nep-cfn New Economics Papers
on Corporate Finance
Issue of 2006‒04‒01
ten papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Stochastic Volatility By Neil Shephard
  2. Interest alignment and firm performance By Gottschalg, Oliver; Meier, Degenhard
  3. Do Banks Reduce Lending Preemptively in Response to Capital Losses? By Shinichi Nishiyama; Tae Okada; Wako Watanabe
  4. Small-firm credit markets, SBA-guaranteed lending, and economic performance in low-income areas By Ben R. Craig; William E. Jackson, III; James B. Thomson
  5. The return to capital and the business cycle By Paul Gomme; B. Ravikumar; Peter Rupert
  6. Modelling Security Market Events in Continuous Time: Intensity Based, Multivariate Point Process Models By Clive G. Bowsher
  7. Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets By Matthieu Wyart; Jean-Philippe Bouchaud; Julien Kockelkoren; Marc Potters; Michele Vettorazzo
  8. The Dynamics of Financial Markets -- Mandelbrot's multifractal cascades, and beyond By Lisa Borland; Jean-Philippe Bouchaud; Jean-Francois Muzy; Gilles Zumbach
  9. Experts' earning forecasts: bias, herding and gossamer information By Olivier Guedj; Jean-Philippe Bouchaud
  10. Random walks, liquidity molasses and critical response in financial markets By Jean-Philippe Bouchaud; Julien Kockelkoren; Marc Potters

  1. By: Neil Shephard (Nuffield College, Oxford University)
    Date: 2005–07–01
  2. By: Gottschalg, Oliver; Meier, Degenhard
    Abstract: This study derives testable hypotheses from their framework and thus provides an empirical test of interest alignment theory based on a sample of 69 management buyouts in the UK. The results of the multivariate regression model suggest that in this setting, interest alignment does have a significant influence on firm performance.
    Keywords: competitive advantage; interest alignment; motivation; buyouts
    JEL: M10
    Date: 2005–01–01
  3. By: Shinichi Nishiyama; Tae Okada; Wako Watanabe
    Abstract: We empirically examined whether declining bank loans in Japan in the late 1990s are the result of banks' downward adjustments of lending supply (a "credit crunch") in response to capital losses (a "capital crunch"). Estimating the new lending supply function as a non-linear function of the capital to asset ratio, we found that the (new lending supply) function is not only increasing in bank capital but also concave in bank capital, which supports the view that a "credit crunch" occurs since forward-looking banks have an incentive to avoid failing to meet regulatory requirements in the future.
    Date: 2006–03
  4. By: Ben R. Craig; William E. Jackson, III; James B. Thomson
    Abstract: SBA guaranteed-lending programs are one of many government-sponsored market interventions aimed at promoting small business. The rationale for providing SBA loan guarantees is often based on the argument that they reduce credit rationing in low-income markets for small business loans. In this paper we empirically test whether SBA-guaranteed lending has a greater impact on economic performance in low-income markets. Using local labor market employment rates as our measure of economic> performance, we find evidence consistent with this proposition. In particular, we find a positive and significant correlation between the average annual level of employment in a local market and the level of SBA-guaranteed lending in that local market. And the intensity of this correlation is relatively larger in low-income markets. Indeed, one interpretation of our results is that this correlation is positive and significant only in low-income markets. This result has important implications for public policy in general and SBA-guaranteed lending in particular.
    Keywords: Small business - Finance ; Small Business Administration ; Government-sponsored enterprises
    Date: 2006
  5. By: Paul Gomme; B. Ravikumar; Peter Rupert
    Abstract: Real business cycle models have difficulty replicating the volatility of S&P 500 returns. This fact should not be surprising since real business cycle theory suggests that the return to capital should be measured by the return to aggregate market capital, not stock market returns. We construct a quarterly time series of the after-tax return to business capital. Its volatility is considerably smaller than that of S&P 500 returns. Our benchmark model captures almost 40 percent of the volatility in the return to capital (relative to the volatility of output). We consider several departures from the benchmark model; the most promising is one with higher risk aversion, which captures over 60 percent of the relative volatility in the return to capital.
    Keywords: Business cycles ; Capital
    Date: 2006
  6. By: Clive G. Bowsher (Nuffield College, Oxford University)
    Abstract: A continuous time econometric modelling framework for multivariate financial market event (or 'transactions') data is developed in which the model is specified via the vector conditional intensity. This has the advantage that the conditioning information set is updated continuously in time as new information arrives. Generalised Hawkes (g-Hawkes) models are introduced that are sufficiently flexible to incorporate `inhibitory' events and dependence between trading days. Novel omnibus specification tests for parametric models based on a multivariate random time change theorem are proposed. A computationally efficient thinning algorithm for simulation of g-Hawkes processes is also developed. A continuous time, bivariate point process model of the timing of trades and mid-quote changes is presented for a New York Stock Exchange stock and the empirical findings are related to the market microstructure literature. The two-way interaction of trades and quote changes is found to be important empirically. Furthermore, the model delivers a continuous record of instantaneous volatility that is conditional on the timing of trades and quote changes.
    Keywords: Point process, conditional intensity, Hawkes process, specification test, random time change, transactions data, market microstructure.
    JEL: C32 C51 C52 G10
    Date: 2005–10–01
  7. By: Matthieu Wyart (CEA Saclay;); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Julien Kockelkoren (Capital Fund Management); Marc Potters (Science & Finance, Capital Fund Management); Michele Vettorazzo
    Abstract: We argue that on electronic markets, limit and market orders should have equal effective costs on average. This symmetry implies a linear relation between the bid-ask spread and the average impact of market orders. Our empirical observations on different markets are consistent with this hypothesis. We then use this relation to justify a simple, and hitherto unnoticed, proportionality relation between the spread and the volatility_per trade_. We provide convincing empirical evidence for this relation. This suggests that the main determinant of the bid-ask spread is adverse selection, if one considers that the volatility per trade is a measure of the amount of `information' included in prices at each transaction. Symmetry between market and limit orders stems from the self-organization of liquidity in electronic markets. Our results appear to hold approximately on liquid specialist markets as well, although the spread is significantly larger.
    Date: 2006–03
  8. By: Lisa Borland (Evnine-Vaughan Associates, Inc.); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Jean-Francois Muzy (Centre de Recherche Paul Pascal, Pessac, FRANCE); Gilles Zumbach (Consulting in Financial Research)
    Abstract: This is a short review in honor of B. Mandelbrot's 80st birthday, to appear in W ilmott magazine. We discuss how multiplicative cascades and related multifractal ideas might be relevant to model the main statistical features of financial time series, in particular the intermittent, long-memory nature of the volatility. We describe in details the Bacry-Muzy-Delour multifractal random walk. We point out some inadequacies of the current models, in particular concerning time reversal symmetry, and propose an alternative family of multi-timescale models, intermediate between GARCH models and multifractal models, that seem quite promising.
    JEL: G10
    Date: 2005–01
  9. By: Olivier Guedj (Capital Fund Management); Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;)
    Abstract: We study the statistics of earning forecasts of US, EU, UK and JP stocks during the period 1987-2004. We confirm, on this large data set, that financial analysts are on average over-optimistic and show a pronounced herding behavior. These effects are time dependent, and were particularly strong in the early nineties and during the Internet bubble. We furthermore find that their forecast ability is, in relative terms, quite poor and comparable in quality, a year ahead, to the simplest `no change' forecast. As a result of herding, analysts agree with each other five to ten times more than with the actual result. We have shown that significant differences exist between US stocks and EU stocks, that may partly be explained as a company size effect. Interestingly, herding effects appear to be stronger in the US than in the Eurozone. Finally, we study the correlation of errors across stocks and show that significant sectorization occurs, some sectors being easier to predict than others. These results add to the list of arguments suggesting that the tenets of Efficient Market Theory are untenable.
    JEL: G10
    Date: 2004–10
  10. By: Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management; CEA Saclay;); Julien Kockelkoren (Capital Fund Management); Marc Potters (Science & Finance, Capital Fund Management)
    Abstract: Stock prices are observed to be random walks in time despite a strong, long term memory in the signs of trades (buys or sells). Lillo and Farmer have recently suggested that these correlations are compensated by opposite long ranged fluctuations in liquidity, with an otherwise permanent market impact, challenging the scenario proposed in Quantitative Finance 4, 176 (2004), where the impact is *transient*, with a power-law decay in time. The exponent of this decay is precisely tuned to a critical value, ensuring simultaneously that prices are diffusive on long time scales and that the response function is nearly constant. We provide new analysis of empirical data that confirm and make more precise our previous claims. We show that the power-law decay of the bare impact function comes both from an excess flow of limit order opposite to the market order flow, and to a systematic anti-correlation of the bid-ask motion between trades, two effects that create a `liquidity molasses' which dampens market volatility.
    JEL: G10
    Date: 2004–06

This nep-cfn issue is ©2006 by Zelia Serrasqueiro. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.