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on Corporate Finance |
| By: | Rene Carmona; Kevin Webster |
| Abstract: | High Frequency Trading (HFT) represents an ever growing proportion of all financial transactions as most markets have now switched to electronic order book systems. The main goal of the paper is to propose continuous time equations which generalize the self-financing relationships of frictionless markets to electronic markets with limit order books. We use NASDAQ ITCH data to identify significant empirical features such as price impact and recovery, rough paths of inventories and vanishing bid-ask spreads. Starting from these features, we identify microscopic identities holding on the trade clock, and through a diffusion limit argument, derive continuous time equations which provide a macroscopic description of properties of the order book. These equations naturally differentiate between trading via limit and market orders. We give several applications (including hedging European options with limit orders, market maker optimal spread choice, and toxicity indexes) to illustrate their impact and how they can be used to the benefit of Low Frequency Traders (LFTs). |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1312.2302&r=cfn |
| By: | David Allen; Michael McAleer (University of Canterbury); Robert Powell; Abhay Singh |
| Abstract: | In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model, which measures distance to default, and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk. |
| Keywords: | Credit risk, Capital buffer, Distance to default, Conditional value at risk, Capital adequacy buffer model |
| JEL: | G01 G21 G28 |
| Date: | 2013–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:cbt:econwp:13/35&r=cfn |
| By: | Olena Senyuta |
| Abstract: | This paper empirically investigates how the level of authority delegation is related to the performance of an organization. Decentralized, horizontal organizational structure takes advantage of more effcient decision making, mainly due to more efficient use of "soft" information. The cost of such decentralization is the loss of control and the need to properly incentivise agents who are legitimately given the authority to make decisions. This is the trade-off organization faces when deciding on the level of authority delegation. The effect of authority delegation is studied using empirical data from the banking sector. Different specifications were used to estimate the effect of authority delegation on performance characteristics. Estimates demonstrate that more authority delegated has a positive effect on quantitative measures of bank performance; however, it decreases the quality of decisions taken. Results demonstrate that there is a trade-off between the quantitative and qualitative performance characteristics. While the local bank branch is able to increase loan generation when more authority is delegated to it, there is also some evidence of loan quality deterioration. |
| Keywords: | banking; organizational structure; authority delegation; soft information; small business lending; |
| JEL: | D23 D83 G21 L22 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp497&r=cfn |
| By: | Hurlin , Christophe; Perignon, Christophe |
| Abstract: | We identify a potential bias in the methodology disclosed in July 2013 by the Basel Committee on Banking Supervision (BCBS) for identifying systemically important financial banks. Contrary to the original objective, the relative importance of the five categories of risk importance (size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity) may not be equal and the resulting systemic risk scores are mechanically dominated by the most volatile categories. In practice, this bias proved to be serious enough that the substitutability category had to be capped by the BCBS. We show that the bias can be removed by simply standardizing each input prior to computing the systemic risk scores. |
| Keywords: | G-SIFI; regulatory capital; Basel Committee |
| JEL: | G21 |
| Date: | 2013–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1005&r=cfn |
| By: | Morellec , Erwan; Valta , Philip; Zhdanov , Alexei |
| Abstract: | We build a dynamic model of investment and financing decisions to study the choice between bonds and bank loans in a firm's marginal financing decision and its effects on corporate investment. We show that firms with more growth options, higher bargaining power in default, operating in more competitive product markets, and facing lower credit supply are more likely to issue bonds. We also demonstrate that, by changing the cost of financing, these characteristics affect the timing of investment. We test these predictions using a sample of U.S. firms and present new evidence which supports our theory. |
| Keywords: | debt structure; capital structure; investment; credit supply; competition |
| JEL: | D83 G12 G32 G33 |
| Date: | 2013–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:heccah:1010&r=cfn |
| By: | Dominique Guegan (Centre d'Economie de la Sorbonne - Paris School of Economics); Florian Ielpo (Centre d'Economie de la Sorbonne et Lombard Odier Darier Hentsch & Cie); Hanjarivo Lalaharison (Centre d'Economie de la Sorbonne) |
| Abstract: | In this paper we propose new option pricing models based on class of models with jump contain in the Lévy-type based models (NIG-Lévy, Merton-jump (Merton 1976) and Duan based model (Duan 2007)). By combining these different class of models with several volatility dynamics of the GARCH type, we aim at taking into account the dynamics of financial returns in a realistic way. The associated risk neutral dynamics of the time series models is obtained through two different specifications for the pricing kernel: we provide a characterization of the change in the probability measure using the Esscher transform and the Minimal Entropy Martingale Measure. We finally assess empirically the performance of this modelling approach, using a dataset of European options based on the S&P 500 and on the CAC 40 indices. Our results show that models involving jumps and a time varying volatility provide realistic pricing results for options with different kinds of time to maturities and moneyness. Furthermore, our results provide evidence of consistency between historical and risk neutral distributions, making the approach developed here interesting to price option when option markets are illiquid or when such markets simply do not exist. |
| Keywords: | Option pricing, Lévy processess, incomplete market, exponential affine stochastic discount factor, Minimal Entropy Martingale Measure, CAC 40, S&P 500. |
| JEL: | G1 C5 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:mse:cesdoc:11037r&r=cfn |
| By: | Viral V. Acharya; Hanh Le; Hyun Song Shin |
| Abstract: | In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy affects the equity value and risk of default of other banks. When such negative externalities are strong and bank franchise values are not too low, the private equilibrium can feature excess dividends relative to a coordinated policy that maximizes the combined equity value of banks. |
| JEL: | G01 G21 G24 G28 G32 G35 G38 |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19707&r=cfn |
| By: | Giovanni Favero (Dept. of Management, Università Ca' Foscari Venice) |
| Abstract: | The research here proposed is a micro-analysis of a business ending in bankruptcy in the aftermaths of the first oil shock, concerning the Italian subsidiary of a German wareenamelling group established in the town of Bassano in 1925. Following the budget reports and the interviews with the former entrepreurs, the company flourished until the 1960s, when managerial and entrepreneurial successions emphasized the growing difficulties deriving from growing labour costs. A tentative reorganization of the company was hindered in 1968 by union resistance and political pressures for the preservation of employment levels. In 1975 the board of directors decided to declare bankruptcy as a consequence of the huge budget losses. However, a subsequent inquiry of the Italian tax authority discovered an accounting fraud concerning hidden profits in 1974 and 1975. The fraud disclosure shows how historical conditions could create the convenience for performance understatement not only for fiscal purposes, but also in order to make divestment possible. However, it is also used here as an element to argue that business sources and the story they tell should not be taken at their face value, and that a different reconstruction of the company's path to failure is possible. The literature concerning the missed recognition of opportunities is then mobilised in order to interpret the inconsistencies that emerge from the triangulation of business archives, press columns and interviews with union representatives and politicians. This allows to put back into perspective what results as an obsession of company management with labour costs, concealing the importance of other competitive elements, such as the increasing specialisation of the producers of home appliances. This 'refractive error' may be typical of businesses operating in (presumed) mature industries at international level, where wage differentials offer the opportunity to pursue quite literally exploitation much further. |
| Keywords: | Business history, foreign direct investments, family business, accounting fraud, corporate governance |
| JEL: | N84 G34 L21 F23 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:vnm:wpdman:63&r=cfn |