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on Corporate Finance |
| By: | Kwamie Dunbar (University of Connecticut and Sacred Heart University) |
| Abstract: | In this paper we propose a methodology that we believe improves the effectiveness of several common assumptions underlying Modern Portfolio Theory's dynamic optimization framework. The paper derives a general outline of a stochastic nonlinear-quadratic control for analyzing and solving a non-linear mean-variance optimization problem. The study first develops and then investigates the role of unsystematic (credit) risk in this continuous time stochastic asset allocation model where the wealth generating process has a non-negative constraint. The paper finds that given unsystematic risk, wealth constraints and higher order moments the market price of risk is non-constant and the investor's optimal terminal return may be lower than previously indicated by a number of classical models. This result provides a convenient solution to practitioners seeking to evaluate competing investment strategies. |
| Keywords: | Dynamic Optimization; Credit Risk; Mean-Variance Analysis; Linear Quadratic Control; Credit Default Swaps; Capital Market Line; Gram-Charlier expansion; unsystematic risks |
| JEL: | G0 G10 C02 C15 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2009-04&r=cfn |
| By: | Kwamie Dunbar (University of Connecticut and Sacred Heart University) |
| Abstract: | The study investigates the role of credit risk in a continuous time stochastic asset allocation model, since the traditional dynamic framework does not provide credit risk flexibility. The general model of the study extends the traditional dynamic efficiency framework by explicitly deriving the optimal value function for the infinite horizon stochastic control problem via a weighted volatility measure of market and credit risk. The model's optimal strategy was then compared to that obtained from a benchmark Markowitz-type dynamic optimization framework to determine which specification adequately reflects the optimal terminal investment returns and strategy under credit and market risks. The paper shows that an investor's optimal terminal return is lower than typically indicated under the traditional mean-variance framework during periods of elevated credit risk. Hence I conclude that, while the traditional dynamic mean-variance approach may indicate the ideal, in the presence of credit-risk it does not accurately reflect the observed optimal returns, terminal wealth and portfolio selection strategies. |
| Keywords: | Dynamic Strategies; Credit Risk; Mean-Variance Analysis; Optimal Portfolio Selection; Viscosity Solution; Credit Default Swaps; Default Risk; Dynamic Control |
| JEL: | G0 G10 C02 C15 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2009-03&r=cfn |
| By: | Ronald E. Shrieves (University of Tennessee); Drew Dahl (Department of Economics and Finance, Utah State University); Michael F. Spivey (Clemson University) |
| Abstract: | We hypothesize that features of European capital markets used to distinguish market reliance and investor protection have predictably influenced emerging national differences in bank capitalization, growth, and choice of income-producing activities. We characterize countries' capital regimes as more or less "equity-friendly" or "debt-friendly" based upon their reliance on equity and credit markets and the extent to which their legal frameworks protect shareholders and creditors. Using bank-level data from 13 European countries, 1998 to 2004, we find evidence of positive associations between “equity-friendly” market features and, respectively, bank capitalization, bank asset growth and the relative emphasis on bank lending to its customers. Support is also provided for hypotheses that “credit-friendly” capital regimes convey advantages reflected in higher rates of growth in assets and greater emphasis on lending to customers. Our results suggests that integration of European banking markets is mitigated by other, relatively static, features of the equity and debt markets on which banks rely. |
| Keywords: | international banking, market integration, shareholder protection |
| JEL: | F33 F36 G21 G28 G32 G38 |
| Date: | 2009–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:uth:wpaper:200807&r=cfn |
| By: | Yakovlev, Andrei (BOFIT) |
| Abstract: | In this paper, we analyze the influence of the state on the improvement of corporate governance in Russia of the early 2000s. Taking into account the low quality of market institutions in the 1990s (i.e., the market failure phenomenon), we assume that state intervention as the “second best” institution had a positive impact in this case. Using a dataset of 822 joint-stock companies, we tested this hypothesis in two types of corporate models – state-owned or mixed firms and “politically connected” firms. The first model confirmed a strong positive influence of state ownership on the corporate governance in Russia in 2001-2004. The estimation results of this model are statistically robust in different specifications. We connect this result with attempts of the Russian government to use standard mechanisms and procedures of corporate governance to defend its property rights in its relations with state-owned and mixed enterprises. |
| Keywords: | corporate governance; market institutions; state-owned companies; Russia |
| JEL: | G34 |
| Date: | 2009–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_026&r=cfn |
| By: | Fungácová , Zuzana (BOFIT); Solanko, Laura (BOFIT) |
| Abstract: | The Russian banking sector has experienced enormous growth rates during the last 6-7 years. The rapid growth of assets has, however, contributed to a decrease in the capital adequacy ratio, thus influencing the ability of banks to cope with risk. Using quarterly data spanning from 1999 to 2007 on all Russian banks, we investigate the relationship between bank characteristics and risk-taking by Russian banks. The analysis of financial ratios reveals that, on average, the risk levels are still below those observed in Central and Eastern Europe. Combining the group-wise comparisons of financial ratios and the results of insolvency risk analysis based on fixed effects vector decomposition, three main conclusions emerge. First, controlling for bank characteristics, large banks have higher insolvency risk than small ones. Second, foreign-owned banks exhibit higher insolvency risk than domestic banks and large state-controlled banks are, unlike other state-controlled banks, more stable. Third, we find that the regional banks engage in significantly more risk-taking than their counterparts in Moscow. |
| Keywords: | bank risk-taking; banks in transition; Russia |
| JEL: | G21 G32 P34 |
| Date: | 2009–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_021&r=cfn |
| By: | Fedorova , Elena (BOFIT); Vaihekoski, Mika (BOFIT) |
| Abstract: | We study a pricing model for global and local sources of risk in six Eastern European emerging stock markets. Utilizing GMM estimation and an unconditional asset-pricing framework with and without time-varying betas, we perform estimations based on monthly data from 1996 to 2007 for Poland, Czech Republic, Hungary, Bulgaria, Slovenia and Russia. Most of these markets display considerable segmentation; the aggregate emerging market risk, as opposed to global market risk, is the significant driver for their stock market returns. It also appears that currency risk is priced into stock prices. The difference between local and global interest rates can be used to model the time-variation in the betas for both sources of risk. |
| Keywords: | market integration; segmentation; asset pricing; emerging markets; Eastern Europe country risk |
| JEL: | G12 G15 G32 |
| Date: | 2009–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_027&r=cfn |
| By: | Arnaud Bourgain; Patrice Pieretti; Jens Høj |
| Abstract: | The financial sector has emerged as the main economic engine over the past two decades. The comparative advantages of placing financial activities in Luxembourg have mostly been in terms of an adaptive legislative and regulatory framework and low taxation. As a result, Luxembourg is today one of the main international centres for investment funds. Besides the sector’s direct and indirect employment effects, the most important effect is the large tax revenue generating capacity of the sector, accounting directly for over 20% of aggregate tax revenues. On the other hand, these tax revenues are volatile as the sector is highly sensitive to developments in international financial markets. Indeed, past downturns in international financial markets have tended to lead to a sharp slowdown of growth in the economy as well as in revenues, pointing to potential large risks associated with the current turmoil in international financial markets. Besides these short-term considerations, a lower trend growth rate of the sector is likely over the medium term. The main activities of the sector are in middle and back offices dealing with financial administration which, with new IT technologies, will tend to be increasingly outsourced. At the same time, the sector is having problems in attracting highly specialised talent to enter higher value front office activities. Over the longer term, international competition will continue to exert pressures that may eventually erode Luxembourg’s position. The extent of the decline in the sector’s trend growth depends on the ability to maintain and expand the attractiveness of investing and working in Luxembourg. Achieving this will depend on being able to adjust tax, infrastructure, and housing policies to attract foreign talent while updating and increasing the transparency of financial sector regulation. |
| Keywords: | public finances, financial sector, economic growth, Luxembourg |
| JEL: | G15 G18 G21 G24 |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:660-en&r=cfn |