nep-cfn New Economics Papers
on Corporate Finance
Issue of 2014‒11‒17
25 papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Capital Adequacy and Liquidity in Banking Dynamics: Theory and Regulatory Implications By Cao, Jin; Chollete, Loran
  2. A Comparison of the Internal and External Determinants of Global Bank Loans: Evidence from Bilateral Cross- Country Data By Uluc Asyun; Ralf Hepp
  3. Corporate Governance Reforms, Interlocking Directorship and Company Performance in Italy By Drago, Carlo; Millo, Francesco; Ricciuti, Roberto; Santella, Paolo
  4. Patent Collateral, Investor Commitment, and the Market for Venture Lending By Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
  5. Financial crisis in The Arcades Project of Walter Benjamin By Estrada, Fernando
  6. Patent collateral investor commitment and the market for venture lending By Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
  7. Recent Developments in Quantitative Finance: An Overview By Chang, Chia-Lin; Hu, Shing-Yang; Yu, Shih-Ti
  8. Reforms in Institutional Finance for Inclusive Growth By Swamy, Vighneswara
  9. Ownership Structure and Corporate Governance in the Case of Turkey By Ozsoz, Emre; Gurarda, Sevin; Ates, Abidin
  10. Initial Offer Precision and M&A Outcomes By Keloharju, Matti; Hukkanen, Petri
  11. News Media Sentiment and Investor Behavior By Roman Kräussl; Elizaveta Mirgorodskaya
  12. The Correlation of Nonperforming Loans between Large and Small Banks By Hugo Rodríguez Mendizábal
  13. The analytical framework for identifying and benchmarking systemically important financial institutions in Europe By Karkowska, Renata
  14. Acquisitions of Start-ups by Incumbent Businesses A market selection process of “high-quality” entrants? By Andersson, Martin; Xiao, Jing
  15. The Individually Accepted Loss By Erick W. Rengifo; Debra Emanuela Trifan; Debra Rossen Trendafilov
  16. The societal benefits of a financial transaction tax By Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
  17. The risk of financial intermediaries By Delis , Manthos D.; Hasan, Iftekhar; Tsionas, Efthymios G.
  18. The empirical analysis of dynamic relationship between financial intermediary connections and market return volatility By Karkowska, Renata
  19. Extreme Returns in the European Financial Crisis By Chouliaras, Andreas; Grammatikos, Theoharry
  20. Testing for Distortions in Performance Measures: An Application to Residual Income Based Measures like Economic Value Added By Randolph Sloof; Mirjam van Praag
  21. Cocos, Contagion and Systemic Risk By Stephanie Chan; Sweder van Wijnbergen
  22. Integration Contracts and Asset Complementarity: Theory and Evidence from US Data By Di Giannatale, Paolo; Passarelli, Francesco
  23. How public information affects asymmetrically informed lenders: evidence from credit registry reform By Choudhary, M. Ali; Jain, Anil
  24. Taking the risk out of systemic risk measurement I By Paul H. Kupiec; Levent Guntay
  25. Common Risk Factors in Equity Markets By Victoria Atanasov

  1. By: Cao, Jin (Norges Bank); Chollete, Loran (UiS)
    Abstract: We present a framework for modelling optimum capital adequacy in a dynamic banking context. We combine the (static) capital adequacy framework of Repullo (2013) with a dynamic banking model similar to that of Corbae and D`Erasmo (2014), with the extra feature that the probability of systemic risk is endogenous. Unlike previous work, we examine frameworks to ameliorate bankruptcy using both capital adequacy and liquidity requirements. Since equity is costly, the social cost of regulation may be reduced if a regulatory capital requirement can be accompanied by other tools such as a liquidity buffer.
    Keywords: Keywords: Bankruptcy; Capital Adequacy; Endogenous Systemic Risk; Liquidity Requirement; Regulation Costs
    JEL: E50 G21 G28
    Date: 2014–09–16
  2. By: Uluc Asyun (University of Central Florida); Ralf Hepp (Fordham University)
    Abstract: This paper finds that factors determined outside of a country are more closely related to the global bank loans she receives. These loans are more stable when global banks are less competitive and have a higher presence in the recipient country. We obtain our results by using data on the bilateral loans positions of 15 countries and a unique methodology to identify and compare the independent effects of external and internal factors. We find support for our empirical results and draw more detailed inferences for competition and global bank presence by solving a simple model of global banking.
    Keywords: Cross-country loans, global banks, competition, overlapping generations model.
    JEL: E44 F34 G15 G21
    Date: 2014
  3. By: Drago, Carlo; Millo, Francesco; Ricciuti, Roberto; Santella, Paolo
    Abstract: We analyze the effects of corporate governance reforms on interlocking directorship (ID), and we assess the relationship between interlocking directorships and company performance for the main Italian firms listed on the Italian stock exchange over 1998-2007. We use a unique dataset that includes corporate governance variables related to the board size, interlocking directorships and variables related to companies’ performances. The network analysis showed only some effectiveness of these reforms in slightly dispersing the web of companies. Using a diff-in-diff approach, we then find in the period considered a slight reduction in the returns of those companies where interlocking directorships were used the most, which confirms our assumption on the perverse effect of ID on company performance in a context prone to shareholder expropriation such as the Italian one
    Keywords: Corporate Governance, Interlocking Directorships, Social Network Analysis, Empirical Corporate Finance
    JEL: C33 G34 G38 L14
    Date: 2014–10–10
  4. By: Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
    Abstract: The use of debt to finance risky entrepreneurial-firm projects is rife with informational and contracting problems. Nonetheless, we document widespread lending to startups in three innovation-intensive sectors and in early stages of development. At odds with claims that the secondary patent market is too illiquid to shape debt financing, we find that intensified patent trading increases the annual rate of startup lending, particularly for startups with more redeployable (less firm-specific) patent assets. Exploiting differences in venture capital (VC) fundraising cycles and a negative capital-supply shock in early 2000, we also find that the credibility of VC commitments to refinance and grow fledgling companies is vital for such lending. Our study illuminates friction-reducing mechanisms in the market for venture lending, a surprisingly active but opaque arena for innovation financing, and tests central tenets of contract theory.
    Keywords: entrepreneurial finance, financial intermediation, market for patents, venture capital, venture lending
    JEL: L14 L26 G24 O16 O3
    Date: 2014–10
  5. By: Estrada, Fernando
    Abstract: The main objective of this paper is to present a reading of The Arcades Project by Walter Benjamin in the context of the financial crisis, in particular, reflect from a few fragments of Benjamin's work appear to lie around a Black Swan. The recovery of the fragments of The Arcades seems appropriate at a time when the financial crisis should be taught as a deeper crisis. Walter Benjamin is placed beyond its time, with a powerful sense of observation worthy of emulation analytical.
    Keywords: Financial theory, markets, Black swan, stock markets, financial crisis, markets risk, Walter Benjamin, Arcades Project.
    JEL: G0 G01 G02 G14 G17 G28 G32 G33
    Date: 2014
  6. By: Yael V. Hochberg; Carlos J. Serrano; Rosemarie H. Ziedonis
    Abstract: The use of debt to finance risky entrepreneurial-firm projects is rife with informational and contracting problems. Nonetheless, we document widespread lending to startups in three innovation-intensive sectors and in early stages of development. At odds with claims that the secondary patent market is too illiquid to shape debt financing, we find that intensified patent trading increases the annual rate of startup lending, particularly for startups with more redeployable (less firm-specific) patent assets. Exploiting differences in venture capital (VC) fundraising cycles and a negative capital-supply shock in early 2000, we also find that the credibility of VC commitments to refinance and grow fledgling companies is vital for such lending. Our study illuminates friction-reducing mechanisms in the market for venture lending, a surprisingly active but opaque arena for innovation financing, and tests central tenets of contract theory.
    Keywords: Entrepreneurial Finance, Financial Intermediation, Market for Patents, Venture Capital, Venture Lending
    JEL: L14 L26 G24 O16 O3
    Date: 2014–10
  7. By: Chang, Chia-Lin; Hu, Shing-Yang; Yu, Shih-Ti
    Abstract: Quantitative finance combines mathematical finance, financial statistics, financial econometrics and empirical finance to provide a solid quantitative foundation for the analysis of financial issues. The purpose of this special issue on “Recent developments in quantitative finance†is to highlight some areas of research in which novel methods in quantitative finance have contributed significantly to the analysis of financial issues, specifically fast methods for large-scale non-elliptical portfolio optimization, the impact of acquisitions on new technology stocks: the Google-Motorola case, the effects of firm characteristics and recognition policy on employee stock options prices after controlling for self-selection, searching for landmines in equity markets, whether CEO incentive pay improves bank performance, using a quantile regression analysis of U.S. commercial banks, testing price pressure, information, feedback trading, and smoothing effects for energy exchange traded funds, actuarial implications of structural changes in El Niño-Southern Oscillation Index dynamics, credit spreads and bankruptcy information from options data, QMLE of a standard exponential ACD model: asymptotic distribution and residual correlation, and using two-part quantile regression to analyze how earnings shocks affect stock repurchases.
    Keywords: Quantitative finance, Financial econometrics, Empirical finance, Equities, Portfolios, Quantiles
    JEL: C58 G11 G12 G21 G32
    Date: 2014–09–01
  8. By: Swamy, Vighneswara
    Abstract: This paper analyses the need, significance and the advantages of ‘reforms in institutional finance for inclusive growth’ in the context of Indian economy and offers some practicable suggestions from the functional perspective. India’s Rural Financial Architecture (RFA) is subject to systemic policy issues and pervasive institutional weaknesses. Lack of autonomy and weak governance and unseen accountability have affected the sustainability of Rural Financial Institutions (RFI) and resulted in constrained outreach. Importance of access to institutional finance for the poor arises from the problem of financial exclusion of nearly 3 billion people from the formal financial services across the world. With only 34% of population engaged in formal banking, this paper argues that the reforms in institutional finance coupled with governance reforms in India’s RFA would greatly benefit the economy in making available the much-needed financial services to the poor and the neglected sections of the society and facilitate the efforts towards achieving inclusive growth.
    Keywords: Development finance; Financial system, Rural financial institutions, Poverty; Governance; Reforms
    JEL: D53 G2 G21 G28 O16 O43 P21 Q14
    Date: 2014
  9. By: Ozsoz, Emre; Gurarda, Sevin; Ates, Abidin
    Abstract: Turkey is one of the eight countries that currently have a corporate governance index for firms listed on its main stock exchange (Borsa Istanbul). As in the case of many emerging markets, the country’s business landscape is characterized by family owned conglomerates some of which have recently become a favorite target for foreign direct and portfolio investment. By using corporate governance data on 22 publicly traded Turkish companies we estimate the determinants of corporate governance ratings for these companies with a focus on ownership structure. Our results show that family ownership has a negative impact on corporate governance ratings while foreign ownership has a weak but positive effect.
    Keywords: Corporate Governance, Turkish companies, Ownership Structure
    JEL: G3 G32 L20
    Date: 2014–09–03
  10. By: Keloharju, Matti (Aalto University); Hukkanen, Petri (Aalto University)
    Abstract: Building on recent research in social psychology, this paper analyzes the link between the precision of initial cash offers and M&A outcomes. About one-half of the offers are made at the precision of one or five dollars per share, and an additional one-third at the precision of half dollar or one quarter. The practice of making offers at granular price per share levels is associated with the following unfavorable outcomes for the bidder: (1) higher purchase price for target shares, (2) lower probability to complete the deal, and (3) lower announcement return. A median-sized offer made at the precision of one or five dollars per share is associated with a 45 million dollars higher expected transaction price than one made at a precision greater than one quarter. Our results are consistent with the idea that bidders have learned to avoid making offers at the most granular level.
    Keywords: Initial Offer Precision; Mergers and Acquisitions
    JEL: G00 G02 G34
    Date: 2014–09–01
  11. By: Roman Kräussl; Elizaveta Mirgorodskaya (LSF)
    Abstract: This paper investigates the impact of news media sentiment on financial market returns and volatility in the long-term. We hypothesize that the way the media formulate and present news to the public produces different perceptions and, thus, incurs different investor behavior. To analyze such framing effects we distinguish between optimistic and pessimistic news frames. We construct a monthly media sentiment indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and/or the lead paragraph. Our results indicate that pessimistic news media sentiment is positively related to global market volatility and negatively related to global market returns 12 to 24 months in advance. We show that our media sentiment indicator reflects very well the financial market crises and pricing bubbles over the past 20 years.
    Keywords: Investor behavior; News media sentiment; Financial market crises; Pricing bubbles; Framing effects
    JEL: G01 G10 E32
    Date: 2014
  12. By: Hugo Rodríguez Mendizábal
    Abstract: This short paper presents a new stylized fact about bank nonperforming loans. According to the data for the US, the average of the ratio of noncurrent loans to total loans for large banks presents a very high negative correlation with the same ratio for small banks. This result remains valid for different measures of bank size as well as controlling for different bank characteristics such as charter class, specialization or geographical location.
    Keywords: bank size, nonperforming loans
    JEL: G21
    Date: 2014–09
  13. By: Karkowska, Renata
    Abstract: The aim of this article is to identify systemically important banks on a European scale, in accordance with the criteria proposed by the supervisory authorities. In this study we discuss the analytical framework for identifying and benchmarking systemically important financial institutions. An attempt to define systemically important institutions is specified their characteristics under the existing and proposed regulations. In a selected group of the largest banks in Europe the following indicators ie.: leverage, liquidity, capital ratio, asset quality and profitability are analyzed as a source of systemic risk. These figures will be confronted with the average value obtained in the whole group of commercial banks in Europe. It should help finding the answer to the question, whether the size of the institution generates higher systemic risk? The survey will be conducted on the basis of the financial statements of commercial banks in 2007 and 2010 with the available statistical tools, which should reveal the variability of risk indicators over time. We find that the largest European banks were characterized by relative safety and without excessive risk in their activities. Therefore, a fundamental feature of increased regulatory limiting systemic risk should understand the nature and sources of instability, and mobilizing financial institutions (large and small) to change their risk profile and business models in a way that reduces the instability of the financial system globally.
    Keywords: banking, Systematically Important Financial Institutions, SIFI, systemic risk, liquidity, leverage, profitability
    JEL: C1 F36 G21 G32 G33
    Date: 2014–09
  14. By: Andersson, Martin (CIRCLE, Lund University and Department of Industrial Economics, Blekinge Institute of Technology); Xiao, Jing (CIRCLE and Department of Economic History, Lund University)
    Abstract: We analyze the frequency and nature by which new firms are acquired by established businesses. Acquisitions are often considered to reflect a technology transfer process and to also constitute one way in which a “symbiosis” between new technology-based firms (NTBFs) and established businesses is realized. Using a micro-level dataset for Sweden in which we follow new entrants up to 18 years after entry, we show that acquisitions of recent start-ups are rare and restricted to a small group of entrants with defining characteristics. Estimates from competing risks models show that acquired start-ups, in particular by multinational enterprises (MNEs), stand out from entrants that either remain independent or exit by being much more likely to be spin-offs operating in high-tech sectors, having strong technological competence, and having weak internal financial resources. Our overall findings support the argument that acquisitions primarily concern NTBFs in market contexts where entry costs are large, access to finance is important and incumbents have high market power.
    Keywords: acquisitions; post-entry performance; market selection; start-ups; new technology-based firms (NTBFs); innovation; competing-risk model; Sweden
    JEL: G34 L22 L26 O32 O33
    Date: 2014–10–03
  15. By: Erick W. Rengifo (Fordham University); Debra Emanuela Trifan (Bayerngas Energy); Debra Rossen Trendafilov (Truman State University)
    Abstract: This paper proposes a new, individual measure of market risk, denoted as the individually acceptable loss (IAL). This measure can be used by portfolio managers in order to better meet the individual profiles of their non-professional clients, including phsychological traits. It can be easily assessed from general subjective and objective parameters. We formally define the IAL of loss averse investors, who narrowly frame financial investments, and are sensitive to the past performance of their risky portfolio. This individual risk measue is applied to the classic portfolio optimization framework in order to derive the optimal wealth allocation among different financial assets. our empirical results suggest that previous optimization relying on a portfolio-exogenous VaR-formulation, underestimates the aversion of individual investors towards financial losses.
    Keywords: market risk, prospect theory, loss aversion, capital allocation, Value-at-Risk.
    JEL: C32 C35 G10
    Date: 2014
  16. By: Aleksander Berentsen; Samuel Huber; Alessandro Marchesiani
    Abstract: We investigate the positive and normative implications of a tax on financial market transactions in a dynamic general equilibrium model, where agents face idiosyncratic liquidity shocks and financial trading is essential. Our main finding is that agents' portfolio choices display a pecuniary externality which results in too much trading. We calibrate the model to U.S. data and find an optimal tax rate of 2.5 percent. Imposing this tax reduces trading in financial markets by 30 percent.
    Keywords: Tobin tax, financial transaction tax, OTC trading
    JEL: E44 E50 G18
    Date: 2014–10
  17. By: Delis , Manthos D. (University of Surrey); Hasan, Iftekhar (Fordham University and Bank of Finland); Tsionas, Efthymios G. (Lancaster University Management School)
    Abstract: This paper reconsiders the formal estimation of bank risk using the variability of the profit function. In our model, point estimates of the variability of profits are derived from a model where this variability is endogenous to other bank characteristics, such as capital and liquidity. We estimate the new model on the entire panel of US banks, spanning the period 1985q1–2012q4. The findings show that bank risk was fairly stable up to 2001 and accelerated quickly thereafter up to 2007. We also establish that the risk of the relatively large banks and banks that failed in the subprime crisis is higher than the industry’s average. Thus, we provide a new leading indicator, which is able to forecast future solvency problems of banks.
    Keywords: estimation of risk; profit function; financial institutions; banks; endogenous risk; US banking sector
    JEL: C13 C33 E47 G21 G32
    Date: 2014–07–09
  18. By: Karkowska, Renata
    Abstract: Article aims to demonstrate the significant impact of dynamics of the relationship between financial intermediaries on the level of market volatility. Particularly important are the growing share of the links between hedge funds and other financial institutions. In order to demonstrate the dynamic test was presented Granger causality, which allows the statistical analysis of cause and effect relationships in the risk spread in the financial system. Using multiple regression analysis study was calculated the impact of the hedge fund market development measured in assets, leverage, the price volatility in various financial markets). Due to data availability study has been limited to 10-year period of analysis (2001-2011). The results show a significant correlation between the volatility in the stock market, bonds and CDS, and the activities of hedge funds on financial markets.
    Keywords: financial market, hedge fund, market instability, volatility
    JEL: A10 C58 G12 G15 G23 G24
    Date: 2013–10
  19. By: Chouliaras, Andreas; Grammatikos, Theoharry
    Abstract: We examine the transmission of extreme stock market returns among three groups of countries: the Euro-periphery countries (Portugal, Ireland, Italy, Greece, Spain), the Euro-core countries (Germany, France, the Netherlands, Finland, Belgium), and the major European Union -but not euro- countries (Sweden, UK, Poland, Czech Republic, Denmark). Using extreme returns on daily stock market data from January 2004 till March 2013, we find that transmission effects are present for the tails of the returns distributions for the Pre-crisis, the US-crisis and the Euro-crisis periods from the Euro-periphery group to the Non-Euro and the Euro-core groups. Within group effects are stronger in the crisis periods. We find that the transmission channel does not seem to have intensified during the crisis periods, but it transmitted larger shocks (in some cases, extreme bottom returns doubled during the crisis periods). Thus, as extreme returns have become much more "extreme" during the financial crisis periods, the expected losses on extreme return days have increased significantly. Given the fact that stock market capitalisations in these country groups are trillions of Euros, a 1% or 2% increase in extreme bottom returns (in crisis periods) can lead to aggregate losses of tens of billions Euros in one single trading day.
    Keywords: Financial Crisis, Financial Contagion, Spillover, Euro-crisis, Stock Markets.
    JEL: G00 G01 G15
    Date: 2014–09–29
  20. By: Randolph Sloof (University of Amsterdam); Mirjam van Praag (Copenhagen Business School, Denmark)
    Abstract: Distorted performance measures in compensation contracts elicit suboptimal behavioral responses that may even prove to be dysfunctional (gaming). This paper applies the empirical test developed by Courty and Marschke (2008) to detect whether the widely used class of Residual Income based performance measures —such as Economic Value Added (EVA)— is distorted, leading to unintended agent behavior. The paper uses a difference-in-differences approach to account for changes in economic circumstances and the self-selection of firms using EVA. Our findings indicate that EVA is a distorted performance measure that elicits the gaming response.
    Keywords: Residual Income, Economic Value Added, distortion, performance measurement, incentive compensation
    JEL: D21 G35 J33 L21 M12 M40 M52
    Date: 2014–05–09
  21. By: Stephanie Chan (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam, the Netherlands)
    Abstract: CoCo’s (contingent convertible capital) are designed to convert from debt to equity when banks need it most. Using a Diamond-Dybvig model cast in a global games framework, we show that while the CoCo conversion of the issuing bank may bring the bank back into compliance with capital requirements, it will nevertheless raise the probability of the bank being run, because conversion is a negative signal to depositors about asset quality. Moreover, conversion imposes a negative externality on other banks in the system in the likely case of correlated asset returns, so bank runs elsewhere in the banking system become more probable too and systemic risk will actually go up after conversion. CoCo’s thus lead to a direct conflict between micro- and macroprudential objectives. We also highlight that ex ante incentives to raise capital to stave off conversion depend critically on CoCo design. In many currently popular CoCo designs, wealth transfers after conversion actually flow from debt holders to equity holders, destroying the latter’s incentives to provide additional capital in times of stress. Finally the link between CoCo conversion and systemic risk highlights the tradeoffs that a regulator faces in deciding to convert CoCo’s, providing a possible explanation of regulatory forbearance.
    Keywords: Contingent Convertible Capital, Contagion, Systemic Risk, Bank Runs, Global Games
    JEL: G01 G21 G32
    Date: 2014–08–21
  22. By: Di Giannatale, Paolo; Passarelli, Francesco
    Abstract: Firms sign an integration contract with the purpose of increasing their expected profits from trade and competition with third parties. Gains depend on how the contract improves the partners' production function (e.g. better synergies, organization, etc.), and how it increases their power in the marketplace. We investigate three bilateral integration contracts under different ownership allocations over resources: M&A, Minority Stake purchase and Joint Venture. We study them theoretically with a cooperative game approach. We derive some profitability conditions that we test empirically on a sample of about 9000 US firms. In order to estimate the link between ownership, asset complementarity and profits over time, we propose a novel multiproduct and time-varying complementarity index. Empirical results fully support our theoretical predictions.
    Keywords: Cooperative Games; Merger; Acquisition; Joint venture; Complementarity
    JEL: C22 C71 G34
    Date: 2014–07–22
  23. By: Choudhary, M. Ali; Jain, Anil
    Abstract: We exploit exogenous variation in the amount of public information available to banks about a firm to empirically evaluate the importance of adverse selection in the credit market. A 2006 reform introduced by the State Bank of Pakistan (SBP) reduced the amount of public information available to Pakistani banks about a firm’s creditworthiness. Prior to 2006, the SBP published credit information not only about the firm in question but also (aggregate) credit information about the firm’s group (where the group was defined as the set of all firms that shared one or more director with the firm in question). After the reform, the SBP stopped providing the aggregate group-level information. We propose a model with differentially informed banks and adverse selection, which generates predictions on how this reform is expected to affect a bank’s willingness to lend. The model predicts that adverse selection leads less informed banks to reduce lending compared to more informed banks. We construct a measure for the amount of information each lender has about a firm’s group using the set of firm-bank lending pairs prior to the reform. We empirically show those banks with private information about a firm lent relatively more to that firm than other, less-informed banks following the reform. Remarkably, this reduction in lending by less informed banks is true even for banks that had a pre-existing relationship with the firm, suggesting that the strength of prior relationships does not eliminate the problem of imperfect information.
    Keywords: Credit Markets; Asymmetric Information; Credit Registry; Developing Country
    JEL: D8 D82 G14 G18
    Date: 2014–01
  24. By: Paul H. Kupiec (American Enterprise Institute); Levent Guntay (American Enterprise Institute)
    Abstract: An emerging literature proposes using conditional value at risk and marginal expected shortfall to measure financial institution systemic risk. We identify two weaknesses in this literature: (1) it lacks formal statistical hypothesis tests; and, (2) it confounds systemic and systematic risk. We address these weaknesses by introducing a null hypothesis that stock returns are normally distributed.
    Keywords: AEI Economic Policy Working Paper Series
    JEL: G
    Date: 2014–01
  25. By: Victoria Atanasov (VU University Amsterdam, the Netherlands)
    Abstract: Empirical measures of world consumption growth risk have failed to rationalize the cross-section of country equity returns. We propose a new factor, termed “the global consumption factor”, to explain the patterns in risk premiums on international equity markets. We identify this factor as the difference between the return on a portfolio of equity market indices with high consumption growth rates and the return on a portfolio of equity market indices with low consumption growth rates. We show that the global consumption factor accounts for about 70% of the cross- sectional variation in equity returns from 47 developed and emerging market countries over a four-decade period. Our risk factor reflects changes in the cross-country consumption dispersion and commands a significant premium to compensate investors for taking on common macroeconomic risks. Empirically, we find that high consumption growth economies have considerably higher consumption dispersion risk than low consumption growth economies, and this can explain their higher average returns.
    Keywords: stock returns, asset pricing, macroeconomic risks, consumption dispersion
    JEL: G11 G12
    Date: 2014–06–17

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