Research articles for the 2020-07-17
Credit Default Swaps Around the World
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We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm and the influence of firms’ local economic and legal environments on that impact. We extend the model of Bolton and Oehmke (2011) to take into account uncertainty about whether the actions taken by the reference entity will trigger credit events for CDS obligations. We test the predictions of our model in a sample of more than 56,000 firms across 51 countries over the period 2001â€"2015 and find substantial evidence that the introduction of CDS affects real decisions. Importantly, we find that the legal and market environments in which reference entities operate have an influence on the impact of CDS. The effect of CDS is larger in environments where uncertainty regarding CDS obligations is reduced and where weak property rights are mitigated by CDS. Our results shed light on the incomplete nature of CDS contracts in international capital markets, which is related to significant legal uncertainty surrounding the interpretation of underlying credit events.
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We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm and the influence of firms’ local economic and legal environments on that impact. We extend the model of Bolton and Oehmke (2011) to take into account uncertainty about whether the actions taken by the reference entity will trigger credit events for CDS obligations. We test the predictions of our model in a sample of more than 56,000 firms across 51 countries over the period 2001â€"2015 and find substantial evidence that the introduction of CDS affects real decisions. Importantly, we find that the legal and market environments in which reference entities operate have an influence on the impact of CDS. The effect of CDS is larger in environments where uncertainty regarding CDS obligations is reduced and where weak property rights are mitigated by CDS. Our results shed light on the incomplete nature of CDS contracts in international capital markets, which is related to significant legal uncertainty surrounding the interpretation of underlying credit events.
Distance, High-Speed Railway Connection, and Price Efficiency: Evidence From China
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In this paper we study how geographical proximity affects price efficiency. Using high-speed railway connections between firm cities and their nearest financial centers in China as exogenous shocks, we find that stocks closer to financial centers are more efficiently priced and that ease of travel attenuates the negative effect of geographic distance on price efficiency. Our results are robust to alternative definitions of geographical proximity and different proxies for price efficiency. Consistent with our hypothesis, ease of travel has a stronger effect for firms that are smaller, have less institutional ownership and financial analyst coverage, and are not on the short sales list. Our paper highlights the importance of geographical proximity on financial market efficiency.
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In this paper we study how geographical proximity affects price efficiency. Using high-speed railway connections between firm cities and their nearest financial centers in China as exogenous shocks, we find that stocks closer to financial centers are more efficiently priced and that ease of travel attenuates the negative effect of geographic distance on price efficiency. Our results are robust to alternative definitions of geographical proximity and different proxies for price efficiency. Consistent with our hypothesis, ease of travel has a stronger effect for firms that are smaller, have less institutional ownership and financial analyst coverage, and are not on the short sales list. Our paper highlights the importance of geographical proximity on financial market efficiency.
Do Overconfident CEOs Pay More to Shareholders? Evidence from the US Market
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This paper aims to discover evidence on the possible impact of CEO overconfidence on payout policy, and the role of corporate boards in offsetting the possible negative effects of this overconfidence. Our investigation demonstrates the effect of overconfidence on the choice of payout method, specifically regarding the repurchases-dividends mix. We also evaluate the ability of corporate governance mechanisms to reduce or even eliminate the negative effects of CEO behavior on payout decisions.This study is conducted using a sample of 671 non-financial companies from the US for the period of 2007â€"2016. We apply probit regressions to study different aspects of payout decisions, and use a panel GMM estimator to check for possible endogenous effects. Using a corporate governance quality index, we test the ability of boards of directors to reduce negative effects of CEO’s overconfidence on the payout decisions.Our findings confirm the hypothesis that overconfident CEOs tend to increase the levels of payout in the form of repurchases, while the levels of cash dividends are unaffected by this type of CEO behavior. Moreover, an overconfident CEO is more likely to initiate repurchases if this has not been done already. The results further illustrate that overconfident CEOs not only pursue higher levels of repurchases, but also switch more often from cash dividends to repurchases. However, it is also shown, in contract to previous research in the field, that efficient boards of directors have very limited power in eliminating the negative effects of CEO overconfidence.This paper contributes to the existing literature by analyzing the specific area of CEO overconfidence using data from the United States, and follows specific lines of inquiry which have not been deeply studied. Further possibilities to explore the implications of this research exists particularly in the consideration of its apparent contradiction of previous research. There is yet scope to determine applicable tools of reducing the negative effects of specific CEO behaviors. It is possible to identify and investigate other relevant behavioral characteristics that may influence payout decisions. Further, these characteristics may be evaluated to see if the operation of these interrelations reproduce alternative results in terms of the effect of corporate governance, both in the US and in other markets.
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This paper aims to discover evidence on the possible impact of CEO overconfidence on payout policy, and the role of corporate boards in offsetting the possible negative effects of this overconfidence. Our investigation demonstrates the effect of overconfidence on the choice of payout method, specifically regarding the repurchases-dividends mix. We also evaluate the ability of corporate governance mechanisms to reduce or even eliminate the negative effects of CEO behavior on payout decisions.This study is conducted using a sample of 671 non-financial companies from the US for the period of 2007â€"2016. We apply probit regressions to study different aspects of payout decisions, and use a panel GMM estimator to check for possible endogenous effects. Using a corporate governance quality index, we test the ability of boards of directors to reduce negative effects of CEO’s overconfidence on the payout decisions.Our findings confirm the hypothesis that overconfident CEOs tend to increase the levels of payout in the form of repurchases, while the levels of cash dividends are unaffected by this type of CEO behavior. Moreover, an overconfident CEO is more likely to initiate repurchases if this has not been done already. The results further illustrate that overconfident CEOs not only pursue higher levels of repurchases, but also switch more often from cash dividends to repurchases. However, it is also shown, in contract to previous research in the field, that efficient boards of directors have very limited power in eliminating the negative effects of CEO overconfidence.This paper contributes to the existing literature by analyzing the specific area of CEO overconfidence using data from the United States, and follows specific lines of inquiry which have not been deeply studied. Further possibilities to explore the implications of this research exists particularly in the consideration of its apparent contradiction of previous research. There is yet scope to determine applicable tools of reducing the negative effects of specific CEO behaviors. It is possible to identify and investigate other relevant behavioral characteristics that may influence payout decisions. Further, these characteristics may be evaluated to see if the operation of these interrelations reproduce alternative results in terms of the effect of corporate governance, both in the US and in other markets.
Do Political Connections Influence Investment Efficiency in Russian Companies?
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The question as to whether political influence can benefit the commercial activity of companies, and the related questions surrounding political corruption that arise, are of perennial fascination for persons at every level of society and in every country. With this in mind, this article seeks to explore the relationship between political connections in commercial firms and investment efficiency. This relationship will be studied on an empirical basis, and will shed some light on the actual parameters, mechanisms, and effects of political influence in the business sphere in the Russian Federation.In this research, we consider only direct relations between business operators and the members of Russian ministries,councils, political parties, heads of the regions and cities. These relationships are categorized as being politically influential depending on the status of the politician, and whether they are active at a federal, regional or municipal level. Connections with such politicians are examined where there is evidence of direct links with company CEOs and chairmen of the boards of directors of companies.This research is carried out on the sample of 106 Russian non-financial companies for the period 2010â€"2015. 44 companies from the final sample were considered as politically connected on at least one level. Some firms have connections more than at one level (11 companies). Companies have politically connected chairman of the board (36 companies) more often than connected CEO (26 companies). Using regression analysis, we determined whether the political ties in Russia have a positive or a negative impact on the investment expenditures of companies. Interestingly, and perhaps contrary to popular belief, we identified a negative relationship between political ties and the efficiency of investment decisions for individual companies. The presence of politically-connected CEOs at federal and regional levels is seen to have a significant negative impact on investment efficiency. However, our results also indicate that the presence of politically-connected chairmen of the board which are active at the municipal level is correlated with efficient investment activity. This indicates that political influence at this level may be responsible for more prudent recommendations regarding commercial and investment decisions. Overall, it can be seen that in this sample of companies from the Russian Federation, the presence of state-tied representatives may be aligned with a tendency for companies to follow targets that are favorable for its government connections and not for the firm itself. Although political connections have a mixed impact on the company’s value, the relation with investment efficiency is primarily negative. Thus, we may reason that the government has a strong power over politically-related companies. Such influences are linked with a tendency for companies to deviate from their primary goal of value maximization.These results may indicate the influence of undue pressure from a government which strives to reach its own goals through the mechanism of commercial activity, or perhaps the opportunistic behavior of individuals in management positions who are motivated towards personal political gain at the expense of the company. Political connections have a mixed effect on the company’s performance and investment efficiency, and we postulate that firms establish relationships with government officials pursuing the goal to obtain more advantageous position. The links between political operators and business activity demonstrated in this research undoubtedly highlight some uncomfortable areas of discourse in the commercial sphere. On a granular level, further research into specific transactions and motivations may seem more a research area for journalists or law enforcement investigators, but this may be simply a popular prejudice. There is certainly ample opportunity for expanding the scope of this study’s results. Beyond the interests of political, sociological and legal researchers, the data presented herein will be of immediate interest to persons operating in the commercial, business, and economic spheres of the Russian Federation and internationally.
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The question as to whether political influence can benefit the commercial activity of companies, and the related questions surrounding political corruption that arise, are of perennial fascination for persons at every level of society and in every country. With this in mind, this article seeks to explore the relationship between political connections in commercial firms and investment efficiency. This relationship will be studied on an empirical basis, and will shed some light on the actual parameters, mechanisms, and effects of political influence in the business sphere in the Russian Federation.In this research, we consider only direct relations between business operators and the members of Russian ministries,councils, political parties, heads of the regions and cities. These relationships are categorized as being politically influential depending on the status of the politician, and whether they are active at a federal, regional or municipal level. Connections with such politicians are examined where there is evidence of direct links with company CEOs and chairmen of the boards of directors of companies.This research is carried out on the sample of 106 Russian non-financial companies for the period 2010â€"2015. 44 companies from the final sample were considered as politically connected on at least one level. Some firms have connections more than at one level (11 companies). Companies have politically connected chairman of the board (36 companies) more often than connected CEO (26 companies). Using regression analysis, we determined whether the political ties in Russia have a positive or a negative impact on the investment expenditures of companies. Interestingly, and perhaps contrary to popular belief, we identified a negative relationship between political ties and the efficiency of investment decisions for individual companies. The presence of politically-connected CEOs at federal and regional levels is seen to have a significant negative impact on investment efficiency. However, our results also indicate that the presence of politically-connected chairmen of the board which are active at the municipal level is correlated with efficient investment activity. This indicates that political influence at this level may be responsible for more prudent recommendations regarding commercial and investment decisions. Overall, it can be seen that in this sample of companies from the Russian Federation, the presence of state-tied representatives may be aligned with a tendency for companies to follow targets that are favorable for its government connections and not for the firm itself. Although political connections have a mixed impact on the company’s value, the relation with investment efficiency is primarily negative. Thus, we may reason that the government has a strong power over politically-related companies. Such influences are linked with a tendency for companies to deviate from their primary goal of value maximization.These results may indicate the influence of undue pressure from a government which strives to reach its own goals through the mechanism of commercial activity, or perhaps the opportunistic behavior of individuals in management positions who are motivated towards personal political gain at the expense of the company. Political connections have a mixed effect on the company’s performance and investment efficiency, and we postulate that firms establish relationships with government officials pursuing the goal to obtain more advantageous position. The links between political operators and business activity demonstrated in this research undoubtedly highlight some uncomfortable areas of discourse in the commercial sphere. On a granular level, further research into specific transactions and motivations may seem more a research area for journalists or law enforcement investigators, but this may be simply a popular prejudice. There is certainly ample opportunity for expanding the scope of this study’s results. Beyond the interests of political, sociological and legal researchers, the data presented herein will be of immediate interest to persons operating in the commercial, business, and economic spheres of the Russian Federation and internationally.
Does Smart & Powerful CEO Contribute to the Performance of Technology Companies?
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Innovative companies have become one of the major drivers of economy worldwide. According to various surveys, nearly 70% of the world's most innovative companies in 2019 are US firms. However, academic studies have tended to focus on the influence of the top management team and the board of director’s on the firm performance, or the relationship between innovative activity and the CEO`s preferences. However, this overlooks the idea that the CEOs themselves can exert a significant influence on the performance of innovative companies. As such, we aim in this research paper to show which CEO characteristics could lead to a higher firm value.This research uses the generalised least squares model on a sample of 12,565 firm-year observations during the period 2004-2015. We used data for three innovative industries: (i) pharmaceuticals, biotechnology & life sciences, (ii) software and services, and (iii) technology hardware and equipment industries. Additionally, we hand-collected data from the CVs stored in the CIQ database. Finally, we provide examples to prove the validity of our tests.Our results indicate that educational background, tenure, and duality play crucial roles in explaining firm value. Our findings indicate that a CEO characteristics play crucial roles in explaining technology firm value and performance. We demonstrated that the founding CEO as well as a CEO with better education contributes more to firm performance. We found that the characteristics of a CEO can mitigate conflicts between different types of investors and their influence on firm performance. More specifically, the CEO-founder was found to add greatly to the performance of Software and Pharmaceutical companies. Furthermore, CEO influence seems to mitigate the conflict of interest with independent active institutional investors in the Hardware industry.The novelty of this paper resides in its specific answers to questions that are overlooked or taken for granted in broader studies on the same subject area. We emphasise the differences in ownership structure in high-tech and non-tech industries, and not only provide answers as to whether the vaunted ‘power’ of a chief executive is significant in increasing company value, but whether a highly educated CEO contributes more to innovations in the hi-tech sphere. The specificity of the empirical investigations concluded herein lends itself well to reference, and as such this paper provides opportunities for academics, students, professionals, and journalists in the business field to cite its conclusions in any number of media.
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Innovative companies have become one of the major drivers of economy worldwide. According to various surveys, nearly 70% of the world's most innovative companies in 2019 are US firms. However, academic studies have tended to focus on the influence of the top management team and the board of director’s on the firm performance, or the relationship between innovative activity and the CEO`s preferences. However, this overlooks the idea that the CEOs themselves can exert a significant influence on the performance of innovative companies. As such, we aim in this research paper to show which CEO characteristics could lead to a higher firm value.This research uses the generalised least squares model on a sample of 12,565 firm-year observations during the period 2004-2015. We used data for three innovative industries: (i) pharmaceuticals, biotechnology & life sciences, (ii) software and services, and (iii) technology hardware and equipment industries. Additionally, we hand-collected data from the CVs stored in the CIQ database. Finally, we provide examples to prove the validity of our tests.Our results indicate that educational background, tenure, and duality play crucial roles in explaining firm value. Our findings indicate that a CEO characteristics play crucial roles in explaining technology firm value and performance. We demonstrated that the founding CEO as well as a CEO with better education contributes more to firm performance. We found that the characteristics of a CEO can mitigate conflicts between different types of investors and their influence on firm performance. More specifically, the CEO-founder was found to add greatly to the performance of Software and Pharmaceutical companies. Furthermore, CEO influence seems to mitigate the conflict of interest with independent active institutional investors in the Hardware industry.The novelty of this paper resides in its specific answers to questions that are overlooked or taken for granted in broader studies on the same subject area. We emphasise the differences in ownership structure in high-tech and non-tech industries, and not only provide answers as to whether the vaunted ‘power’ of a chief executive is significant in increasing company value, but whether a highly educated CEO contributes more to innovations in the hi-tech sphere. The specificity of the empirical investigations concluded herein lends itself well to reference, and as such this paper provides opportunities for academics, students, professionals, and journalists in the business field to cite its conclusions in any number of media.
Exogenously Unsecured Creditors and the Pricing and Use of Secured Debt
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An important advantage of secured relative to unsecured debt is that it provides better protection against dilution from other creditors of the firm. While covenants may provide unsecured lenders protection from dilution arising from the issuance of additional debt, they are less likely to be effective in insulating unsecured lenders from dilution arising from litigation and other non-debt related claims on a firm’s assets; claimants we refer to as exogenously unsecured creditors. In this paper we empirically examine the impact of litigation claims on the pricing of secured relative to unsecured debt and the relation between the likelihood of litigation claims and the use of secured debt. We find that litigation claims are associated with a significant increase in the spread between a firm’s secured and unsecured debt claims, particularly for unrated firms and those with below investment grade credit ratings. We also find that the propensity of material litigation claims is negatively related to firms’ reliance on secured debt.
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An important advantage of secured relative to unsecured debt is that it provides better protection against dilution from other creditors of the firm. While covenants may provide unsecured lenders protection from dilution arising from the issuance of additional debt, they are less likely to be effective in insulating unsecured lenders from dilution arising from litigation and other non-debt related claims on a firm’s assets; claimants we refer to as exogenously unsecured creditors. In this paper we empirically examine the impact of litigation claims on the pricing of secured relative to unsecured debt and the relation between the likelihood of litigation claims and the use of secured debt. We find that litigation claims are associated with a significant increase in the spread between a firm’s secured and unsecured debt claims, particularly for unrated firms and those with below investment grade credit ratings. We also find that the propensity of material litigation claims is negatively related to firms’ reliance on secured debt.
Forced to Be Active: Evidence From a Regulation Intervention
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Closet index funds are mutual funds sold as active funds but have a low degree of activeness. Investors pay high fees for a service that they are partially receiving. Financial supervisory authorities consider regulating these funds. In this paper, we investigate how the Scandinavian countries’ closet index funds respond to interference by the supervisory authorities. We compare exposed funds with funds not affected by the intervention and find that regulation done correctly can be in the interest of the investors. However, the best solution is not to force closet index funds to become more active but to promote fee reduction.
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Closet index funds are mutual funds sold as active funds but have a low degree of activeness. Investors pay high fees for a service that they are partially receiving. Financial supervisory authorities consider regulating these funds. In this paper, we investigate how the Scandinavian countries’ closet index funds respond to interference by the supervisory authorities. We compare exposed funds with funds not affected by the intervention and find that regulation done correctly can be in the interest of the investors. However, the best solution is not to force closet index funds to become more active but to promote fee reduction.
Generalised Lyapunov Functions and Functionally Generated Trading Strategies
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This paper investigates the dependence of functional portfolio generation, introduced by Fernholz (1999), on an extra finite variation process. The framework of Karatzas and Ruf (2017) is used to formulate conditions on trading strategies to be strong arbitrage relative to the market over sufficiently large time horizons. A mollification argument and Komlo's theorem yield a general class of potential arbitrage strategies. These theoretical results are complemented by several empirical examples using data from the S&P 500 stocks.
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This paper investigates the dependence of functional portfolio generation, introduced by Fernholz (1999), on an extra finite variation process. The framework of Karatzas and Ruf (2017) is used to formulate conditions on trading strategies to be strong arbitrage relative to the market over sufficiently large time horizons. A mollification argument and Komlo's theorem yield a general class of potential arbitrage strategies. These theoretical results are complemented by several empirical examples using data from the S&P 500 stocks.
High Dimensional Minimum Variance Portfolio Estimation under Statistical Factor Models
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We propose a high dimensional minimum variance portfolio estimator under statistical factor models, and show that our estimated portfolio enjoys sharp risk consistency. Our approach relies on properly integrating l1 constraint on portfolio weights with an appropriate covariance matrix estimator. In terms of covariance matrix estimation, we extend the theoretical results of POET(Fan et al. (2013)) to a setting that is coherent with principal component analysis. Simulation and extensive empirical studies on S&P 100 Index constituent stocks demonstrate favorable performance of our MVP estimator compared with benchmark portfolios.
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We propose a high dimensional minimum variance portfolio estimator under statistical factor models, and show that our estimated portfolio enjoys sharp risk consistency. Our approach relies on properly integrating l1 constraint on portfolio weights with an appropriate covariance matrix estimator. In terms of covariance matrix estimation, we extend the theoretical results of POET(Fan et al. (2013)) to a setting that is coherent with principal component analysis. Simulation and extensive empirical studies on S&P 100 Index constituent stocks demonstrate favorable performance of our MVP estimator compared with benchmark portfolios.
Information and Accounting Support for Accounts Receivable Management
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The article explores the subject of information and accounting solutions for accounts receivable management that include appropriate accounting solutions and analytical techniques. The study focuses on the statutory framework for accounting for accounts receivable under the Russian Accounting Standards (RAP), International Financial Reporting Standards (IFRS), and the generally accepted accounting principles (GAAP). The analytical techniques are described in the context of the authors' view on the essence of accounts receivable management that implies analysis, the establishment of a credit policy and of a discount policy. The article places emphasis on the use of available information technology for accounts payable management, such as blockchain-based smart contracts.
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The article explores the subject of information and accounting solutions for accounts receivable management that include appropriate accounting solutions and analytical techniques. The study focuses on the statutory framework for accounting for accounts receivable under the Russian Accounting Standards (RAP), International Financial Reporting Standards (IFRS), and the generally accepted accounting principles (GAAP). The analytical techniques are described in the context of the authors' view on the essence of accounts receivable management that implies analysis, the establishment of a credit policy and of a discount policy. The article places emphasis on the use of available information technology for accounts payable management, such as blockchain-based smart contracts.
Infrastructure Investment Under Uncertainty: Reconciling Private and Public Incentives
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Private companies (PCs) in restructured infrastructure industries, e.g., energy and transportation, determine facility investment timing and sizing. Such decisions maximize the PC's expected profit (rather than social welfare) under uncertainty. By anticipating the PC's incentives, a welfare-maximizing transmission system operator (TSO) shapes the network to align public and private objectives. Via an option-based approach, we first quantify welfare losses from the PC's and TSO's conflicting objectives. We show that by anticipating the optimal decisions of the profit-maximizing PC, the TSO is able to reduce welfare loss. In this setting, however, the TSO is still not able to enforce the social optimum under substantial market volatility. Next, we exploit the dependence of the PC's capacity on the TSO's infrastructure design to devise a proactive transmission-investment strategy. Hence, we mitigate welfare losses arising from misaligned incentives even in relatively uncertain markets.
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Private companies (PCs) in restructured infrastructure industries, e.g., energy and transportation, determine facility investment timing and sizing. Such decisions maximize the PC's expected profit (rather than social welfare) under uncertainty. By anticipating the PC's incentives, a welfare-maximizing transmission system operator (TSO) shapes the network to align public and private objectives. Via an option-based approach, we first quantify welfare losses from the PC's and TSO's conflicting objectives. We show that by anticipating the optimal decisions of the profit-maximizing PC, the TSO is able to reduce welfare loss. In this setting, however, the TSO is still not able to enforce the social optimum under substantial market volatility. Next, we exploit the dependence of the PC's capacity on the TSO's infrastructure design to devise a proactive transmission-investment strategy. Hence, we mitigate welfare losses arising from misaligned incentives even in relatively uncertain markets.
Light a Lamp and Look at the Stock Market
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This paper investigates the impact of the light a lamp event that happened in India during the Great Lockdown due to COVID-19. The event happened across the country and millions of people participated in it. We link the event with the stock market via investor sentiment and misattribution bias. We find a 9% hike in the market return in the post-event day. The effect is heterogeneous in terms of beta, downside risk, volatility, financial distress. We also find an increase (decrease) in long-term bond yields (price), together suggest that market participants demand risky assets in the post-event day.
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This paper investigates the impact of the light a lamp event that happened in India during the Great Lockdown due to COVID-19. The event happened across the country and millions of people participated in it. We link the event with the stock market via investor sentiment and misattribution bias. We find a 9% hike in the market return in the post-event day. The effect is heterogeneous in terms of beta, downside risk, volatility, financial distress. We also find an increase (decrease) in long-term bond yields (price), together suggest that market participants demand risky assets in the post-event day.
Monetary Policy and Intangible Investment
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We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less.
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We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less.
Non-Value-Added Tax to Improve Market Fairness
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Promotion of both market fairness and efficiency has long been a goal of securities market regulators worldwide. While previous studies mostly focused on market efficiency, our paper proposes tools to improve market fairness. We define market fairness as the ability of a market structure and its regulatory framework to guarantee unimpeded competition while curbing excessive speculation and market manipulation. Such behaviors undermine the quality of financial markets in the sense that they cause volatility and lead to instability. To encourage value generation and improve market quality, we advance a graduated Non-Value-Added Tax. The proposed tax is implemented in a simulation-based model whereby a profitable transaction is taxed at the higher rate if it does not enhance efficiency measured by deviation from fundamentals. When an agent locks in profit not supported by fundamentals but driven by trend-following strategies, the generated profit is taxed at graduate rates under the Non-Value-Added Tax regime. Unlike existing Financial Transaction Taxes, the Non-Value-Added Tax is levied on profit and not on price. More concretely, our findings show that this tool encourages profitable trades that add-value to the market and discourages valueless profit making. It significantly curtails volatility, and prevents the occurrence of extreme market events like bubbles and crashes.
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Promotion of both market fairness and efficiency has long been a goal of securities market regulators worldwide. While previous studies mostly focused on market efficiency, our paper proposes tools to improve market fairness. We define market fairness as the ability of a market structure and its regulatory framework to guarantee unimpeded competition while curbing excessive speculation and market manipulation. Such behaviors undermine the quality of financial markets in the sense that they cause volatility and lead to instability. To encourage value generation and improve market quality, we advance a graduated Non-Value-Added Tax. The proposed tax is implemented in a simulation-based model whereby a profitable transaction is taxed at the higher rate if it does not enhance efficiency measured by deviation from fundamentals. When an agent locks in profit not supported by fundamentals but driven by trend-following strategies, the generated profit is taxed at graduate rates under the Non-Value-Added Tax regime. Unlike existing Financial Transaction Taxes, the Non-Value-Added Tax is levied on profit and not on price. More concretely, our findings show that this tool encourages profitable trades that add-value to the market and discourages valueless profit making. It significantly curtails volatility, and prevents the occurrence of extreme market events like bubbles and crashes.
Positioning Risk
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Risk profiles of individual assets vary with speculative positioning. hedge fund positions in currency futures strongly predict currency betas: currencies in which speculators hold long positions comove more positively with equity markets. The link emerges after the global financial crisis, when speculators and their intermediary counterparties commonly unwind their positions with equity market shocks. My findings suggest that the scaling of futures positions in response to equity market moves translates directly into an endogenous equity market risk exposure of the currency. Compared to previously studied patterns of endogenous risks and crowded trades, these risk externalities are harder to diversify across asset classes.
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Risk profiles of individual assets vary with speculative positioning. hedge fund positions in currency futures strongly predict currency betas: currencies in which speculators hold long positions comove more positively with equity markets. The link emerges after the global financial crisis, when speculators and their intermediary counterparties commonly unwind their positions with equity market shocks. My findings suggest that the scaling of futures positions in response to equity market moves translates directly into an endogenous equity market risk exposure of the currency. Compared to previously studied patterns of endogenous risks and crowded trades, these risk externalities are harder to diversify across asset classes.
Premium Evaluation in Mergers and Acquisitions of Electricity Companies
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The purpose of this research is to build a model for estimating the relative premium in mergers and acquisitions involving electric power companies. This evaluation is based on four groups of factors: the company’s operating and financial results, the country in which the company operates, the industry the company belongs to, and the debt market conjuncture.This paper is based on a comparative business valuation method. The empirical base of this research includes data on 6504 deals that have occurred throughout the world from 1997 to 2018. This data is sourced from the Zephyr database, which includes data on both public and non-public companies for which the amount paid in a deal is known, as well as the value of total assets.The results of this research demonstrates that this categorisation of industries, (achieved via a mathematical algorithm) corresponds almost identically to the existing industry structure of the electric power industry. The coefficient of determination of the final econometric model is more than 20 percent, which indicates a high-quality assessment. This is because the relative premium is predicted (and not the amount paid in the deal), which is in close correlation with the value of the company’s assets.The scientific novelty of this paper consists in our clarifying of the conceptual apparatus (the relative premium term introduced in a deal), the selection and grouping of factors which affect the size of the relative premium, and the identification and quantifying of the influence of variables included in each group of factors. This article proposes the author’s approach to the categorisation of countries and industries based on the equality of premium coefficients in the regression, as well as categorisation by groups of countries and industries with equal premiums.This composition outlines a methodology that may be used to predict the value of a business, as well as determining the value paid in a deal, in cases where such information is not available publicly. This will be of obvious interest to anyone involved in business or research in several fields. Further, as concerns further development of these results, various interesting features are highlighted which are beyond the scope of this research to investigate further. For example, the relative premium seems to be determined by variables related to the quality of the institutional environment. The correlation of political stability and premium value arises, providing fresh ground for future study.
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The purpose of this research is to build a model for estimating the relative premium in mergers and acquisitions involving electric power companies. This evaluation is based on four groups of factors: the company’s operating and financial results, the country in which the company operates, the industry the company belongs to, and the debt market conjuncture.This paper is based on a comparative business valuation method. The empirical base of this research includes data on 6504 deals that have occurred throughout the world from 1997 to 2018. This data is sourced from the Zephyr database, which includes data on both public and non-public companies for which the amount paid in a deal is known, as well as the value of total assets.The results of this research demonstrates that this categorisation of industries, (achieved via a mathematical algorithm) corresponds almost identically to the existing industry structure of the electric power industry. The coefficient of determination of the final econometric model is more than 20 percent, which indicates a high-quality assessment. This is because the relative premium is predicted (and not the amount paid in the deal), which is in close correlation with the value of the company’s assets.The scientific novelty of this paper consists in our clarifying of the conceptual apparatus (the relative premium term introduced in a deal), the selection and grouping of factors which affect the size of the relative premium, and the identification and quantifying of the influence of variables included in each group of factors. This article proposes the author’s approach to the categorisation of countries and industries based on the equality of premium coefficients in the regression, as well as categorisation by groups of countries and industries with equal premiums.This composition outlines a methodology that may be used to predict the value of a business, as well as determining the value paid in a deal, in cases where such information is not available publicly. This will be of obvious interest to anyone involved in business or research in several fields. Further, as concerns further development of these results, various interesting features are highlighted which are beyond the scope of this research to investigate further. For example, the relative premium seems to be determined by variables related to the quality of the institutional environment. The correlation of political stability and premium value arises, providing fresh ground for future study.
Scenario Planning Brexit Referendum â€" Do Not Put Eggs in One Basket
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Brexit referendum will impact sooner or later, since the European economies are massively underperforming and UK is chained to them.This referendum is “advisoryâ€, not “bindingâ€.In case of Brexit scenario the strategy should be UK to diversify its international links.World is an Oyster, UK may strengthen the relationships with Russia, USA, BRICS andalliances with colonial ruled countries.European Union and frameworks couldn’t save financial sector disaster in the past. A newapproach must be adopted by liaising with other countries globally.
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Brexit referendum will impact sooner or later, since the European economies are massively underperforming and UK is chained to them.This referendum is “advisoryâ€, not “bindingâ€.In case of Brexit scenario the strategy should be UK to diversify its international links.World is an Oyster, UK may strengthen the relationships with Russia, USA, BRICS andalliances with colonial ruled countries.European Union and frameworks couldn’t save financial sector disaster in the past. A newapproach must be adopted by liaising with other countries globally.
Syndicated Loans and Economic Growth: Empirical Evidence from G7 Countries
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This paper examines the impact of syndicated loans on economic growth in G7 countries (Canada, France, Italy, Germany, Japan, United Kingdom, and the USA) over the period between 2000 to 2017. Utilizing a panel data analysis along with several pre-tests to assure the validity of data, these tests involve multicollinearity test, stationary test, Hausman test, heteroscedasticity test, and cross-sectional dependence test. The main findings indicate that the growth of syndicated loans has positively affected economic growth in the G7 group. Moreover, the results came in line with previous literature regarding the effect of government expenditures, law enforcement, human capital, and financial stability on economic growth over the period in our sample. However, it is found that liberalization of trade has an adverse effect on economic growth.
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This paper examines the impact of syndicated loans on economic growth in G7 countries (Canada, France, Italy, Germany, Japan, United Kingdom, and the USA) over the period between 2000 to 2017. Utilizing a panel data analysis along with several pre-tests to assure the validity of data, these tests involve multicollinearity test, stationary test, Hausman test, heteroscedasticity test, and cross-sectional dependence test. The main findings indicate that the growth of syndicated loans has positively affected economic growth in the G7 group. Moreover, the results came in line with previous literature regarding the effect of government expenditures, law enforcement, human capital, and financial stability on economic growth over the period in our sample. However, it is found that liberalization of trade has an adverse effect on economic growth.
The Behavior of Sovereign Credit Default Swaps (CDS) Spread: Evidence from Turkey with the Effect of COVID-19 Pandemic
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This study examines how sovereign CDS spreads of Turkey behave in COVID-19 pandemic times by considering that CDS spreads reflect the riskiness, vulnerability, financial stability, and macroeconomic stability of countries and CDS spreads of most of the emerging countries have increased with the emergence of COVID-19 pandemic. Therefore, the study focuses on the year 2020 which includes before COVID-19 and COVID-19 pandemic times periods. In this context, daily data between 12.06.2019 and 06.16.2020, 6 independent variables, and 6 COVID-19 situations are analyzed by employing Multivariate Adaptive Regression Splines (MARS) method. The findings reveal that (i) influential factors on Turkey’s CDS spreads are BIST100 index, VIX index, MSCI Turkey index, and USD/TL foreign exchange rates for the period which is before COVID-19 pandemic times; (ii) MSCI emerging market index, number of new deaths from COVID-19, USD/TL foreign exchange rates, weighted average cost of funds, number of new cases from Covid-19, and VIX index have effect on Turkey’s CDS spreads in COVID-19 pandemic times, respectively; (iii) on the other hand, number of cumulative cases, number of cumulative deaths, and measures do not have effect on Turkey’s CDS spreads in any period. Taking precautions to decrease negative effects on Turkey’s CDS spreads by considering the importance of deaths number from COVID-19 pandemic is very important. Hence, Turkey could stimulate foreign portfolio investment inflows with decreasing CDS spreads.
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This study examines how sovereign CDS spreads of Turkey behave in COVID-19 pandemic times by considering that CDS spreads reflect the riskiness, vulnerability, financial stability, and macroeconomic stability of countries and CDS spreads of most of the emerging countries have increased with the emergence of COVID-19 pandemic. Therefore, the study focuses on the year 2020 which includes before COVID-19 and COVID-19 pandemic times periods. In this context, daily data between 12.06.2019 and 06.16.2020, 6 independent variables, and 6 COVID-19 situations are analyzed by employing Multivariate Adaptive Regression Splines (MARS) method. The findings reveal that (i) influential factors on Turkey’s CDS spreads are BIST100 index, VIX index, MSCI Turkey index, and USD/TL foreign exchange rates for the period which is before COVID-19 pandemic times; (ii) MSCI emerging market index, number of new deaths from COVID-19, USD/TL foreign exchange rates, weighted average cost of funds, number of new cases from Covid-19, and VIX index have effect on Turkey’s CDS spreads in COVID-19 pandemic times, respectively; (iii) on the other hand, number of cumulative cases, number of cumulative deaths, and measures do not have effect on Turkey’s CDS spreads in any period. Taking precautions to decrease negative effects on Turkey’s CDS spreads by considering the importance of deaths number from COVID-19 pandemic is very important. Hence, Turkey could stimulate foreign portfolio investment inflows with decreasing CDS spreads.
The Effect of an Acquirer’s Life Cycle Stage on the Performance of M&As: Evidence from Mega and Non-Mega Deals in the US
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A substantial body of academic literature continues to investigate whether M&A deals create or destroy shareholder value and what are the main determinants of M&A performance, but the results are still inconclusive. In this paper, we investigate the impact of corporate life cycle on M&A performance from the perspective of acquiring firms.We shed additional light on the performance of M&A deals from the perspective of bidders’ life cycle stages and the deal size . We single out mega deals, where activity remains upbeat, and compare their effects on M&A performance with the effect of non-mega transactions. In contrast to previous studies in the area, we identify four life cycle stages (introduction, growth, maturity and decline), whereas the existing literature mostly focuses on three life cycle stages.Our sample includes 2413 US domestic M&A deals from 2003 to 2017, and consists of 386 mega deals and 2027 non-mega transactions. The data for analysis were obtained from Capital IQ, Bloomberg and Thomson Reuters Eikon databases.Based on the event study method and regression analysis, we find that stock market reaction is positive for M&A deals in the US and this reaction is more favorable for non-mega acquisitions than for mega M&A deals. We show that non-mega deals outperform mega transactions for acquirers at the introduction and growth stages of the business life cycle. Our results also indicate that benefits for shareholders from acquiring firms decrease on average with the life-cycle of an organisation, but the returns for shareholders are positive in both cases. By contrast, in mega deals, shareholders receive negative returns when the acquiring firm is at introductory life cycle stage.The scientific novelty of this paper is reflected in our contribution and expansion of the scope of research in this field. There is a relative scarcity of analysis examining M&A deals from the perspective of life cycle stage, and our addition of a fourth category of analysis in this area, along with a focus on the value of the deal, expands the range of methodology for future research. This research is open to further expansion in different markets and our methodology is readily adaptable for the addition of further analytical variables. Importantly, with the validation of our research hypotheses and the confirmation of significant results, we provide a useful new tool for managers and professionals engaged in M&A deals to actively gauge and forecast practical implications of their deals.
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A substantial body of academic literature continues to investigate whether M&A deals create or destroy shareholder value and what are the main determinants of M&A performance, but the results are still inconclusive. In this paper, we investigate the impact of corporate life cycle on M&A performance from the perspective of acquiring firms.We shed additional light on the performance of M&A deals from the perspective of bidders’ life cycle stages and the deal size . We single out mega deals, where activity remains upbeat, and compare their effects on M&A performance with the effect of non-mega transactions. In contrast to previous studies in the area, we identify four life cycle stages (introduction, growth, maturity and decline), whereas the existing literature mostly focuses on three life cycle stages.Our sample includes 2413 US domestic M&A deals from 2003 to 2017, and consists of 386 mega deals and 2027 non-mega transactions. The data for analysis were obtained from Capital IQ, Bloomberg and Thomson Reuters Eikon databases.Based on the event study method and regression analysis, we find that stock market reaction is positive for M&A deals in the US and this reaction is more favorable for non-mega acquisitions than for mega M&A deals. We show that non-mega deals outperform mega transactions for acquirers at the introduction and growth stages of the business life cycle. Our results also indicate that benefits for shareholders from acquiring firms decrease on average with the life-cycle of an organisation, but the returns for shareholders are positive in both cases. By contrast, in mega deals, shareholders receive negative returns when the acquiring firm is at introductory life cycle stage.The scientific novelty of this paper is reflected in our contribution and expansion of the scope of research in this field. There is a relative scarcity of analysis examining M&A deals from the perspective of life cycle stage, and our addition of a fourth category of analysis in this area, along with a focus on the value of the deal, expands the range of methodology for future research. This research is open to further expansion in different markets and our methodology is readily adaptable for the addition of further analytical variables. Importantly, with the validation of our research hypotheses and the confirmation of significant results, we provide a useful new tool for managers and professionals engaged in M&A deals to actively gauge and forecast practical implications of their deals.
The Impact of Basel III Adoption by G20 Members on Their Credit Ratings
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This study aims to analyze the effect of Basel III standards adoption made by 27 countries included in Basel III adoption reports (including G20 group members) on their credit rating. In addition, the study tests the impact of some macroeconomic variables on sovereign credit rating. The data are obtained from BCBS semi-annual adoption reports, along with other macroeconomic indicators published by IMF and World Bank; however, the basic indicator for credit rating is Standard &Poor’s credit rating. The period under the study is between 2011 and 2016. The results of the analysis show that there is a strong statistical significant positive effect of Basel III standards on 27 countries’ credit rating.
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This study aims to analyze the effect of Basel III standards adoption made by 27 countries included in Basel III adoption reports (including G20 group members) on their credit rating. In addition, the study tests the impact of some macroeconomic variables on sovereign credit rating. The data are obtained from BCBS semi-annual adoption reports, along with other macroeconomic indicators published by IMF and World Bank; however, the basic indicator for credit rating is Standard &Poor’s credit rating. The period under the study is between 2011 and 2016. The results of the analysis show that there is a strong statistical significant positive effect of Basel III standards on 27 countries’ credit rating.
The Impact of Political Variables on Stock Returns and Investor Sentiment
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In this paper, we employ econometric techniques to examine the impact of political variables on investor sentiment, stock market returns, and the covariance between investor sentiment and equity returns. Similar to prior studies our results indicate that stock market returns are higher during Democratic presidencies. Contrast we also find that both investor sentiment and the covariance between investor sentiment and stock returns are both higher when Democrats control the White House. Our results seem to suggest that political variables not only influence stock returns, but they also influence the way investors feel about the market.
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In this paper, we employ econometric techniques to examine the impact of political variables on investor sentiment, stock market returns, and the covariance between investor sentiment and equity returns. Similar to prior studies our results indicate that stock market returns are higher during Democratic presidencies. Contrast we also find that both investor sentiment and the covariance between investor sentiment and stock returns are both higher when Democrats control the White House. Our results seem to suggest that political variables not only influence stock returns, but they also influence the way investors feel about the market.
The Impact of Proportional Transaction Costs on Systematically Generated Portfolios
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The effect of proportional transaction costs on systematically generated portfolios is studied empirically. The performance of several portfolios (the index tracking portfolio, the equally-weighted portfolio, the entropy-weighted portfolio, and the diversity-weighted portfolio) in the presence of dividends and transaction costs is examined under different configurations involving the trading frequency, constituent list size, and renewing frequency. All portfolios outperform the index tracking portfolio in the absence of transaction costs. This outperformance is statistically significant for daily and weekly traded portfolios but not for monthly traded portfolios. However, when proportional transaction costs of 0.5% are imposed, most portfolios no longer outperform the market. Some exceptional cases include the entropy-weighted and the diversity-weighted portfolios under specific configurations. The only statistical significant difference appears for the relative underperformance of the equally-weighted portfolio.
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The effect of proportional transaction costs on systematically generated portfolios is studied empirically. The performance of several portfolios (the index tracking portfolio, the equally-weighted portfolio, the entropy-weighted portfolio, and the diversity-weighted portfolio) in the presence of dividends and transaction costs is examined under different configurations involving the trading frequency, constituent list size, and renewing frequency. All portfolios outperform the index tracking portfolio in the absence of transaction costs. This outperformance is statistically significant for daily and weekly traded portfolios but not for monthly traded portfolios. However, when proportional transaction costs of 0.5% are imposed, most portfolios no longer outperform the market. Some exceptional cases include the entropy-weighted and the diversity-weighted portfolios under specific configurations. The only statistical significant difference appears for the relative underperformance of the equally-weighted portfolio.
The Impact of the Digital Transformation of Business on Corporate Governance. An Overview of Recent Studies
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This article presents a survey of recent studies on the impact of digitization, and particularly blockchain technology, on corporate governance and the principal-agent conflict in companies. The principal-agent conflict has been a centerpiece of the corporate governance research for more than 40 years. However, recent technological developments, and blockchain in particular, has created new avenues for exploration.We survey the implications of blockchain for the principal-agent conflict in three parts: 1) the organisational environment, and the creation of the conflict; 2) common observable instances of conflict; 3) actions necessary to maximise the value of blockchain implementation. We limit the studied conflict to the relationship between shareholders and management. We also limit the blockchain use cases to those currently in testing. The applications for blockchain in securities trading and for corporate functions automation via ‘smart’ contracts are both analysed. We also evaluate the implications for investor activism.Our results indicate that passive investor behavior is at the core of the environment that creates conflict. One of the key drivers of low activity is a non-transparent voting process resulting in low participation rates. Studies indicate that blockchain can solve this issue, thus mitigating the conflict, and is an attractive proposition for board members. The most frequent instances of conflict are related to the composition of boards of directors and compensation schemes observed at shareholder voting. Using blockchain for settlement would eliminate ambiguity in shareholder registers and prevent such strategies as “empty votingâ€. Smart contracts promise automation of governance functions like audit, which also weakens conflict. Even skeptics agree that voting is a promising application for blockchain. However, there is evidence that blockchain poses its own problems, and that smart contracts are associated with practical risks. Some critics argue that blockchain is less efficient than conventional corporate procedures.Blockchain is among the top digital technologies that business leaders have to monitor closely. As such, this overview of the most up-to-date thinking on the subject is relevant for anyone interested in the future of corporate governance and the digitization of business processes. This evaluation serves to highlight the current status of this innovative resource, outlining for both professionals and newcomers what exactly blockchain’s potential uses and implications are, while also outlining where a lack of quantitative research creates opportunities for further contributions to the research field. This study will also be instructive for those investigating blockchain implementation and the optimal characteristics of the solution.
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This article presents a survey of recent studies on the impact of digitization, and particularly blockchain technology, on corporate governance and the principal-agent conflict in companies. The principal-agent conflict has been a centerpiece of the corporate governance research for more than 40 years. However, recent technological developments, and blockchain in particular, has created new avenues for exploration.We survey the implications of blockchain for the principal-agent conflict in three parts: 1) the organisational environment, and the creation of the conflict; 2) common observable instances of conflict; 3) actions necessary to maximise the value of blockchain implementation. We limit the studied conflict to the relationship between shareholders and management. We also limit the blockchain use cases to those currently in testing. The applications for blockchain in securities trading and for corporate functions automation via ‘smart’ contracts are both analysed. We also evaluate the implications for investor activism.Our results indicate that passive investor behavior is at the core of the environment that creates conflict. One of the key drivers of low activity is a non-transparent voting process resulting in low participation rates. Studies indicate that blockchain can solve this issue, thus mitigating the conflict, and is an attractive proposition for board members. The most frequent instances of conflict are related to the composition of boards of directors and compensation schemes observed at shareholder voting. Using blockchain for settlement would eliminate ambiguity in shareholder registers and prevent such strategies as “empty votingâ€. Smart contracts promise automation of governance functions like audit, which also weakens conflict. Even skeptics agree that voting is a promising application for blockchain. However, there is evidence that blockchain poses its own problems, and that smart contracts are associated with practical risks. Some critics argue that blockchain is less efficient than conventional corporate procedures.Blockchain is among the top digital technologies that business leaders have to monitor closely. As such, this overview of the most up-to-date thinking on the subject is relevant for anyone interested in the future of corporate governance and the digitization of business processes. This evaluation serves to highlight the current status of this innovative resource, outlining for both professionals and newcomers what exactly blockchain’s potential uses and implications are, while also outlining where a lack of quantitative research creates opportunities for further contributions to the research field. This study will also be instructive for those investigating blockchain implementation and the optimal characteristics of the solution.
The Opacity of ‘Transparent’ Bitcoin Data
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Transparency of data recorded on distributed ledgers has been hailed as a key benefit of blockchains, such as Bitcoin. Our examination of 389 million Bitcoin wallet addresses involving 183 million unique users shows that the way the “Notebreaker†wallet mechanism handles transactions introduces remarkable opacity into otherwise “transparent†data. Utilizing a novel algorithm that achieves 90% accuracy at separating “economic value†from “security value†in Notebreaker blockchains, we show that transaction volumes are inflated 7-8 times and transaction fees are inflated 7-15 times what is commonly believed when compared to economic transfer undertaken. A common heuristic for unique adopter counts â€" address counts â€" is also overstated. Our study identifies a key weakness in public Bitcoin data and the danger of extrapolating adoption levels of blockchains utilizing Notebreaker.
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Transparency of data recorded on distributed ledgers has been hailed as a key benefit of blockchains, such as Bitcoin. Our examination of 389 million Bitcoin wallet addresses involving 183 million unique users shows that the way the “Notebreaker†wallet mechanism handles transactions introduces remarkable opacity into otherwise “transparent†data. Utilizing a novel algorithm that achieves 90% accuracy at separating “economic value†from “security value†in Notebreaker blockchains, we show that transaction volumes are inflated 7-8 times and transaction fees are inflated 7-15 times what is commonly believed when compared to economic transfer undertaken. A common heuristic for unique adopter counts â€" address counts â€" is also overstated. Our study identifies a key weakness in public Bitcoin data and the danger of extrapolating adoption levels of blockchains utilizing Notebreaker.
The Power of Choice: Discrete Duration in Delayed Trade Publication
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Modelling blocks’ delay time period and trade information in Cox's proportional hazard framework, this paper measures the value of the delay regime for blocks facilitators. Using the observed duration of London Stock Exchange's facilitated block transactions, we find that dealers exercise their discretion to delay in accordance with their need of inventory management and profit realisation. During this process, the dealers maintain market quality by ensuring price is continued to be discovered through their unwinding activities. The maximum permitted time is too long, but the power to exercise prudent discretion provides particular advantages.
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Modelling blocks’ delay time period and trade information in Cox's proportional hazard framework, this paper measures the value of the delay regime for blocks facilitators. Using the observed duration of London Stock Exchange's facilitated block transactions, we find that dealers exercise their discretion to delay in accordance with their need of inventory management and profit realisation. During this process, the dealers maintain market quality by ensuring price is continued to be discovered through their unwinding activities. The maximum permitted time is too long, but the power to exercise prudent discretion provides particular advantages.
The Role of Academics and Empirical Studies in the Debate on the Economic Role of Futures Trading
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A number of empirical studies, mainly from academic researchers, have been crucial in the debate on the economic role of futures trading. This article briefly reviews these influential studies with a focus on agricultural futures contracts, financial futures contracts. and the transparency of data.
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A number of empirical studies, mainly from academic researchers, have been crucial in the debate on the economic role of futures trading. This article briefly reviews these influential studies with a focus on agricultural futures contracts, financial futures contracts. and the transparency of data.
The Role of Intermediaries in Derivatives Markets: Evidence from VIX Options
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Consistent with models in which intermediaries absorb net demand pressure from end-users and respond by changing prices, net option demand is positively related to option prices in the market for VIX puts and VIX calls. These findings are consistent with existing results for S&P 500 index (SPX) options (Bollen and Whaley (2004)). They are very robust to variations in the empirical implementation. A joint analysis of net demand pressure in VIX and SPX option markets suggests that the VIX option markets are highly integrated with the SPX put market, but much less so with the market for SPX calls. The impact of net demand shocks on future prices is limited, but shocks to prices significantly affect future net demand.
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Consistent with models in which intermediaries absorb net demand pressure from end-users and respond by changing prices, net option demand is positively related to option prices in the market for VIX puts and VIX calls. These findings are consistent with existing results for S&P 500 index (SPX) options (Bollen and Whaley (2004)). They are very robust to variations in the empirical implementation. A joint analysis of net demand pressure in VIX and SPX option markets suggests that the VIX option markets are highly integrated with the SPX put market, but much less so with the market for SPX calls. The impact of net demand shocks on future prices is limited, but shocks to prices significantly affect future net demand.
The Spillover Effects of Peer Firm Bankruptcy and Accounting Conservatism
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This paper investigates if and how a peer’s bankruptcy affects financial reporting by other firms within the industry. Prior research documents that the bankruptcy filing of a peer firm has a negative capital market effects on other firms within the industry (lower stock market value and higher cost of debt). We argue that firms within an industry experiencing peer bankruptcies may modify their financial reporting to mitigate such negative capital market effects. Using a large sample from 1980 to 2018, we find that firms exhibit more conservatism in financial reporting following a peer firm bankruptcy filing. The result is robust to the exclusion of distressed industries, the 2000 dot-com crash period, and the 2008 financial crisis period. The results are insignificant for placebo bankruptcies one and two years before the actual bankruptcies. Further analysis shows that the spillover effects are more pronounced for firms in low concentrated industries, for firms that undertake new equity or debt financing, and for firms with a higher percentage of independent directors.
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This paper investigates if and how a peer’s bankruptcy affects financial reporting by other firms within the industry. Prior research documents that the bankruptcy filing of a peer firm has a negative capital market effects on other firms within the industry (lower stock market value and higher cost of debt). We argue that firms within an industry experiencing peer bankruptcies may modify their financial reporting to mitigate such negative capital market effects. Using a large sample from 1980 to 2018, we find that firms exhibit more conservatism in financial reporting following a peer firm bankruptcy filing. The result is robust to the exclusion of distressed industries, the 2000 dot-com crash period, and the 2008 financial crisis period. The results are insignificant for placebo bankruptcies one and two years before the actual bankruptcies. Further analysis shows that the spillover effects are more pronounced for firms in low concentrated industries, for firms that undertake new equity or debt financing, and for firms with a higher percentage of independent directors.
The Way People Lie in Markets
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In a finitely repeated game with asymmetric information, we experimentally study how reputation and standard market mechanisms change the nature of fraudulent announcements by experts. While some lies can be detected ex post by investors, other lies remain deniable. Lying behavior suggests that individuals care more about the consequences of being caught, rather than the act of lying per se. Allowing for reputation reduces the frequency of lies that can be detected but has no impact on deniable lies: individuals simply hide their lies better and fraud persists. Competition without reputation increases risky lies and never protects investment.
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In a finitely repeated game with asymmetric information, we experimentally study how reputation and standard market mechanisms change the nature of fraudulent announcements by experts. While some lies can be detected ex post by investors, other lies remain deniable. Lying behavior suggests that individuals care more about the consequences of being caught, rather than the act of lying per se. Allowing for reputation reduces the frequency of lies that can be detected but has no impact on deniable lies: individuals simply hide their lies better and fraud persists. Competition without reputation increases risky lies and never protects investment.
Too Big to Diversify: A Stress Test on Collateralized Loan Obligations
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Using detailed loan holding data of Collateralized Loan Obligations (CLOs), we document systemic risk due to leverage constraints on CLOs. We find that, under a stress scenario where only 10 largest borrowers default, nearly half of CLOs would face binding leverage constraint. Portfolio diversification at the CLO level leads to the similarity in loan holdings among CLOs, such that leverage constraint tends to bind simultaneously for multiple CLOs. Constrained CLOs fire sell loans downgraded to CCC or below, and thus loans widely held by constrained CLOs experience temporarily lower prices than loans that are not. CLOs' overlapping loan holdings transform idiosyncratic credit risk of large borrowers to systemic risk in the leveraged loan market.
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Using detailed loan holding data of Collateralized Loan Obligations (CLOs), we document systemic risk due to leverage constraints on CLOs. We find that, under a stress scenario where only 10 largest borrowers default, nearly half of CLOs would face binding leverage constraint. Portfolio diversification at the CLO level leads to the similarity in loan holdings among CLOs, such that leverage constraint tends to bind simultaneously for multiple CLOs. Constrained CLOs fire sell loans downgraded to CCC or below, and thus loans widely held by constrained CLOs experience temporarily lower prices than loans that are not. CLOs' overlapping loan holdings transform idiosyncratic credit risk of large borrowers to systemic risk in the leveraged loan market.
Unskilled Fund Managers: Replicating Active Fund Performance With Few ETFs
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This paper use Exchange Traded Funds (ETFs) instead of risk factors as benchmarks to examine active mutual fund performance distribution. While transaction costs are included in the ETF returns, that is not true regarding risk factors, making it more challenging to characterize extraordinary performances via alphas. Assessments are based on the proportion of skilled funds, defined as positive-alpha funds. Such a proportion is calculated taking into account potential false discoveries and employing the method devised by Barras et al. (2010). After evaluating several ETF combinations, we conclude that sets of 3 to 5 ETFs replicate most levels of active fund performance. Finally, we propose specific ETF selection algorithms, whereby we estimate that 95% of active management funds fail to generate value for their investors. Alphas calculated with ETFs are higher than those using risk factors, but the difference is similar to the transaction costs required for investing in risk factor portfolios (Frazzini et al., 2012).
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This paper use Exchange Traded Funds (ETFs) instead of risk factors as benchmarks to examine active mutual fund performance distribution. While transaction costs are included in the ETF returns, that is not true regarding risk factors, making it more challenging to characterize extraordinary performances via alphas. Assessments are based on the proportion of skilled funds, defined as positive-alpha funds. Such a proportion is calculated taking into account potential false discoveries and employing the method devised by Barras et al. (2010). After evaluating several ETF combinations, we conclude that sets of 3 to 5 ETFs replicate most levels of active fund performance. Finally, we propose specific ETF selection algorithms, whereby we estimate that 95% of active management funds fail to generate value for their investors. Alphas calculated with ETFs are higher than those using risk factors, but the difference is similar to the transaction costs required for investing in risk factor portfolios (Frazzini et al., 2012).
Ðнализ модельного риÑка иÑÐ¿Ð¾Ð»ÑŒÐ·Ð¾Ð²Ð°Ð½Ð¸Ñ Ñ‚ÐµÑ…Ð½Ð¾Ð»Ð¾Ð³Ð¸Ð¸ мультипликаторов при оценке акций роÑÑийÑких компаний (Assessment of Model Risk of Technology Use Multipliers in the Valuation of Shares of Russian Companies)
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Russian Abstract: Ð"Ð°Ð½Ð½Ð°Ñ Ñ€Ð°Ð±Ð¾Ñ‚Ð° ÑвлÑетÑÑ Ð½Ð¾Ð²Ñ‹Ð¼ направлением Ñ€Ð°Ð·Ð²Ð¸Ñ‚Ð¸Ñ Ñ€Ð°Ð½ÐµÐµ проведенного авторами иÑÑÐ»ÐµÐ´Ð¾Ð²Ð°Ð½Ð¸Ñ Ð¿Ñ€Ð¾Ð±Ð»ÐµÐ¼Ñ‹, ÑвÑзанной Ñ Ð¿Ñ€Ð¸Ð¼ÐµÐ½ÐµÐ½Ð¸ÐµÐ¼ метода рыночных мультипликаторов в оценке ценноÑти компаний нефтегазовой отраÑли. Работа оÑнована на выводах ÑтатиÑтичеÑких иÑÑледований мультипликаторов, раÑÑчитанных Ð´Ð»Ñ Ð¾Ñ‚Ñ€Ð°Ñли, а также их волатильноÑти за 12-летний период â€" Ñ 2006 по 2017 г. включительно на примере 46 компаний из девÑти отраÑлей Ñкономики РоÑÑийÑкой Федерации. Проведен анализ мер риÑка Value-at-Risk (далее â€" VaR) и Expected Shortfall (далее â€" ES), вычиÑленных Ñ Ð²Ð¾Ð»Ð°Ñ‚Ð¸Ð»ÑŒÐ½Ð¾Ñтью, раÑÑчитанной разными ÑпоÑобами. Ð' чаÑтноÑти, иÑпользовалаÑÑŒ муль- Ñ‚Ð¸Ð¿Ð»Ð¸ÐºÐ°Ñ‚Ð¾Ñ€Ð½Ð°Ñ Ð²Ð¾Ð»Ð°Ñ‚Ð¸Ð»ÑŒÐ½Ð¾ÑÑ‚ÑŒ, Ð²Ð²ÐµÐ´ÐµÐ½Ð½Ð°Ñ Ð² обиход Ð'. Ð'. МинаÑÑном. УÑтановлено, что по девÑти отраÑлÑм Ñкономики РФ оценки мер риÑка VaR и ES, раÑÑчитанные Ñ Ð¿Ð¾Ð¼Ð¾Ñ‰ÑŒÑŽ обычных ÑтатиÑтичеÑких данных волатильноÑти акции (когда Ñто возможно), приводили к меньшим раÑчетным величинам риÑка по Ñравнению Ñ Ñ‚ÐµÐ¼Ð¸, что раÑÑчитаны Ñ Ð¿Ñ€Ð¸Ð¼ÐµÐ½ÐµÐ½Ð¸ÐµÐ¼ мультипликаторной волатильноÑти. Результаты иÑÑÐ»ÐµÐ´Ð¾Ð²Ð°Ð½Ð¸Ñ Ð¿Ñ€ÐµÐ´ÑтавлÑÑŽÑ‚ Ð¸Ð½Ñ‚ÐµÑ€ÐµÑ Ð´Ð»Ñ Ð¾Ñ†ÐµÐ½Ñ‰Ð¸ÐºÐ¾Ð², инвеÑторов и других заинтереÑованных лиц, так как позволÑÑŽÑ‚ проанализировать общую картину Ð¿Ð¾Ð²ÐµÐ´ÐµÐ½Ð¸Ñ ÑтоимоÑти акций роÑÑийÑких компаний и дают возможноÑÑ‚ÑŒ Ñравнить изменение показателей различных отраÑлей Ñкономики в рамках иÑÐ¿Ð¾Ð»ÑŒÐ·Ð¾Ð²Ð°Ð½Ð¸Ñ Ñ‚ÐµÑ…Ð½Ð¾Ð»Ð¾Ð³Ð¸Ð¸ мультипликаторов. English Abstract: This work is a new direction for the development of a problem previously conducted by the authors related to the use of the market multipliers method in assessing the value of oil and gas companies. The work is based on the findings of statistical studies of multipliers calculated for the industry, as well as their volatility for the 12-year period - from 2006 to 2017 inclusive on the example of 46 companies from nine sectors of the economy of the Russian Federation. The risk measures Value-at-Risk (hereinafter referred to as VaR) and Expected Shortfall (hereinafter referred to as ES) calculated with volatility calculated in different ways have been analyzed. In particular, mulltiplicator volatility introduced by V. B. Minasyan. It was established that for nine sectors of the Russian economy, estimates of VaR and ES risk measures calculated using the usual stock volatility statistics (when possible) led to lower estimated risk values compared to those calculated using multiplier volatility. The results of the study are of interest to valuers, investors and other stakeholders, as they allow you to analyze the general picture of the behavior of the value of shares of Russian companies and make it possible to compare the change in indicators of various sectors of the economy as part of the use of multiplier technology.
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Russian Abstract: Ð"Ð°Ð½Ð½Ð°Ñ Ñ€Ð°Ð±Ð¾Ñ‚Ð° ÑвлÑетÑÑ Ð½Ð¾Ð²Ñ‹Ð¼ направлением Ñ€Ð°Ð·Ð²Ð¸Ñ‚Ð¸Ñ Ñ€Ð°Ð½ÐµÐµ проведенного авторами иÑÑÐ»ÐµÐ´Ð¾Ð²Ð°Ð½Ð¸Ñ Ð¿Ñ€Ð¾Ð±Ð»ÐµÐ¼Ñ‹, ÑвÑзанной Ñ Ð¿Ñ€Ð¸Ð¼ÐµÐ½ÐµÐ½Ð¸ÐµÐ¼ метода рыночных мультипликаторов в оценке ценноÑти компаний нефтегазовой отраÑли. Работа оÑнована на выводах ÑтатиÑтичеÑких иÑÑледований мультипликаторов, раÑÑчитанных Ð´Ð»Ñ Ð¾Ñ‚Ñ€Ð°Ñли, а также их волатильноÑти за 12-летний период â€" Ñ 2006 по 2017 г. включительно на примере 46 компаний из девÑти отраÑлей Ñкономики РоÑÑийÑкой Федерации. Проведен анализ мер риÑка Value-at-Risk (далее â€" VaR) и Expected Shortfall (далее â€" ES), вычиÑленных Ñ Ð²Ð¾Ð»Ð°Ñ‚Ð¸Ð»ÑŒÐ½Ð¾Ñтью, раÑÑчитанной разными ÑпоÑобами. Ð' чаÑтноÑти, иÑпользовалаÑÑŒ муль- Ñ‚Ð¸Ð¿Ð»Ð¸ÐºÐ°Ñ‚Ð¾Ñ€Ð½Ð°Ñ Ð²Ð¾Ð»Ð°Ñ‚Ð¸Ð»ÑŒÐ½Ð¾ÑÑ‚ÑŒ, Ð²Ð²ÐµÐ´ÐµÐ½Ð½Ð°Ñ Ð² обиход Ð'. Ð'. МинаÑÑном. УÑтановлено, что по девÑти отраÑлÑм Ñкономики РФ оценки мер риÑка VaR и ES, раÑÑчитанные Ñ Ð¿Ð¾Ð¼Ð¾Ñ‰ÑŒÑŽ обычных ÑтатиÑтичеÑких данных волатильноÑти акции (когда Ñто возможно), приводили к меньшим раÑчетным величинам риÑка по Ñравнению Ñ Ñ‚ÐµÐ¼Ð¸, что раÑÑчитаны Ñ Ð¿Ñ€Ð¸Ð¼ÐµÐ½ÐµÐ½Ð¸ÐµÐ¼ мультипликаторной волатильноÑти. Результаты иÑÑÐ»ÐµÐ´Ð¾Ð²Ð°Ð½Ð¸Ñ Ð¿Ñ€ÐµÐ´ÑтавлÑÑŽÑ‚ Ð¸Ð½Ñ‚ÐµÑ€ÐµÑ Ð´Ð»Ñ Ð¾Ñ†ÐµÐ½Ñ‰Ð¸ÐºÐ¾Ð², инвеÑторов и других заинтереÑованных лиц, так как позволÑÑŽÑ‚ проанализировать общую картину Ð¿Ð¾Ð²ÐµÐ´ÐµÐ½Ð¸Ñ ÑтоимоÑти акций роÑÑийÑких компаний и дают возможноÑÑ‚ÑŒ Ñравнить изменение показателей различных отраÑлей Ñкономики в рамках иÑÐ¿Ð¾Ð»ÑŒÐ·Ð¾Ð²Ð°Ð½Ð¸Ñ Ñ‚ÐµÑ…Ð½Ð¾Ð»Ð¾Ð³Ð¸Ð¸ мультипликаторов. English Abstract: This work is a new direction for the development of a problem previously conducted by the authors related to the use of the market multipliers method in assessing the value of oil and gas companies. The work is based on the findings of statistical studies of multipliers calculated for the industry, as well as their volatility for the 12-year period - from 2006 to 2017 inclusive on the example of 46 companies from nine sectors of the economy of the Russian Federation. The risk measures Value-at-Risk (hereinafter referred to as VaR) and Expected Shortfall (hereinafter referred to as ES) calculated with volatility calculated in different ways have been analyzed. In particular, mulltiplicator volatility introduced by V. B. Minasyan. It was established that for nine sectors of the Russian economy, estimates of VaR and ES risk measures calculated using the usual stock volatility statistics (when possible) led to lower estimated risk values compared to those calculated using multiplier volatility. The results of the study are of interest to valuers, investors and other stakeholders, as they allow you to analyze the general picture of the behavior of the value of shares of Russian companies and make it possible to compare the change in indicators of various sectors of the economy as part of the use of multiplier technology.
