nep-cfn New Economics Papers
on Corporate Finance
Issue of 2014‒05‒17
five papers chosen by
Zelia Serrasqueiro
University of the Beira Interior

  1. Finance and industrial strategy By Malcolm Sawyer
  2. Money management with optimal stopping of losses for maximizing the returns of futures trading By Lundström, Christian
  3. Friendship between Banks: An Application of an Actor-Oriented Model of Network Formation on Interbank Credit Relations By Karl Finger; Thomas Lux
  4. Do ETFs Increase Volatility? By Itzhak Ben-David; Francesco Franzoni; Rabih Moussawi
  5. Investment Noise and Trends By Robert F. Stambaugh

  1. By: Malcolm Sawyer (University of Leeds)
    Abstract: The paper is focused on the role of finance in the context of the implementation of industrial along the lines of industrial strategy. It argues that there is not a shortage of savings for the funding of investment, and that attention should focus on the direction of savings in ways compatible with development and sustainability. An underlying theme paper is that the financial sector has to serve the economy and industry, rather than vice versa. The financial sector should be re-structured in ways which are conducive to sustainable development. This would involve focusing activities of the financial sector on commercial banking, promotion of a financial sector less prone to financial instability, and direction of funds. A well-designed financial transaction tax along with other taxes on the financial sector would aid focusing the financial sector onto commercial banking activities. The promotion of a more diverse (e.g. in forms of ownership) and regional based banking system could contribute to stability. A combination of ‘directed lending’ with requirements that a stated proportion of bank lending be directed towards specified areas such as ‘green investment’, small and medium sized enterprises, and the birth of a State development bank are advocated.
    Keywords: industrial strategy, finance
    JEL: G20 L52
    Date: 2014–04–08
  2. By: Lundström, Christian (Department of Economics, Umeå School of Business and Economics)
    Abstract: By using money management, an investor may determine the optimal leverage factor to apply on each trade, for maximizing the profitability of investing. Research suggests that the stopping of losses may increase the profitability of a trading strategy when returns follow momentum. This paper contributes to the literature by proposing the first money management criterion that incorporates optimal stopping of losses. In an empirical trading study, we are able to substantially improve the profitability when using this criterion, relative to the existing criteria. We conclude that money management should incorporate stopping of losses when returns follow momentum.
    Keywords: Kelly criterion; Vince optimal f; Leverage; Position size; Commodity trading advisor; Managed futures hedge funds
    JEL: G11 G14 G17 G19
    Date: 2014–05–06
  3. By: Karl Finger; Thomas Lux
    Abstract: This paper investigates the driving forces behind banks’ link formation in the interbank market by applying the stochastic actor oriented model (SAOM) developed in sociology. Our data consists of quarterly networks constructed from the transactions on an electronic platform (e-MID) over the period from 2001 to 2010. Estimating the model for the time before and after the global financial crisis (GFC), shows relatively similar behavior over the complete period. We find that past trades are a significant predictor of future credit relations which indicates a strong role for the formation of lasting relationships between banks. We also find strong importance of size-related characteristics, but little influence of past interest rates. The major changes found for the period after the onset of the financial crisis are that: (1) large banks and those identified as `core´ intermediaries became even more popular and (2) indirect counterparty risk appears to be more of a concern as indicated by a higher tendency to avoid indirect exposure via clustering effects
    Keywords: interbank market, network formation, financial crisis
    JEL: G21 G01 C35
    Date: 2014–04
  4. By: Itzhak Ben-David; Francesco Franzoni; Rabih Moussawi
    Abstract: We study whether exchange traded funds (ETFs)—an asset of increasing importance—impact the volatility of their underlying stocks. Using identification strategies based on the mechanical variation in ETF ownership, we present evidence that stocks owned by ETFs exhibit significantly higher intraday and daily volatility. We estimate that an increase of one standard deviation in ETF ownership is associated with an increase of 16% in daily stock volatility. The driving channel appears to be arbitrage activity between ETFs and the underlying stocks. Consistent with this view, the effects are stronger for stocks with lower bid-ask spread and lending fees. Finally, the evidence that ETF ownership increases stock turnover suggests that ETF arbitrage adds a new layer of trading to the underlying securities.
    JEL: G12 G14 G15
    Date: 2014–04
  5. By: Robert F. Stambaugh
    Abstract: During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as well as shifts by active managers toward lower fees and more index-like investing. I develop an equilibrium model linking these investment trends to the decline in individual ownership, interpreting the latter as a reduction in noise trading. Active management corrects most noise-trader induced mispricing, and the fraction left uncorrected shrinks as noise traders' stake in the market declines. Less mispricing then dictates a smaller footprint for active management.
    JEL: G10 G11 G12 G23
    Date: 2014–04

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