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on Corporate Finance |
| By: | Baris Serifsoy |
| Abstract: | In recent years stock exchanges have been increasingly diversifying their operations into related business areas such as derivatives trading, post-trading services and software sales. This trend can be observed most notably among profit-oriented trading venues. While the pursuit for diversification is likely to be driven by the attractiveness of these investment opportunities, it is yet an open question whether certain integration activities are also efficient, both from a social welfare and from the exchanges' perspective. Academic contributions so far analyzed different business models primarily from the social welfare perspective, whereas there is only little literature considering their impact on the exchange itself. By employing a panel data set of 28 stock exchanges for the years 1999-2003 we seek to shed light on this topic by comparing the factor productivity of exchanges with different business models. Our findings suggest three conclusions: (1) Integration activity comes at the cost of increased operational complexity which in some cases outweigh the potential synergies between related activities and therefore leads to technical inefficiencies and lower productivity growth. (2) We find no evidence that vertical integration is more efficient and productive than other business models. This finding could contribute to the ongoing discussion about the merits of vertical integration from a social welfare perspective. (3) The existence of a strong in-house IT-competence seems to be beneficial to overcome |
| JEL: | F39 G32 C23 C24 C61 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:fra:franaf:158&r=cfn |
| By: | Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Peter F. Christoffersen (Faculty of Management, McGill University, Montreal, Quebec, H3A 1G5, and CIRANO); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER) |
| Abstract: | Volatility has been one of the most active and successful areas of research in time series econometrics and economic forecasting in recent decades. This chapter provides a selective survey of the most important theoretical developments and empirical insights to emerge from this burgeoning literature, with a distinct focus on forecasting applications. Volatility is inherently latent, and Section 1 begins with a brief intuitive account of various key volatility concepts. Section 2 then discusses a series of different economic situations in which volatility plays a crucial role, ranging from the use of volatility forecasts in portfolio allocation to density forecasting in risk management. Sections 3, 4 and 5 present a variety of alternative procedures for univariate volatility modeling and forecasting based on the GARCH, stochastic volatility and realized volatility paradigms, respectively. Section 6 extends the discussion to the multivariate problem of forecasting conditional covariances and correlations, and Section 7 discusses volatility forecast evaluation methods in both univariate and multivariate cases. Section 8 concludes briefly. |
| JEL: | C10 C53 G1 |
| Date: | 2005–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200508&r=cfn |
| By: | Elena Carletti (Center for Financial Studies, Taunusanlage 6, D-60329 Frankfurt, Germany); Vittoria Cerasi (Università degli Studi di Milano Bicocca, Statistics Department, Via Bicocca degli Arcimboldi 8, 20126 Milano, Italy); Sonja Daltung (Sveriges Riksbank, Research Department, 103 37 Stockholm, Sweden) |
| Abstract: | This paper analyzes banks’ choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication. |
| Keywords: | individual-bank lending, multiple-bank lending, monitoring, diversification, free-riding problem |
| JEL: | D82 G21 G32 |
| Date: | 2004–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200418&r=cfn |
| By: | Peter F. Christoffersen (McGill University and CIRANO); Francis X. Diebold (University of Pennsylvania and NBER) |
| Abstract: | We consider three sets of phenomena that feature prominently – and separately – in the financial economics literature: conditional mean dependence (or lack thereof) in asset returns, dependence (and hence forecastability) in asset return signs, and dependence (and hence forecastability) in asset return volatilities. We show that they are very much interrelated, and we explore the relationships in detail. Among other things, we show that: (a) Volatility dependence produces sign dependence, so long as expected returns are nonzero, so that one should expect sign dependence, given the overwhelming evidence of volatility dependence; (b) The standard finding of little or no conditional mean dependence is entirely consistent with a significant degree of sign dependence and volatility dependence; (c) Sign dependence is not likely to be found via analysis of sign autocorrelations, runs tests, or traditional market timing tests, because of the special nonlinear nature of sign dependence; (d) Sign dependence is not likely to be found in very high-frequency (e.g., daily) or very low-frequency (e.g., annual) returns; instead, it is more likely to be found at intermediate return horizons; (e) Sign dependence is very much present in actual U.S. equity returns, and its properties match closely our theoretical predictions; (f) The link between volatility forecastability and sign forecastability remains intact in conditionally non-Gaussian environments, as for example with time-varying conditional skewness and/or kurtosis. |
| Date: | 2004–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200408&r=cfn |
| By: | Daniel Schmidt (CEPRES Center of Private Equity Research, VCM Venture Capital Management GmbH) |
| Abstract: | In this article, we investigate risk return characteristics and diversification benefits when private equity is used as a portfolio component. We use a unique dataset describing 642 US-American portfolio companies with 3620 private equity investments. Information about precisely dated cash flows at the company level enables for the first time a cash flow equivalent and simultaneous investment simulation in stocks, as well as the construction of stock portfolios for benchmarking purposes. With respect to the methodology involved, we construct private equity, stock-benchmark and mixed-asset portfolios using bootstrap simulations. For the late 1990s we find a dramatic increase in the extent to which private equity outperforms stock investment. In earlier years private equity was underperforming its stock benchmarks. Within the overall class of private equity, returns on earlier private equity investment categories, like venture capital, show on average higher variations and even higher rates of failure. It is in this category in particular that high average portfolio returns are generated solely by the ability to select a few extremely well performing companies, thus compensating for lost investments. There is a high marginal diversifiable risk reduction of about 80% when the portfolio size is increased to include 15 investments. When the portfolio size is increased from 15 to 200 there are few marginal risk diversification effects on the one hand, but a large increase in managing expenditure on the other, so that an actual average portfolio size between 20 and 28 investments seems to be well balanced. We provide empirical evidence that the non-diversifiable risk that a constrained investor, who is exclusively investing in private equity, has to hold exceeds that of constrained stock investors and also the market risk. From the viewpoint of unconstrained investors with complete investment freedom, risk can be optimally reduced by constructing mixed asset portfolios. According to the various private equity subcategories analyzed, there are big differences in optimal allocations to this asset class for minimizing mixed-asset portfolio variance or maximizing performance ratios. We observe optimal portfolio weightings to be between 3% and 65%. |
| Keywords: | Venture Capital, Private Equity, Performance, Return, Risk, Portfolio, Fund, Diversification, Efficient Frontier, Allocation |
| JEL: | G11 |
| Date: | 2004–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200412&r=cfn |
| By: | Torben G. Andersen (Department of Finance, Kellogg School, Northwestern University, and NBER); Tim Bollerslev (Departments of Economics and Finance, Duke University, and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania, and NBER); Jin Wu (Department of Economics, University of Pennsylvania) |
| Abstract: | A large literature over several decades reveals both extensive concern with the question of time-varying betas and an emerging consensus that betas are in fact time-varying, leading to the prominence of the conditional CAPM. Set against that background, we assess the dynamics in realized betas, vis-à-vis the dynamics in the underlying realized market variance and individual equity covariances with the market. Working in the recently-popularized framework of realized volatility, we are led to a framework of nonlinear fractional cointegration: although realized variances and covariances are very highly persistent and well approximated as fractionally-integrated, realized betas, which are simple nonlinear functions of those realized variances and covariances, are less persistent and arguably best modeled as stationary I(0) processes. We conclude by drawing implications for asset pricing and portfolio management. |
| Keywords: | quadratic variation and covariation, realized volatility, asset pricing, CAPM, equity betas, long memory, nonlinear fractional cointegration, continuous-time methods. |
| JEL: | C1 G1 |
| Date: | 2004–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200416&r=cfn |
| By: | Torben G. Andersen (Department of Finance, Northwestern University and NBER); Tim Bollerslev (Departments of Economics and Finance, Duke University and NBER); Francis X. Diebold (Departments of Economics, Finance and Statistics, University of Pennsylvania and NBER); Clara Vega (Department of Economics, University of Rochester) |
| Abstract: | We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects. |
| Keywords: | Asset Pricing; Macroeconomic News Announcements; Financial Market Linkages; Market Microstructure; High-Frequency Data; Survey Data; Asset Return Volatility; Forecasting. |
| JEL: | F3 F4 G1 C5 |
| Date: | 2004–01–19 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200419&r=cfn |
| By: | Lars Norden (Department of Banking and Finance, University of Mannheim, L 5.2, 68131 Mannheim, Germany); Martin Weber (Department of Banking and Finance, University of Mannheim, L 5.2, 68131 Mannheim, Germany and Centre for Economic Policy Research (CEPR), London, United Kingdom) |
| Abstract: | This paper analyzes the empirical relationship between credit default swap, bond and stock markets during the period 2000-2002. Focusing on the intertemporal comovement, we examine weekly and daily lead-lag relationships in a vector autoregressive model and the adjustment between markets caused by cointegration. First, we find that stock returns lead CDS and bond spread changes. Second, CDS spread changes Granger cause bond spread changes for a higher number of firms than vice versa. Third, the CDS market is significantly more sensitive to the stock market than the bond market and the magnitude of this sensitivity increases when credit quality becomes worse. Finally, the CDS market plays a more important role for price discovery than the corporate bond market. |
| Keywords: | Credit risk; Credit spreads; Credit derivatives; Lead-lag relationship |
| JEL: | G10 G14 C32 |
| Date: | 2004–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200420&r=cfn |
| By: | Eberhard Feess (Aachen University (RWTH), Dept. of Economics, Templergraben 64, D-52056 Aachen); Ulrich Hege (HEC School of Management, Department of Finance and Economics, F-78351 Jouy-en-Josas Cedex, France) |
| Abstract: | The Basel Committee plans to differentiate risk-adjusted capital requirements between banks regulated under the internal ratings based (IRB) approach and banks under the standard approach. We investigate the consequences for the lending capacity and the failure risk of banks in a model with endogenous interest rates. The optimal regulatory response depends on the banks’ inclination to increase their portfolio risk. If IRB-banks are well-capitalized or gain little from taking risks, then they will increase their market share and hold safe portfolios. As risk-taking incentives become more important, the optimal portfolio size of banks adopting intern rating systems will be increasingly constrained, and ultimately they may lose market share relative to banks using the standard approach. The regulator has only limited options to avoid the excessive adoption of internal rating systems. |
| Keywords: | Basel II Accord, risk-based capital, internal ratings based approach, bank capital, bank competition, risk-taking |
| JEL: | K13 H41 |
| Date: | 2004–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200425&r=cfn |
| By: | Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Peter F. Christoffersen (Faculty of Management, McGill University, Montreal, Quebec, H3A 1G5, and CIRANO); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER) |
| Abstract: | What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions – in particular, real-time risk tracking in very high-dimensional situations – impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds. |
| JEL: | G10 |
| Date: | 2005–01–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200502&r=cfn |
| By: | Torben G. Andersen (Department of Finance, Kellogg School of Management, Northwestern University, Evanston, IL 60208, and NBER); Tim Bollerslev (Department of Economics, Duke University, Durham, NC 27708, and NBER); Francis X. Diebold (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104, and NBER); Jin (Ginger) Wu (Department of Economics, University of Pennsylvania, Philadelphia, PA 19104) |
| Abstract: | We selectively survey, unify and extend the literature on realized volatility of financial asset returns. Rather than focusing exclusively on characterizing the properties of realized volatility, we progress by examining economically interesting functions of realized volatility, namely realized betas for equity portfolios, relating them both to their underlying realized variance and covariance parts and to underlying macroeconomic fundamentals. |
| Keywords: | Realized volatility, realized beta, conditional CAPM, business cycle |
| JEL: | G12 |
| Date: | 2005–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200504&r=cfn |
| By: | Günter Franke (Center for Finance and Econometrics at the University of Konstanz, and CFS Center for Financial Studies, Frankfurt); Jan Pieter Krahnen (Goethe-University Frankfurt and CFS Center for Financial Studies, Frankfurt, and CEPR. Correspondence: CFS, Taunusanlage 6, D-60329 Frankfurt(Main)) |
| Abstract: | This paper contributes to the economics of financial institutions risk management by exploring how loan securitization a.ects their default risk, their systematic risk, and their stock prices. In a typical CDO transaction a bank retains through a first loss piece a very high proportion of the expected default losses, and transfers only the extreme losses to other market participants. The size of the first loss piece is largely driven by the average default probability of the securitized assets. If the bank sells loans in a true sale transaction, it may use the proceeds to to expand its loan business, thereby incurring more systematic risk. We find an increase of the banks’ betas, but no significant stock price e.ect around the announcement of a CDO issue. Our results suggest a role for supervisory requirements in stabilizing the financial system, related to transparency of tranche allocation, and to regulatory treatment of senior tranches. |
| JEL: | D82 G21 D74 |
| Date: | 2005–01–06 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200506&r=cfn |
| By: | Dirk Krueger (Goethe University Frankfurt, Mertonstr. 17, PF 81, 60054 Frankfurt); Harald Uhlig (Humboldt University, Wirtschaftswissenschaftliche Fakultät, Spandauer Str. 1, 10178 Berlin) |
| Abstract: | This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment e.ectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogo. (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved. |
| Keywords: | Long-term Contracts, Risk Sharing, Limited Commitment, Competition |
| JEL: | G22 E21 D11 D91 |
| Date: | 2005–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200507&r=cfn |
| By: | Markus Haas (University of Munich); Stefan Mittnik (University of Munich); Bruce Mizrach (Rutgers University) |
| Abstract: | Financial markets embed expectations of central bank policy into asset prices. This paper compares two approaches that extract a probability density of market beliefs. The first is a simulatedmoments estimator for option volatilities described in Mizrach (2002); the second is a new approach developed by Haas, Mittnik and Paolella (2004a) for fat-tailed conditionally heteroskedastic time series. In an application to the 1992-93 European Exchange Rate Mechanism crises, that both the options and the underlying exchange rates provide useful information for policy makers. |
| Keywords: | Options; Implied Probability Densities; GARCH; Fat-tails; Exchange Rate Mechanism |
| JEL: | G12 G14 F31 |
| Date: | 2005–01–09 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200509&r=cfn |
| By: | Sydney C. Ludvigson; Serena Ng |
| Abstract: | A key criticism of the existing empirical literature on the risk-return relation relates to the relatively small amount of conditioning information used to model the conditional mean and conditional volatility of excess stock market returns. To the extent that financial market participants have information not reflected in the chosen conditioning variables, measures of conditional mean and conditional volatility--and ultimately the risk-return relation itself--will be misspecified and possibly highly misleading. We consider one remedy to these problems using the methodology of dynamic factor analysis for large datasets, whereby a large amount of economic information can be summarized by a few estimated factors. We find that three new factors, a "volatility," "risk premium," and "real" factor, contain important information about one-quarter ahead excess returns and volatility that is not contained in commonly used predictor variables. Moreover, the factor-augmented specifications we examine predict an unusual 16-20 percent of the one-quarter ahead variation in excess stock market returns, and exhibit remarkably stable and strongly statistically significant out-of-sample forecasting power. Finally, in contrast to several pre-existing studies that rely on a small number of conditioning variables, we find a positive conditional correlation between risk and return that is strongly statistically significant, whereas the unconditional correlation is weakly negative and statistically insignificant. |
| JEL: | G12 G10 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11477&r=cfn |
| By: | Yung Chul Park (Korea University); Wonho Song (Korea Institute for Internation Economic Policy); Yunjong Wang (Korea Institute for Internation Economic Policy) |
| Abstract: | Despite the increasing trend toward market-based finance systems, most East Asian countries still have bank-based systems. The purpose of this paper is to examine the extent to which bank-based financial development in East Asia has contributed to economic growth. To do this, a series of empirical analyses are conducted to gauge the effects of changes in the exogenous component of financial development on economic growth by using data on East Asian and Latin American countries for the 1960-97 period. Out empirical results show that the exogenous changes to financial development in East Asia have a strong, positive impact on growth rates. However, we find that there is weak evidence of a negative relationship between finance and growth for Latin American countries, a finding consistent with that of de Gregario and Guidotti (1995). |
| Keywords: | Economic development, East Asia, finance, financial develoment, GMM |
| JEL: | G10 G20 O12 O16 |
| Date: | 2003–10 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:366&r=cfn |
| By: | Yung Chul Park (Korea University); Wonho Song (Korea Institute for Internation Economic Policy); Yunjong Wang (Korea Institute for Internation Economic Policy) |
| Abstract: | This paper focuses on the following two issues. First, the paper investigates the extent to which financial development has contributed to economic growth in Korea. For this purpose, we introduce four well-know financial development indicators, and seek to find a long-ruin relationship between output growth and financial development. Second, the effects of financial repression on economic growth are examined. A financial index is constructed based on five related measures, and this index is augmented to the growth-finance equation. For the robustness of the results, the model with per capita capital stock is also estimated. |
| Keywords: | Economic development, finance, financial development, financial repression, Korea |
| JEL: | G10 G20 O12 O16 |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:530&r=cfn |
| By: | William N. Goetzmann (Yale School of Management - International Center for Finance); Ravi Dhar (International Center for Finance at Yale School of Management) |
| Abstract: | In this paper we address the factors influencing the institutional decision to allocate resources to real estate. We survey a sample of major institutional investors via a web questionnaire. They were willing to answer questions about their target real estate allocation, their plans to increase or decrease their allocation, the major reasons for investing in real estate, and views on the major risks and relative expense of doing so. We find that the endowments in our sample typically had a relatively short history of real estate investment, but planned to increase their allocation to the asset class - more so than pension funds. We also find uncertainty about use of historical data to be a significant factor in the allocation choice. |
| Keywords: | Behavioral Finance, real estate, investing, risk, uncertainty |
| JEL: | R33 G0 G23 |
| Date: | 2005–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:ysm:somwrk:ysm457&r=cfn |