governance Qualität der Gesellschaften basierend auf vier eigens hierfür konstruierten Governance Indizes, welche die Kernbereiche Transparenz, Kontrolle/Überwachung, Anreizsysteme und Vielfalt abbilden. Ergänzt wird dies um Analysen hinsichtlich des Verhaltens bezüglich Kodexanregungen, des Zusammenhangs zwischen Complianceverhalten und Unternehmensgröße bzw. Eigentümerstruktur und einer Analyse der im Rahmen der Entsprechenserklärungen gegebenen Erläuterungen. Im Rahmen der Studie werden die bis 31. März 2019 veröffentlichten Entsprechenserklärungen (gemäß §161 AktG) der in DAX und MDAX notierten Gesellschaften analysiert. Die untersuchten Unternehmen repräsentieren zu Ende 2018 etwa 92 Prozent der Marktkapitalisierung des Prime Standard der Deutschen Börse, sodass die Studie einen umfassenden und gleichzeitig individuell- differenzierten Blick auf die marktrelevante Akzeptanz des DCGK in den größten deutschen Aktiengesellschaften vermittelt.
Bankruptcy Spillover Effects on Oil and Gas Industry
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This paper studies bankruptcy spillover effects onto portfolios of non-bankrupt firms in oil and gas industry. Using hand-collected data on bankruptcy filings in oil and gas industry from 2000 to 2017, I find that, on average, the value-weighted portfolios of non-bankrupt oil and gas firms experience a negative stock price reaction 4-day around a bankruptcy filing announcement in the industry. This negative stock price reaction is not only statistically significant at 1% but also economically significant as the 4-day cumulative abnormal losses are averagely calculated at $4.47 billion. Further analyses on oil and gas sub-industries lead to the findings that while the Oil & Gas Production Portfolio and Oil & Gas Field Machinery & Equipment Portfolio are the most affected, the Petroleum Refining Portfolio and Petroleum Products Wholesalers Portfolio show very little to no evidence of being affected by bankruptcy filing announcements within the industry wide. I also find that the magnitude of spillover effects is conditional on the size of bankrupt firms and the degree of competition of sub-industries but not on the chapters of the filing and the sub-industry leverage. These findings are robust after controlling for sub-industry-specific factors and market-wide factors.
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This paper studies bankruptcy spillover effects onto portfolios of non-bankrupt firms in oil and gas industry. Using hand-collected data on bankruptcy filings in oil and gas industry from 2000 to 2017, I find that, on average, the value-weighted portfolios of non-bankrupt oil and gas firms experience a negative stock price reaction 4-day around a bankruptcy filing announcement in the industry. This negative stock price reaction is not only statistically significant at 1% but also economically significant as the 4-day cumulative abnormal losses are averagely calculated at $4.47 billion. Further analyses on oil and gas sub-industries lead to the findings that while the Oil & Gas Production Portfolio and Oil & Gas Field Machinery & Equipment Portfolio are the most affected, the Petroleum Refining Portfolio and Petroleum Products Wholesalers Portfolio show very little to no evidence of being affected by bankruptcy filing announcements within the industry wide. I also find that the magnitude of spillover effects is conditional on the size of bankrupt firms and the degree of competition of sub-industries but not on the chapters of the filing and the sub-industry leverage. These findings are robust after controlling for sub-industry-specific factors and market-wide factors.
Comparing the Supremum Augmented Dickey Fuller and Log Periodic Power Law Frameworks for Identifying Bubbles
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This paper compares the ability of the log periodic power law (LPPL) procedure and the supremum augmented Dickey Fuller (supremum ADF) tests to confirm or reject the presence of bubbles in various time series simulations. We develop a time stamping method for the LPPL procedure and derive a more general formulation allowing for non-zero required rate of return. We support earlier findings that the standard generalized SADF test is oversized when subject to serially correlated innovations, and that this can be helped by bootstrapping the critical value distribution. Furthermore, we document that both the standard and the bootstrap GSADF test suffer from oversized test statistics when subject to GARCH innovations. The LPPL procedure shows promising results but these are highly dependent on its specific formulation.
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This paper compares the ability of the log periodic power law (LPPL) procedure and the supremum augmented Dickey Fuller (supremum ADF) tests to confirm or reject the presence of bubbles in various time series simulations. We develop a time stamping method for the LPPL procedure and derive a more general formulation allowing for non-zero required rate of return. We support earlier findings that the standard generalized SADF test is oversized when subject to serially correlated innovations, and that this can be helped by bootstrapping the critical value distribution. Furthermore, we document that both the standard and the bootstrap GSADF test suffer from oversized test statistics when subject to GARCH innovations. The LPPL procedure shows promising results but these are highly dependent on its specific formulation.
Cross-Border Claims and Banking Crises: An Early Warning System for Small Open Economies
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This paper presents an early warning system for predicting banking crises specifically tailored to developed small open economies. The model considers two sources of financial instability: Domestic macro-financial imbalances and exposure to foreign banking systems with high crisis risk. Exposure of small open economies is measured by their total cross-border bank claims against foreign countries relative to GDP and weighted by the domestic risk of banking crisis in the foreign economies. A combined system that captures both national and foreign-induced risks outperforms conventional domestic early warning models. Further, the system correctly predicts crisis incidence out-of-sample for every small open economy in the sample prior to the Global Financial Crisis. Low banking exposure to highly leveraged foreign economies explains the resilience of many small open economies during the recent crisis.
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This paper presents an early warning system for predicting banking crises specifically tailored to developed small open economies. The model considers two sources of financial instability: Domestic macro-financial imbalances and exposure to foreign banking systems with high crisis risk. Exposure of small open economies is measured by their total cross-border bank claims against foreign countries relative to GDP and weighted by the domestic risk of banking crisis in the foreign economies. A combined system that captures both national and foreign-induced risks outperforms conventional domestic early warning models. Further, the system correctly predicts crisis incidence out-of-sample for every small open economy in the sample prior to the Global Financial Crisis. Low banking exposure to highly leveraged foreign economies explains the resilience of many small open economies during the recent crisis.
Do Institutions and Firms Trade in Tandem With One Another? Evidence From Share Repurchases
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I study repurchase motives by examining trading from institutional investors, usually considered informed traders, around the events. When firms conduct repurchases, the likelihood of institutional selling increases and institutional buying decreases, consistent firms repurchasing to provide liquidity to institutional traders. A negative relation between repurchase intensity and changes in institutional ownership before and during repurchase quarter, but not in the quarter after the events, suggests that firms buy back shares to provide liquidity to institutional selling and not vice versa. The results hold across all types of institutions and are stronger for illiquid stocks. Institutional trading adds value to repurchase signals: Repurchases with concurrent institutional buying are associated with significantly higher abnormal returns than those with net institutional selling in the quarter before and up to two quarters in the future around share repurchases. The relation between ex-post returns and institutional trading is stronger for active and transient institutions.
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I study repurchase motives by examining trading from institutional investors, usually considered informed traders, around the events. When firms conduct repurchases, the likelihood of institutional selling increases and institutional buying decreases, consistent firms repurchasing to provide liquidity to institutional traders. A negative relation between repurchase intensity and changes in institutional ownership before and during repurchase quarter, but not in the quarter after the events, suggests that firms buy back shares to provide liquidity to institutional selling and not vice versa. The results hold across all types of institutions and are stronger for illiquid stocks. Institutional trading adds value to repurchase signals: Repurchases with concurrent institutional buying are associated with significantly higher abnormal returns than those with net institutional selling in the quarter before and up to two quarters in the future around share repurchases. The relation between ex-post returns and institutional trading is stronger for active and transient institutions.
Do Wealthy Economies Have Better Accounting Quality? International Evidence
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Purpose: The purpose of this article is to empirically test whether wealthy economies have better accounting quality (AQ) compared to their “poor†counterparts. Design/methodology/approach: To test the formulated hypothesis, this article examines accounting and market data of 40 countries' capital markets, obtained from Compustat Global and Compustat North America, and spanned throughout the last quarter of century, from 1992 to 2016. Country wealth and controlling- and valuation-usefulness of accounting information are proxied by gross domestic product per capita, conditional accounting conservatism and value relevance of earnings and book values, respectively.Findings: Descriptive analysis, consistent with the prior literature, reveals that controlling-usefulness and valuation-usefulness of accounting information significantly negatively correlate with each other, putting them as alternative (rather than compatible) objectives of the accounting system. The major finding shows that wealthy economies report significantly more controlling-useful but about equally valuation-useful accounting information compared to their poor counterparts.Practical implications: The findings are interesting from investors as well as standard setters' perspective.Originality/value: According to Ball (Journal of International Accounting Research (2016), 15(2), 1â€"6), wealthy economies are likely to invest more in the establishment and development of a country-level reporting infrastructure such as accounting, financial, legal and political systems, which should ultimately lead to better AQ. This article argues that wealthy economies are likely to report more controlling-useful, but not necessarily more valuation-useful accounting information compared to the poor ones. This argument is based on the fact that on the one hand decision makers within the wealthy economies' capital markets are likely to intensively utilize various alternative sources of information, implying a lower demand on accounting information as a source of valuation decisions. On the other hand, demand for controlling-useful accounting information would exist even while utilizing other (external) sources of information as the inside (managerial) information helps the management to efficiently control and plan the firm activities.
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Purpose: The purpose of this article is to empirically test whether wealthy economies have better accounting quality (AQ) compared to their “poor†counterparts. Design/methodology/approach: To test the formulated hypothesis, this article examines accounting and market data of 40 countries' capital markets, obtained from Compustat Global and Compustat North America, and spanned throughout the last quarter of century, from 1992 to 2016. Country wealth and controlling- and valuation-usefulness of accounting information are proxied by gross domestic product per capita, conditional accounting conservatism and value relevance of earnings and book values, respectively.Findings: Descriptive analysis, consistent with the prior literature, reveals that controlling-usefulness and valuation-usefulness of accounting information significantly negatively correlate with each other, putting them as alternative (rather than compatible) objectives of the accounting system. The major finding shows that wealthy economies report significantly more controlling-useful but about equally valuation-useful accounting information compared to their poor counterparts.Practical implications: The findings are interesting from investors as well as standard setters' perspective.Originality/value: According to Ball (Journal of International Accounting Research (2016), 15(2), 1â€"6), wealthy economies are likely to invest more in the establishment and development of a country-level reporting infrastructure such as accounting, financial, legal and political systems, which should ultimately lead to better AQ. This article argues that wealthy economies are likely to report more controlling-useful, but not necessarily more valuation-useful accounting information compared to the poor ones. This argument is based on the fact that on the one hand decision makers within the wealthy economies' capital markets are likely to intensively utilize various alternative sources of information, implying a lower demand on accounting information as a source of valuation decisions. On the other hand, demand for controlling-useful accounting information would exist even while utilizing other (external) sources of information as the inside (managerial) information helps the management to efficiently control and plan the firm activities.
Equity Exchange Fees and Revenues
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Fees charged by U.S. equity exchanges for services such as non-core market data, connectivity, and co-location have become controversial. Recently, the Securities and Exchange Commission required the exchanges justify hundreds of past fee increases. In their defense, exchanges argue that the fees that they charge are constrained by competition for order flow between the three major exchange families. To the authors’ knowledge, no extant work associates fee changes with exchange revenues. We gather fee increases and exchange financial statement information between 2006 and 2016 to examine the relation between fees and revenues. We find that, when statistically significant, revenue increases with fee increases without a consistently strong volume effect, which suggests that any decrease in subscriptions due to fee increases is more than offset by the revenue increase from the remaining subscribers.
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Fees charged by U.S. equity exchanges for services such as non-core market data, connectivity, and co-location have become controversial. Recently, the Securities and Exchange Commission required the exchanges justify hundreds of past fee increases. In their defense, exchanges argue that the fees that they charge are constrained by competition for order flow between the three major exchange families. To the authors’ knowledge, no extant work associates fee changes with exchange revenues. We gather fee increases and exchange financial statement information between 2006 and 2016 to examine the relation between fees and revenues. We find that, when statistically significant, revenue increases with fee increases without a consistently strong volume effect, which suggests that any decrease in subscriptions due to fee increases is more than offset by the revenue increase from the remaining subscribers.
Evidence from Purchases and Redemptions in the Spanish Equity Fund Market
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The potential relationship between fund flows and performance is a remarkable topic in the mutual fund industry that has been explored by many empirical academic papers. In this work, it is shown that investors in Spanish equity funds respond to past good performance by increasing their (net) purchases, and to past poor performance by reducing their (net) purchases. However, the relationship be-tween flows and performance appears to be non-linear. This non-linearity is different from the one observed in most of the previous research papers. These papers did not find any response to poor performance. Net purchases, purchases and redemptions are analysed separately and, as a new feature, the retail and wholesale markets of mutual funds are addressed. The comparison of the two markets reveals some interesting differences on the determinants of the financial decisions regarding purchasing or selling shares of equity funds. It was also found that investor sensitivity to poor performance is reduced in the case of more visible funds. This puzzling result, which originates in the retail segment, could be explained in terms of the market power of fund families.
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The potential relationship between fund flows and performance is a remarkable topic in the mutual fund industry that has been explored by many empirical academic papers. In this work, it is shown that investors in Spanish equity funds respond to past good performance by increasing their (net) purchases, and to past poor performance by reducing their (net) purchases. However, the relationship be-tween flows and performance appears to be non-linear. This non-linearity is different from the one observed in most of the previous research papers. These papers did not find any response to poor performance. Net purchases, purchases and redemptions are analysed separately and, as a new feature, the retail and wholesale markets of mutual funds are addressed. The comparison of the two markets reveals some interesting differences on the determinants of the financial decisions regarding purchasing or selling shares of equity funds. It was also found that investor sensitivity to poor performance is reduced in the case of more visible funds. This puzzling result, which originates in the retail segment, could be explained in terms of the market power of fund families.
Evidence of Non-Linear Relationship between Non-Interest Income and Profitability of Commercial Banks in Pakistan
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Pakistan's commercial banks are lately facing hindrance in earning substantial profits due to low-interest rates and low-interest margins on Government Securities which is evidently reflected in the low Earning per Share and low share prices of commercial banks. To confronting this, the banks are forced to diversify their income. The past studies show the mixed inferences about the reliance on non-interest income can be profitable for commercial banks in Pakistan's case. This research fills the gap for the existence of a non-linear relationship between the non-interest income and profitability of banks in Pakistan. Threshold Regression Model is applied on a panel data of 13 commercial for the period 2007-2017. The results have shown that optimal diversification benefit can be attained by reaching to a certain level of non-interest income proportion. The findings of the study are: (1) there exist a single threshold, confirming the non-linear relationship between the Non-Interest Income ratio (NIR) and profitability (ROE). (2) The NIR impacts positively on profitability (ROE) when NIR (≤61.1%) and beyond this value i.e. NIR (>61.12%) the relationship is negative. The study can help the Pakistani banks in exploiting their maximum level of diversification and in earning large profits in unfavorable times.
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Pakistan's commercial banks are lately facing hindrance in earning substantial profits due to low-interest rates and low-interest margins on Government Securities which is evidently reflected in the low Earning per Share and low share prices of commercial banks. To confronting this, the banks are forced to diversify their income. The past studies show the mixed inferences about the reliance on non-interest income can be profitable for commercial banks in Pakistan's case. This research fills the gap for the existence of a non-linear relationship between the non-interest income and profitability of banks in Pakistan. Threshold Regression Model is applied on a panel data of 13 commercial for the period 2007-2017. The results have shown that optimal diversification benefit can be attained by reaching to a certain level of non-interest income proportion. The findings of the study are: (1) there exist a single threshold, confirming the non-linear relationship between the Non-Interest Income ratio (NIR) and profitability (ROE). (2) The NIR impacts positively on profitability (ROE) when NIR (≤61.1%) and beyond this value i.e. NIR (>61.12%) the relationship is negative. The study can help the Pakistani banks in exploiting their maximum level of diversification and in earning large profits in unfavorable times.
Firm-Level Versus Aggregate Market Investor Sentiment: What Matters Most for Corporate Announcement Returns
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Noise trader models of market behaviour propose that investor sentiment affects investor responses to corporate announcements. Existing empirical studies test these theoretical models using market-level measures of investor sentiment. However, the lack of cross-sectional heterogeneity may limit the explanatory power of market-level measures of investor sentiment when analysing firm-specific issues. We apply a new measure of firm-level investor sentiment using data from the StockTwits social media platform to examine the relative explanatory power of measures of firm- and market-level investor sentiment as determinants of merger and acquisition announcement returns. We report evidence that firm-level investor sentiment dominates market-level investor sentiment in explaining announcement returns, particularly in stocks that are subject to more costly arbitrage and are difficult to value.
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Noise trader models of market behaviour propose that investor sentiment affects investor responses to corporate announcements. Existing empirical studies test these theoretical models using market-level measures of investor sentiment. However, the lack of cross-sectional heterogeneity may limit the explanatory power of market-level measures of investor sentiment when analysing firm-specific issues. We apply a new measure of firm-level investor sentiment using data from the StockTwits social media platform to examine the relative explanatory power of measures of firm- and market-level investor sentiment as determinants of merger and acquisition announcement returns. We report evidence that firm-level investor sentiment dominates market-level investor sentiment in explaining announcement returns, particularly in stocks that are subject to more costly arbitrage and are difficult to value.
Granular Borrowers
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This paper uses a credit registry covering the quasi universe of firm-bank relationships in France for the period 1999-2016 to provide a detailed account of the role of very large borrowers ("granular borrowers") in shaping bank-level and aggregate credit variations. We document that the distribution of borrowers is fat-tailed, the top 100 borrowers making up on average for 18% of the aggregate amount of long-term credit and 64% of total undrawn credit lines. We adapt the methodology of Amiti and Weinstein (2018) to identify the contributions of firm, bank, and aggregate shocks to credit variations at any level of aggregation. At the macroeconomic level, we show that the aggregate properties of credit largely reflect the idiosyncratic shocks of granular borrowers. This finding highlights the limitations of using time series of aggregate credit to assess the magnitude of financial frictions in the economy. At the bank-level, we find that the concentration of the portfolio of credit lines exposes lenders to considerable borrower idiosyncratic risk and leads liquidity flows to be more synchronized across banks. This suggests that shocks on granular borrowers may represent a source of systemic risk.
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This paper uses a credit registry covering the quasi universe of firm-bank relationships in France for the period 1999-2016 to provide a detailed account of the role of very large borrowers ("granular borrowers") in shaping bank-level and aggregate credit variations. We document that the distribution of borrowers is fat-tailed, the top 100 borrowers making up on average for 18% of the aggregate amount of long-term credit and 64% of total undrawn credit lines. We adapt the methodology of Amiti and Weinstein (2018) to identify the contributions of firm, bank, and aggregate shocks to credit variations at any level of aggregation. At the macroeconomic level, we show that the aggregate properties of credit largely reflect the idiosyncratic shocks of granular borrowers. This finding highlights the limitations of using time series of aggregate credit to assess the magnitude of financial frictions in the economy. At the bank-level, we find that the concentration of the portfolio of credit lines exposes lenders to considerable borrower idiosyncratic risk and leads liquidity flows to be more synchronized across banks. This suggests that shocks on granular borrowers may represent a source of systemic risk.
How Do the Stocks React to Analysts’ Recommendations?
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The purpose of this article is to study the impact of analysts’ recommendation on stock prices and to study whether profitable investment strategies could be designed or not. The impact of analysts’ recommendations to buy, sell and hold the stocks were studied. The Economic Times (print news paper) publish stocks’ recommendations of leading research houses/brokerage houses. The analysts give calls to buy, sell and hold the Indian stock. The performances of total 1178 research calls of 361 companies were analysed. The performance of buy, sell and hold calls were compared and analysed. The abnormal return of the stocks during analysts’ recommendations was measured for the all stocks. The impact of recommendations on volume was also analyzed. The study found that, sell calls offered higher AAR returns compared to the buy or hold calls.
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The purpose of this article is to study the impact of analysts’ recommendation on stock prices and to study whether profitable investment strategies could be designed or not. The impact of analysts’ recommendations to buy, sell and hold the stocks were studied. The Economic Times (print news paper) publish stocks’ recommendations of leading research houses/brokerage houses. The analysts give calls to buy, sell and hold the Indian stock. The performances of total 1178 research calls of 361 companies were analysed. The performance of buy, sell and hold calls were compared and analysed. The abnormal return of the stocks during analysts’ recommendations was measured for the all stocks. The impact of recommendations on volume was also analyzed. The study found that, sell calls offered higher AAR returns compared to the buy or hold calls.
Idiosyncratic Skewness or Coskewness? Evidence from Commodity Futures Returns
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We examine the ability of idiosyncratic skewness and coskewness to explain the cross section of commodity returns at the characteristics and factor levels, and find that idiosyncratic skewness is significantly related to the cross section of commodity returns, whereas coskewness is not. Furthermore, we construct a tradeable factor based on idiosyncratic skewness and find that it is significantly priced cross-sectionally in commodity futures. In addition, a new measure of idiosyncratic skewness (IE) proposed by Jiang, Wu, Zhou, and Zhu (2018) is stronger and more robust in capturing the skewness or asymmetry effect at both the characteristics and factor levels.
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We examine the ability of idiosyncratic skewness and coskewness to explain the cross section of commodity returns at the characteristics and factor levels, and find that idiosyncratic skewness is significantly related to the cross section of commodity returns, whereas coskewness is not. Furthermore, we construct a tradeable factor based on idiosyncratic skewness and find that it is significantly priced cross-sectionally in commodity futures. In addition, a new measure of idiosyncratic skewness (IE) proposed by Jiang, Wu, Zhou, and Zhu (2018) is stronger and more robust in capturing the skewness or asymmetry effect at both the characteristics and factor levels.
Informational Endowment, Sophisticated Skepticism and Management Earnings Forecasts
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While sophisticated skepticism promotes voluntary disclosure, various frictions serve to defeat it. One of the simplest frictions is rational investor uncertainty about management’s endowment of information (UEI). Sophisticated skepticism will increase as the likelihood that management is withholding value-relevant negative information increases, causing managers to voluntarily disclose increasingly unfavorable information in order to avoid the investors’ larger discounts. Based on previous research, we argue that the quality of management’s information improves with customer concentration. Accordingly, we find that the precision of, and investors’ reactions to, management forecasts increase for suppliers with more concentrated customer bases. Moreover, as the UEI model implies, firms with major customers are more likely to issue management forecasts preceding sales contractions (bad news) and the difference between the forecast disclosure frequency preceding sales expansions versus sales contractions decreases with both customer concentration and value relevance of the information possessed by management.
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While sophisticated skepticism promotes voluntary disclosure, various frictions serve to defeat it. One of the simplest frictions is rational investor uncertainty about management’s endowment of information (UEI). Sophisticated skepticism will increase as the likelihood that management is withholding value-relevant negative information increases, causing managers to voluntarily disclose increasingly unfavorable information in order to avoid the investors’ larger discounts. Based on previous research, we argue that the quality of management’s information improves with customer concentration. Accordingly, we find that the precision of, and investors’ reactions to, management forecasts increase for suppliers with more concentrated customer bases. Moreover, as the UEI model implies, firms with major customers are more likely to issue management forecasts preceding sales contractions (bad news) and the difference between the forecast disclosure frequency preceding sales expansions versus sales contractions decreases with both customer concentration and value relevance of the information possessed by management.
International Tail Risk Connectedness: Network and Determinants
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We develop the full network of directional tail risk connectedness for a system of 32 countries using the Least Absolute Shrinkage and Selection Operator (LASSO) Quantile Regression framework. Our result highlights important features of the tail risk network, including the key drivers, receivers, and transmitters of risk in international financial markets. We then investigate the network determinants and demonstrate the predominant role of the economy size amongst economic and stock market factors. After controlling for this, we present striking evidence of the negative relationship between economic linkage factors such as trade and capital flows, and capital stocks with the cross-country tail risk connectedness. Our observation provides important evidence to support the cheap import, contractual commitment, and diversification effects in international economic relationship.
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We develop the full network of directional tail risk connectedness for a system of 32 countries using the Least Absolute Shrinkage and Selection Operator (LASSO) Quantile Regression framework. Our result highlights important features of the tail risk network, including the key drivers, receivers, and transmitters of risk in international financial markets. We then investigate the network determinants and demonstrate the predominant role of the economy size amongst economic and stock market factors. After controlling for this, we present striking evidence of the negative relationship between economic linkage factors such as trade and capital flows, and capital stocks with the cross-country tail risk connectedness. Our observation provides important evidence to support the cheap import, contractual commitment, and diversification effects in international economic relationship.
Italia 1 Trim 2019: Pil, Debito & Co (Italy 1q 2019: GDP, Debt & Co.)
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Italian Abstract: Ricerca sulla situazione economica italiana basata sui dati economici ufficiali; vengono analizzati e confrontati con il passato il debito pubblico, le riserve ufficiali, il PIL, l'inflazione e la disoccupazione. English Abstract: Research into the state of the Italian economy based on official economic data; the current Sovereign Debt, Official Reserves, GDP, Inflation and Unemployment situation is presented and and compared with the past.
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Italian Abstract: Ricerca sulla situazione economica italiana basata sui dati economici ufficiali; vengono analizzati e confrontati con il passato il debito pubblico, le riserve ufficiali, il PIL, l'inflazione e la disoccupazione. English Abstract: Research into the state of the Italian economy based on official economic data; the current Sovereign Debt, Official Reserves, GDP, Inflation and Unemployment situation is presented and and compared with the past.
Kodexakzeptanz 2019: Analyse der Entsprechenserklärungen von DAX- und MDAX-Gesellschaften zum Deutschen Corporate Governance Kodex (Code Compliance 2019: Analysis of the Declarations of Conformity with the German Corporate Governance Code)
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German Abstract: Die Studie analysiert und bewertet systematisch und umfassend die Akzeptanz der aktuellen, vierzehnten Fassung des Deutschen Corporate Governance Kodex (DCGK) durch DAX-und MDAX-Gesellschaften anhand der durch §161 AktG vorgeschriebenen Entsprechenserklärungen. Analysiert wird das grundsätzliche Niveau der Kodexakzeptanz, aber auch das Entsprechensverhalten der Gesellschaften auf Kapitel- und Ziffernebene, bis hin zur Analyse einzelner Empfehlungen. Darüber hinaus untersucht die Studie die Governance Qualität der Gesellschaften basierend auf vier eigens hierfür konstruierten Governance Indizes, welche die Kernbereiche Transparenz, Kontrolle/Überwachung, Anreizsysteme und Vielfalt abbilden. Ergänzt wird dies um Analysen hinsichtlich des Verhaltens bezüglich Kodexanregungen, des Zusammenhangs zwischen Complianceverhalten und Unternehmensgröße bzw. Eigentümerstruktur und einer Analyse der im Rahmen der Entsprechenserklärungen gegebenen Erläuterungen. Im Rahmen der Studie werden die bis 31. März 2019 veröffentlichten Entsprechenserklärungen (gemäß §161 AktG) der in DAX und MDAX notierten Gesellschaften analysiert. Die untersuchten Unternehmen repräsentieren zu Ende 2018 etwa 92 Prozent der Marktkapitalisierung des Prime Standard der Deutschen Börse, sodass die Studie einen umfassenden und gleichzeitig individuell- differenzierten Blick auf die marktrelevante Akzeptanz des DCGK in den größten deutschen Aktiengesellschaften vermittelt. English Abstract: The Code Compliance Study 2019 examines the acceptance level of the current version of the German Corporate Governance Code (GCGC) within DAX and MDAX firms. The study analyses overall compliance, as well as the firms’ compliance behavior on the level of chapters, items and even single GCGC recommendations.In addition, the study examines the firms' governance quality based on four specially constructed governance indices that represent the key areas of governance (transparency, monitoring/control, incentives and diversity). Moreover, compliance behavior with respect to GCGC's suggestions as well as the relationship between firm characteristics and compliance levels is analyzed. Overall, the study presents a broad and comprehensive view on code compliance behavior of German listed firms.
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German Abstract: Die Studie analysiert und bewertet systematisch und umfassend die Akzeptanz der aktuellen, vierzehnten Fassung des Deutschen Corporate Governance Kodex (DCGK) durch DAX-und MDAX-Gesellschaften anhand der durch §161 AktG vorgeschriebenen Entsprechenserklärungen. Analysiert wird das grundsätzliche Niveau der Kodexakzeptanz, aber auch das Entsprechensverhalten der Gesellschaften auf Kapitel- und Ziffernebene, bis hin zur Analyse einzelner Empfehlungen. Darüber hinaus untersucht die Studie die Governance Qualität der Gesellschaften basierend auf vier eigens hierfür konstruierten Governance Indizes, welche die Kernbereiche Transparenz, Kontrolle/Überwachung, Anreizsysteme und Vielfalt abbilden. Ergänzt wird dies um Analysen hinsichtlich des Verhaltens bezüglich Kodexanregungen, des Zusammenhangs zwischen Complianceverhalten und Unternehmensgröße bzw. Eigentümerstruktur und einer Analyse der im Rahmen der Entsprechenserklärungen gegebenen Erläuterungen. Im Rahmen der Studie werden die bis 31. März 2019 veröffentlichten Entsprechenserklärungen (gemäß §161 AktG) der in DAX und MDAX notierten Gesellschaften analysiert. Die untersuchten Unternehmen repräsentieren zu Ende 2018 etwa 92 Prozent der Marktkapitalisierung des Prime Standard der Deutschen Börse, sodass die Studie einen umfassenden und gleichzeitig individuell- differenzierten Blick auf die marktrelevante Akzeptanz des DCGK in den größten deutschen Aktiengesellschaften vermittelt. English Abstract: The Code Compliance Study 2019 examines the acceptance level of the current version of the German Corporate Governance Code (GCGC) within DAX and MDAX firms. The study analyses overall compliance, as well as the firms’ compliance behavior on the level of chapters, items and even single GCGC recommendations.In addition, the study examines the firms' governance quality based on four specially constructed governance indices that represent the key areas of governance (transparency, monitoring/control, incentives and diversity). Moreover, compliance behavior with respect to GCGC's suggestions as well as the relationship between firm characteristics and compliance levels is analyzed. Overall, the study presents a broad and comprehensive view on code compliance behavior of German listed firms.
Law, Endowment and Inequality in Access to Finance
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Theoretical work suggests an ambiguous relationship between the strength of institutions and the distribution of access to finance. Using a sample of listed firms from 70 countries, this study constructs country-level measures of inequality in access to external finance and explores its relation to institutions. We show that inequality of access is positively related to financial development as well as inequality in the distribution of firm size, firm revenue, and residents’ incomes. Countries with stronger investor protection for equity and debt have higher inequality in equity and debt financing respectively, presumably as a result of higher efficiency in fund allocation. Finally, we find that the historical determinants of institutions, including the civil law tradition and the disease environment encountered by colonizers, are negative related to inequality in access to external finance. The results support both law and endowment theories.
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Theoretical work suggests an ambiguous relationship between the strength of institutions and the distribution of access to finance. Using a sample of listed firms from 70 countries, this study constructs country-level measures of inequality in access to external finance and explores its relation to institutions. We show that inequality of access is positively related to financial development as well as inequality in the distribution of firm size, firm revenue, and residents’ incomes. Countries with stronger investor protection for equity and debt have higher inequality in equity and debt financing respectively, presumably as a result of higher efficiency in fund allocation. Finally, we find that the historical determinants of institutions, including the civil law tradition and the disease environment encountered by colonizers, are negative related to inequality in access to external finance. The results support both law and endowment theories.
Liquidity Risks, Transaction costs and Online Portfolio Selection
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The performance of online (sequential) portfolio selection (OPS), which rebalances a portfolio in every period (e.g. daily or weekly) in order to maximise the portfolio's expected terminal wealth in the long run, has been overestimated by the ideal assumption of unlimited market liquidity or no market impact cost. Therefore, a new transaction cost factor model that considers both market impact costs, estimated from limit order book (LOB) data, and proportional transaction costs has been proposed in this paper to measure existing OPS strategies performance in a more practical way as well as to develop a more effective OPS method. Backtesting results from the historical LOB data of NASDAQ-traded stocks show both the performance deterioration of existing OPS methods by the market impact costs and the superiority of our proposed OPS method in the environment of limited market liquidity.
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The performance of online (sequential) portfolio selection (OPS), which rebalances a portfolio in every period (e.g. daily or weekly) in order to maximise the portfolio's expected terminal wealth in the long run, has been overestimated by the ideal assumption of unlimited market liquidity or no market impact cost. Therefore, a new transaction cost factor model that considers both market impact costs, estimated from limit order book (LOB) data, and proportional transaction costs has been proposed in this paper to measure existing OPS strategies performance in a more practical way as well as to develop a more effective OPS method. Backtesting results from the historical LOB data of NASDAQ-traded stocks show both the performance deterioration of existing OPS methods by the market impact costs and the superiority of our proposed OPS method in the environment of limited market liquidity.
Making Basel III Work for Emerging Markets and Developing Economies: A CGD Task Force Report
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A sound financial regulatory framework is critical for minimizing the risk imposed by financial system fraÂgility. In the world’s emerging markets and developing economies (EMDEs), such regulation is also essential to support economic development and poverty reducÂtion. Meanwhile, it is increasingly recognized that global financial stability is a global public good: recent decades have seen the development of new interÂnational financial regulatory standards, to serve as benchmarks for gauging regulation across countries, facilitate cooperation among financial supervisors from different countries, and create a level playing field for financial institutions wherever they operate. For the worldwide banking industry, the international regulatory standards promulgated by the Basel ComÂmittee on Banking Supervision (BCBS) stand out for their wide-ranging scope and detail. Even though the latest Basel recommendations, adopted in late 2017 and known as Basel III, are, like their predecessors, calibrated primarily for advanced countries, many EMDEs are in the process of adopting and adapting them, and many others are considering it. They do so because they see it as in their long-term interest, but at the same time the new standards pose for them new risks and challenges. This report assesses the implicaÂtions of Basel III for EMDEs and provides recommenÂdations for both international and local policymakers to make Basel III work for these economies.
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A sound financial regulatory framework is critical for minimizing the risk imposed by financial system fraÂgility. In the world’s emerging markets and developing economies (EMDEs), such regulation is also essential to support economic development and poverty reducÂtion. Meanwhile, it is increasingly recognized that global financial stability is a global public good: recent decades have seen the development of new interÂnational financial regulatory standards, to serve as benchmarks for gauging regulation across countries, facilitate cooperation among financial supervisors from different countries, and create a level playing field for financial institutions wherever they operate. For the worldwide banking industry, the international regulatory standards promulgated by the Basel ComÂmittee on Banking Supervision (BCBS) stand out for their wide-ranging scope and detail. Even though the latest Basel recommendations, adopted in late 2017 and known as Basel III, are, like their predecessors, calibrated primarily for advanced countries, many EMDEs are in the process of adopting and adapting them, and many others are considering it. They do so because they see it as in their long-term interest, but at the same time the new standards pose for them new risks and challenges. This report assesses the implicaÂtions of Basel III for EMDEs and provides recommenÂdations for both international and local policymakers to make Basel III work for these economies.
Managerial Ability, Risk Preferences and the Incentives for Active Management
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Managerial ability, risk preferences and the incentives for active management5AbstractThis paper uses a structural econometric model to assess the managerial ability of Spanish management companies. Traditionally, ability has been mainly measured by the alphas of CAPM models. The model used in this paper allows to disentangle the ability and preferences that are embedded in alphas. The results show that the abilities of Spanish management companies are lower than their peers in the US. This result could be the consequence of the limited competition in the mutual fund market as well as the narrowness of the equity markets that the funds invest in. Moreover, it is shown that the fraction of the funds’ portfolios that is actively man-aged does not depend on the fees paid and it is negatively correlated to funds’ total assets and whether a fund belongs to a credit institution’s management company.
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Managerial ability, risk preferences and the incentives for active management5AbstractThis paper uses a structural econometric model to assess the managerial ability of Spanish management companies. Traditionally, ability has been mainly measured by the alphas of CAPM models. The model used in this paper allows to disentangle the ability and preferences that are embedded in alphas. The results show that the abilities of Spanish management companies are lower than their peers in the US. This result could be the consequence of the limited competition in the mutual fund market as well as the narrowness of the equity markets that the funds invest in. Moreover, it is shown that the fraction of the funds’ portfolios that is actively man-aged does not depend on the fees paid and it is negatively correlated to funds’ total assets and whether a fund belongs to a credit institution’s management company.
Market Contestability and Payout Policy
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We analyze the impact of market contestability on payout policy by exploiting plausibly exogenous changes in interstate geographical restrictions on branch expansion of financial institutions. Leveraging branch-level data on bank deposits enables us to capture the exposure of each bank to state-level branching restrictions. We provide evidence of a negative impact of branching restrictions on payout ratios, which occurs only for banks with a low degree of market power, suggesting that competition is indeed driving our results. We test two potential channels: a “charter-value†channel, which predicts that contestability decreases charter values and leads to risk-shifting; and a “signaling†channel, which predicts that managers increase payout ratios to signal to the market that they do not expect a long-term decrease in profitability as a result of heightened market contestability. We do not find robust evidence that high-risk banks raise payout ratios more than low-risk banks when market contestability increases. Rather, we find support for the signaling hypothesis, in that market contestability boosts the probability of dividend increases, while share repurchases, which lack an ongoing commitment, do not increase. Moreover, the price reaction to dividend cuts is statistically significant only when market contestability is high, and unlisted banks (which cannot be punished by the stock market) do not react to changes in market contestability.
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We analyze the impact of market contestability on payout policy by exploiting plausibly exogenous changes in interstate geographical restrictions on branch expansion of financial institutions. Leveraging branch-level data on bank deposits enables us to capture the exposure of each bank to state-level branching restrictions. We provide evidence of a negative impact of branching restrictions on payout ratios, which occurs only for banks with a low degree of market power, suggesting that competition is indeed driving our results. We test two potential channels: a “charter-value†channel, which predicts that contestability decreases charter values and leads to risk-shifting; and a “signaling†channel, which predicts that managers increase payout ratios to signal to the market that they do not expect a long-term decrease in profitability as a result of heightened market contestability. We do not find robust evidence that high-risk banks raise payout ratios more than low-risk banks when market contestability increases. Rather, we find support for the signaling hypothesis, in that market contestability boosts the probability of dividend increases, while share repurchases, which lack an ongoing commitment, do not increase. Moreover, the price reaction to dividend cuts is statistically significant only when market contestability is high, and unlisted banks (which cannot be punished by the stock market) do not react to changes in market contestability.
Network-Based Measures As Leading Indicators of Market Instability: The Case of the Spanish Stock Market
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This paper studies the undirected partial-correlation stock network for the Spanish market that considers the constituents of IBEX-35 as nodes and their partial correlations of returns as links. I propose a novel methodology that combines a recently developed variable selection method, Graphical Lasso, with Monte Carlo simulations as fundamental ingredients for the estimation recipe. Three major results come from this study. First, in topological terms, the network shows features that are not consistent with random arrangements and it also presents a high level of stability over time. International comparison between major European stock markets extends that conclusion beyond the Spanish context. Second, the systemic importance of the banking sector, relative to the other sectors in the economy, is quantitatively uncovered by means of its network centrality. Particularly interesting is the case of the two major banks that occupy the places of the most systemic players. Finally, the empirical evidence indicates that some network-based measures are leading indicators of distress for the Spanish stock market.
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This paper studies the undirected partial-correlation stock network for the Spanish market that considers the constituents of IBEX-35 as nodes and their partial correlations of returns as links. I propose a novel methodology that combines a recently developed variable selection method, Graphical Lasso, with Monte Carlo simulations as fundamental ingredients for the estimation recipe. Three major results come from this study. First, in topological terms, the network shows features that are not consistent with random arrangements and it also presents a high level of stability over time. International comparison between major European stock markets extends that conclusion beyond the Spanish context. Second, the systemic importance of the banking sector, relative to the other sectors in the economy, is quantitatively uncovered by means of its network centrality. Particularly interesting is the case of the two major banks that occupy the places of the most systemic players. Finally, the empirical evidence indicates that some network-based measures are leading indicators of distress for the Spanish stock market.
Political Connections and Insider Trading
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Politically connected insiders, especially senior officers who hold a director position, are more likely to make informed trades than non-politically connected insiders. This effect, however, is limited to insider sales, consistent with insider sales facing higher legal risk. Politically connected insiders are also more likely to execute trades that would normally be more likely to trigger an SEC insider trading investigation: trading closer to the earnings announcements, trading during periods that overlap with traditional blackout periods, and missing SEC timely reporting requirements.
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Politically connected insiders, especially senior officers who hold a director position, are more likely to make informed trades than non-politically connected insiders. This effect, however, is limited to insider sales, consistent with insider sales facing higher legal risk. Politically connected insiders are also more likely to execute trades that would normally be more likely to trigger an SEC insider trading investigation: trading closer to the earnings announcements, trading during periods that overlap with traditional blackout periods, and missing SEC timely reporting requirements.
Predicting Nifty 50-Use of Advance Decline ratio
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The stock market volatility stimulates the trading feelings of investors. The thrilling to predict stock market attracts attention of researchers and investors towards study of stock market indicators which can useful to predicting stock market. But the question is can someone, somehow predict short term price of an individual stock? This paper attempts to do what many investors and mathematicians have tried to do for decades, and that is to make such predications. The past 12-months daily data of the year 2010 of Advance/Decline (A/D) ratio and daily closing price data of Nifty 50 index is collected and the regression analysis is used to know the relationship among the A/D ratio and Nifty. With the statistical software (Gretl) Durbin Watson and Autoregression is also applied to know the relationship between A/D ratio and Nifty 50.
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The stock market volatility stimulates the trading feelings of investors. The thrilling to predict stock market attracts attention of researchers and investors towards study of stock market indicators which can useful to predicting stock market. But the question is can someone, somehow predict short term price of an individual stock? This paper attempts to do what many investors and mathematicians have tried to do for decades, and that is to make such predications. The past 12-months daily data of the year 2010 of Advance/Decline (A/D) ratio and daily closing price data of Nifty 50 index is collected and the regression analysis is used to know the relationship among the A/D ratio and Nifty. With the statistical software (Gretl) Durbin Watson and Autoregression is also applied to know the relationship between A/D ratio and Nifty 50.
Recent Housing Market Developments in Spain
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After the sharp correction during the crisis, activity in the Spanish real estate sector commenced its recovery in early 2014. This improving trend has since been observable both in quantity and price-based indicators. However, this market is well known for its high heterogeneity due to the location of the properties, their type and the nationality of purchasers. The recent buoyancy seems to reflect, among other factors, positive labour market developments and the low cost of borrowing against a backdrop of gradual growth of loans for house purchase.
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After the sharp correction during the crisis, activity in the Spanish real estate sector commenced its recovery in early 2014. This improving trend has since been observable both in quantity and price-based indicators. However, this market is well known for its high heterogeneity due to the location of the properties, their type and the nationality of purchasers. The recent buoyancy seems to reflect, among other factors, positive labour market developments and the low cost of borrowing against a backdrop of gradual growth of loans for house purchase.
Speed and Biases of Fourier-Based Pricing Choices: Analysis of the Bastes and Asymmetric Variance Gamma Models
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This paper compares the CPU effort and numerical biases of six Fourier-based implementations. Our analyses focus on two jump models that can consistently price options with different strikes and maturities: (i) the Bates jump-diffusion model, which combines jumps with stochastic volatility and (ii) the Asymmetric Variance Gamma (AVG) model, a pure-jump process where an infinite number of jumps can occur in any interval of time. We show that both truncation and discretization errors significantly increase as we move away from the diffusive Black-Scholes-Merton dynamics. While most pricing choices converge to the Bates reference values, Attari’s formula is the only Fourier-based method that does not completely blow up in any AVG problematic region. In terms of CPU speed, the strike vector computations proposed by Zhu (2010) significantly improve the computational burden, rendering the use of fast Fourier transforms and plain delta-probability decompositions inefficient.
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This paper compares the CPU effort and numerical biases of six Fourier-based implementations. Our analyses focus on two jump models that can consistently price options with different strikes and maturities: (i) the Bates jump-diffusion model, which combines jumps with stochastic volatility and (ii) the Asymmetric Variance Gamma (AVG) model, a pure-jump process where an infinite number of jumps can occur in any interval of time. We show that both truncation and discretization errors significantly increase as we move away from the diffusive Black-Scholes-Merton dynamics. While most pricing choices converge to the Bates reference values, Attari’s formula is the only Fourier-based method that does not completely blow up in any AVG problematic region. In terms of CPU speed, the strike vector computations proposed by Zhu (2010) significantly improve the computational burden, rendering the use of fast Fourier transforms and plain delta-probability decompositions inefficient.
Stay Concentrated to Survive
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Using a text-based measure as proxy for a firm’s geographically dispersed business interests, we document that geographic dispersion increases the probability of failure risk for newly listed firms. We find that the effect is more pronounced in a soft information environment where information is not easily transferrable or verifiable over long distances, and in small communities where managerial social concerns dominate in decision-making. Moreover, we find that firms with spatially distributed business interests are negatively associated with post-IPO operating performance. Overall, the results are consistent with the argument that geographically dispersed firms are subject to internal information asymmetry and divert managerial focus away from shareholder value, which negatively affects corporate performance and eventually results in corporate failure. Our study suggests to the corporate world, stay concentrated to survive.
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Using a text-based measure as proxy for a firm’s geographically dispersed business interests, we document that geographic dispersion increases the probability of failure risk for newly listed firms. We find that the effect is more pronounced in a soft information environment where information is not easily transferrable or verifiable over long distances, and in small communities where managerial social concerns dominate in decision-making. Moreover, we find that firms with spatially distributed business interests are negatively associated with post-IPO operating performance. Overall, the results are consistent with the argument that geographically dispersed firms are subject to internal information asymmetry and divert managerial focus away from shareholder value, which negatively affects corporate performance and eventually results in corporate failure. Our study suggests to the corporate world, stay concentrated to survive.
The Effect of Electoral Competition on Government-Subsidized Small Business Loans: Evidence from Congressional Gerrymandering
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We study how electoral competition affects the flow of government-subsidized small business loans to congressional districts. To identify the causal impact of electoral competitiveness, we examine the politically-motivated manipulation of congressional redistricting, colloquially known as "gerrymandering". Specifically, we exploit the discontinuity in post-redistricting electoral competitiveness between districts where redistricting party incumbents narrowly won and narrowly lost the pre-redistricting election. Using a regression discontinuity design, we find that districts with electorally vulnerable Congressional Representatives receive more Small Business Administration (SBA) loans than districts with more entrenched Representatives, and this leads to higher local employment and wage growth in the short run.
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We study how electoral competition affects the flow of government-subsidized small business loans to congressional districts. To identify the causal impact of electoral competitiveness, we examine the politically-motivated manipulation of congressional redistricting, colloquially known as "gerrymandering". Specifically, we exploit the discontinuity in post-redistricting electoral competitiveness between districts where redistricting party incumbents narrowly won and narrowly lost the pre-redistricting election. Using a regression discontinuity design, we find that districts with electorally vulnerable Congressional Representatives receive more Small Business Administration (SBA) loans than districts with more entrenched Representatives, and this leads to higher local employment and wage growth in the short run.
The Nature of Volatility Spillovers Across the International Capital Markets
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This paper studies the nature of volatility spillovers across countries from the per-spective of network theory and by relying on data of US-listed ETFs. I use a Lasso-related technique to estimate the International Volatility Network (IVN) where the nodes correspond to large-cap international stock markets while the links account for significant volatility lead-lags. Also included in the analysis is the International Trade Network (ITN), whose links measure bilateral export-import flows thus, cap-turing fundamental interconnections between countries. I find that the IVN and the ITN resemble each other closely pointing out that volatility does not disseminate randomly but tends to spread across fundamentally related economies. I also note that the lagged volatility reactions embedded in the IVN are consistent with the no-tion of gradual diffusion of information across investors who are subject to limited attention and home bias. This hypothesis is formally tested by using as a direct proxy of investors’ attention the aggregate search frequency in Google. The empiri-cal results support this intuition indicating that higher volatility surprises in key foreign markets predict higher domestic attention upon those markets in subse-quent days. Once domestic attention is captured by such external shocks, it is con-temporaneously transformed into higher domestic volatility.
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This paper studies the nature of volatility spillovers across countries from the per-spective of network theory and by relying on data of US-listed ETFs. I use a Lasso-related technique to estimate the International Volatility Network (IVN) where the nodes correspond to large-cap international stock markets while the links account for significant volatility lead-lags. Also included in the analysis is the International Trade Network (ITN), whose links measure bilateral export-import flows thus, cap-turing fundamental interconnections between countries. I find that the IVN and the ITN resemble each other closely pointing out that volatility does not disseminate randomly but tends to spread across fundamentally related economies. I also note that the lagged volatility reactions embedded in the IVN are consistent with the no-tion of gradual diffusion of information across investors who are subject to limited attention and home bias. This hypothesis is formally tested by using as a direct proxy of investors’ attention the aggregate search frequency in Google. The empiri-cal results support this intuition indicating that higher volatility surprises in key foreign markets predict higher domestic attention upon those markets in subse-quent days. Once domestic attention is captured by such external shocks, it is con-temporaneously transformed into higher domestic volatility.
The Primacy Effect Impact of Information’s Order on Investors’ Perception
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The annual report is the way to communicate about the business position to the stakeholders. The annual reports provide meaningful information regarding historical performance and prospective future opportunities. The president’s letter or director's report is a report submitted by the directors of a company to its shareholders, appraising them of the performance of the company under its direction. It is an exercise of self-evaluation. The letter mainly summaries company’s performance and the financial results, discusses company's plans for expansion, diversification or modernization, tells about appropriation of profits, and elaborates company's future prospects and plans for investments. Apart from mandatory disclosure for annual reports to shareholders, it is used as marketing tools which is used to focus the firm’s mission, objectives, strategies, and financial performance. The content of the letter is very important because it catch the attention of the readers like shareholders, investors, analysts, suppliers, government, banks, financial institutions etc. That is why it is very important to take care about the information, positive or negative, convey in presidents’ letter. This paper tried to examine the impact of ordering (Primacy and Recency effect) of the positive and negative information in the president’s letter on readers’ perception. The study concludes that the Primacy Effect can be observed due to change ininformation’s order.
SSRN
The annual report is the way to communicate about the business position to the stakeholders. The annual reports provide meaningful information regarding historical performance and prospective future opportunities. The president’s letter or director's report is a report submitted by the directors of a company to its shareholders, appraising them of the performance of the company under its direction. It is an exercise of self-evaluation. The letter mainly summaries company’s performance and the financial results, discusses company's plans for expansion, diversification or modernization, tells about appropriation of profits, and elaborates company's future prospects and plans for investments. Apart from mandatory disclosure for annual reports to shareholders, it is used as marketing tools which is used to focus the firm’s mission, objectives, strategies, and financial performance. The content of the letter is very important because it catch the attention of the readers like shareholders, investors, analysts, suppliers, government, banks, financial institutions etc. That is why it is very important to take care about the information, positive or negative, convey in presidents’ letter. This paper tried to examine the impact of ordering (Primacy and Recency effect) of the positive and negative information in the president’s letter on readers’ perception. The study concludes that the Primacy Effect can be observed due to change ininformation’s order.
The Regulation of Private Money
SSRN
Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk.
SSRN
Financial crises are bank runs. At root the problem is short-term debt (private money), which while an essential feature of market economies, is inherently vulnerable to runs in all its forms (not just demand deposits). Bank regulation aims at preventing bank runs. History shows two approaches to bank regulation: the use of high quality collateral to back banks’ short-term debt and government insurance for the short-term debt. Also, explicit or implicit limitations on entry into banking can create charter value (an intangible asset) that is lost if the bank fails. This can create an incentive for the bank to abide by the regulations and not take too much risk.
The Role of Capital Market and Banks in Economic Development of India
SSRN
The sound financial system contributes in overall development of the country by collecting and converting the funds into productive usage. The corporate collects funds in the form of equity or debt, earns return on investment, develops infrastructure and generates employment which results into the economic development of the country. This research paper has evaluated the relationship between market capitalization of BSE, banking business and economic development. The data of quarterly market capitalisation of Bombay Stock Exchange (BSE), Business of all commercial scheduled banks and Gross Domestic Product (GDP) were collected from 1999: Q1 to 2015: Q4. The ordinary Least Square method was applied to check the causal relationship among variables. The results of the study suggest a positive relationship between the stock market, banking business and the economic growth.
SSRN
The sound financial system contributes in overall development of the country by collecting and converting the funds into productive usage. The corporate collects funds in the form of equity or debt, earns return on investment, develops infrastructure and generates employment which results into the economic development of the country. This research paper has evaluated the relationship between market capitalization of BSE, banking business and economic development. The data of quarterly market capitalisation of Bombay Stock Exchange (BSE), Business of all commercial scheduled banks and Gross Domestic Product (GDP) were collected from 1999: Q1 to 2015: Q4. The ordinary Least Square method was applied to check the causal relationship among variables. The results of the study suggest a positive relationship between the stock market, banking business and the economic growth.
The Silent Weapon in the Rise of Passive: Shaping the Corporate Landscape
SSRN
We present a new channel that rationalizes the recent rise in the share of passive investment in the asset management industry. By including the effect that ï¬rm shareholders have on corporate decisions, we establish that the preferred ï¬rm strategy of different shareholders varies conditional on their portfolio allocations. Passive investors who hold a market portfolio influence ï¬rms to pursue strategies that reduce the value of holding any other portfolio. In a rational information model, endogenous strategic complementarities arise where passive investors decrease the expected proï¬ts from information acquisition. This effect leads to passive investors giving rise to more passive investors as the equilibrium outcome. Furthermore, we offer various empirical predictions to guide future research.
SSRN
We present a new channel that rationalizes the recent rise in the share of passive investment in the asset management industry. By including the effect that ï¬rm shareholders have on corporate decisions, we establish that the preferred ï¬rm strategy of different shareholders varies conditional on their portfolio allocations. Passive investors who hold a market portfolio influence ï¬rms to pursue strategies that reduce the value of holding any other portfolio. In a rational information model, endogenous strategic complementarities arise where passive investors decrease the expected proï¬ts from information acquisition. This effect leads to passive investors giving rise to more passive investors as the equilibrium outcome. Furthermore, we offer various empirical predictions to guide future research.
What Do We Know About Financial Innovation?
SSRN
This article is a survey of the academic literature on financial innovation. We review definitions and examples of financial innovation, the costs and benefits of financial innovation, financial innovators, factors that encourage or hinder financial innovation, incentives for financial innovation, welfare effects of financial innovation, and the role of regulation in influencing financial innovation.
SSRN
This article is a survey of the academic literature on financial innovation. We review definitions and examples of financial innovation, the costs and benefits of financial innovation, financial innovators, factors that encourage or hinder financial innovation, incentives for financial innovation, welfare effects of financial innovation, and the role of regulation in influencing financial innovation.
Will Bust Banks Be Born Again by Bail-In?
SSRN
Resolution may begin with bail-in. But it does not end there. Resolution only ends when the bank is fully born again, i.e. when the resolution authority ceases to control the bank and the bank returns to normal governance and supervision. How that should happen has received relatively little attention. Yet these details matter greatly, for they determine how attractive investors will find the gone-concern capital instruments upon which bail-in and therefore resolution critically depend. If a bank reaches the point of non-viability, the outcome for investors in gone-concern capital instruments (capital that absorbs losses on the bank’s entry into resolution) can vary from complete loss to complete recovery depending primarily on the decisions the resolution authorities take. This dispersion results from uncertainty concerning the point at which the authorities put a failing bank into resolution, their choice of resolution method, the terms on which authorities bail in liabilities and the process by which the authorities end resolution and return control to investors. Investors may therefore find it difficult to estimate loss given resolution, especially for instruments convertible into CET1 capital. Consequently, if investors in gone concern capital wish to preserve value in their investments, the time for them to take action is before the bank enters resolution.
SSRN
Resolution may begin with bail-in. But it does not end there. Resolution only ends when the bank is fully born again, i.e. when the resolution authority ceases to control the bank and the bank returns to normal governance and supervision. How that should happen has received relatively little attention. Yet these details matter greatly, for they determine how attractive investors will find the gone-concern capital instruments upon which bail-in and therefore resolution critically depend. If a bank reaches the point of non-viability, the outcome for investors in gone-concern capital instruments (capital that absorbs losses on the bank’s entry into resolution) can vary from complete loss to complete recovery depending primarily on the decisions the resolution authorities take. This dispersion results from uncertainty concerning the point at which the authorities put a failing bank into resolution, their choice of resolution method, the terms on which authorities bail in liabilities and the process by which the authorities end resolution and return control to investors. Investors may therefore find it difficult to estimate loss given resolution, especially for instruments convertible into CET1 capital. Consequently, if investors in gone concern capital wish to preserve value in their investments, the time for them to take action is before the bank enters resolution.
