nep-cfn New Economics Papers
on Corporate Finance
Issue of 2015‒04‒25
23 papers chosen by
Zelia Serrasqueiro
Universidade da Beira Interior

  1. Testing for Distortions in Performance Measures: An Application to Residual Income Based Measures like Economic Value Added By Randolph Sloof; Mirjam van Praag
  2. Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks By William R. Cline
  3. Does it pay to invest in Art? A Selection-corrected Returns Perspective By Arthur Korteweg; Roman Kräussl; Patrick Verwijmeren
  4. Capital Structure Arbitrage revisited By Marcin Wojtowicz
  5. Central Clearing and Asset Prices By Albert J. Menkveld; Emiliano Pagnotta; Marius A. Zoican
  6. Banks and Market Liquidity By Stefan Arping
  7. Why Do We Need Both Liquidity Regulations and a Lender of Last Resort? A Perspective from Federal Reserve Lending during the 2007-09 U.S. Financial Crisis By Carlson, Mark A.; Duygan-Bump, Burcu; Nelson, William R.
  8. Financial Fragility, Sovereign Default Risk and the Limits to Commercial Bank Bail-outs By Sweder van Wijnbergen; Christiaan van der Kwaak
  9. Insecure Debt By Enrico Perotti; Rafael Matta
  10. Banking Unions: Distorted Incentives and Efficient Bank Resolution By Marius A. Zoican; Lucyna A. Górnicka
  11. Option Prices and Model-free Measurement of Implied Herd Behavior in Stock Markets By Daniël Linders; Jan Dhaene; Wim Schoutens
  12. A Real Option Perspective on Valuing Gas Fields By Lin Zhao; Sweder van Wijnbergen
  13. Recessions after Systemic Banking Crises: Does it matter how Governments intervene? By Sweder van Wijnbergen; Timotej Homar
  14. Short-Selling, Leverage and Systemic Risk By Amelia Pais; Philip A. Stork
  15. Institutional Monitoring, Coordination and Acquisition Decision in Chinese Public Listed Companies By Peng, Fei; Kang, Lili; Yang, Xiaocong
  16. Risk Modelling and Management: An Overview By Chia-Lin Chang; David E. Allen; Michael McAleer; Teodosio Perez Amaral
  17. Investor Sentiment and Employment By Maurizio Montone; Remco C.J. Zwinkels
  18. A One Line Derivation of EGARCH By Michael McAleer; Christian M. Hafner
  19. The Empirics of Balance Sheet Mechanics. Capital and Leverage in Small-scale Banking By Franz R. Hahn
  20. Decision Making in Incomplete Markets with Ambiguity -- A Case Study of a Gas Field Acquisition By Lin Zhao; Sweder van Wijnbergen
  21. The Impact of China on Stock Returns and Volatility in the Taiwan Tourism Industry By Chia-Lin Chang; Hui-Kuang Hsu; Michael McAleer
  22. Advances in Financial Risk Management and Economic Policy Uncertainty: An Overview By Shawkat Hammoudeh; Michael McAleer
  23. Total Factor Productivity of Indian Microfinance Institutions By Bibek Ray Chaudhuri; Shubhasree Bhadra

  1. By: Randolph Sloof (University of Amsterdam); Mirjam van Praag (Copenhagen Business School, Denmark)
    Abstract: This discussion paper resulted in a publication in the 'Journal of Economics and Management Strategy', forthcoming.<P> 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.<P> Submitted to the 'Journal of Economics and Management Strategy'.
    Keywords: Residual Income, Economic Value Added, distortion, performance measurement, incentive compensation
    JEL: D21 G35 J33 L21 M12 M40 M52
    Date: 2014–05–09
  2. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Some advocates of far higher capital requirements for banks invoke the Modigliani-Miller theorem as grounds for judging that associated costs would be minimal. The M&M theorem holds that the average cost of capital to the firm is independent of capital structure, because any reduction in capital cost from switching to higher leverage using lower-cost debt is exactly offset by an induced increase in the unit cost of higher-cost equity capital as a consequence of the associated rise in risk. Statistical tests for large US banks in 2002–13 find that less than half of this M&M offset attains in practice. Higher capital requirements would thus impose increases in lending costs, with associated output costs from lower capital formation. These costs to the economy would need to be compared with benefits from lower risk of banking crises to arrive at optimal levels of capital requirements.
    Keywords: Financial Regulation, Bank Capital Requirements, Capital Structure
    JEL: E44 G21 G28 G32
    Date: 2015–04
  3. By: Arthur Korteweg (Stanford Graduate School of Business, Stanford, California, United States of America); Roman Kräussl (Luxembourg School of Finance and the Center for Alternative Investments at Goizueta Business School, Emory University); Patrick Verwijmeren (Erasmus University Rotterdam, Duisenberg School of Finance,The Netherlands; University of Melbourne; University of Glasgow)
    Abstract: This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 7 percent, down from 11 percent for traditional uncorrected repeat-sales regressions, and Sharpe Ratios drop from 0.4 to 0.1. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy, once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously.
    Keywords: Art investing, Selection bias, Asset allocation
    JEL: D44 G1 Z11
    Date: 2013–10–03
  4. By: Marcin Wojtowicz (VU University Amsterdam, the Netherlands)
    Abstract: We study risk and return properties of capital structure arbitrage strategies aiming to profit from temporal mispricing between equity and credit default swaps (CDSs) of companies. We find that capital structure arbitrage provides an attractive annualized return of 24.35% on invested capital. The arbitrage returns are higher for lower rated companies and surprisingly they are also higher for more liquid companies with larger CDS trading volumes. We find that the number of arbitrage trade opportunities can at times cluster and in our sample the concentration of trades occurs when they are most profitable, which highlights the issue of capital allocation. Constructing weekly return indices of capital structure arbitrage, we find that no more than 15% of the returns is explained by common risk factors.
    Keywords: Capital structure arbitrage, credit defaults swaps, equities, limits to arbitrage
    JEL: G11 G12 G14 G19
    Date: 2014–10–20
  5. By: Albert J. Menkveld (VU University Amsterdam); Emiliano Pagnotta (NYU Stern School of Business, United States of America); Marius A. Zoican (VU University Amsterdam, Tinbergen Institute and Duisenberg School of Finance)
    Abstract: We investigate the effects of introducing a central clearing counterparty (CCP) on securities prices by adopting as an experimental construct the 2009 CCP reform in three Nordic markets. We find that, relative to other European economies, these countries experience market-adjusted equity returns of -1.08% per month during a 16-month announcement window. We also find negative effects on price-earnings ratios. The decrease in prices is less pronounced for stocks with low number of counterparties and,consistent with the margin-CAPM, more pronounced for stocks with higher margins. Our results suggest that introducing a CCP may have unintended negative consequences for public corporations.
    Keywords: clearing, asset prices, margins, liquidity
    JEL: G12 G14 G23
    Date: 2013–11–08
  6. By: Stefan Arping (University of Amsterdam)
    Abstract: I study a model of market-liquidity provision by levered intermediaries that, besides operating trading desks, run deposit-taking franchises. Levered intermediaries’ heightened incentive to absorb risk helps to counteract liquidity-provision frictions that, in an unlevered economy, would lead to price distortions and suppressed levels of asset origination ex ante. However, liquidity provision may also overshoot, leading to unhealthy price bubbles and causing asset origination to become excessive. Capital requirements are no panacea: They can spur risk taking and make bubbles bubblier. Ring fencing of trading activities can be, but is not necessarily, undesirable.
    Keywords: Market Liquidity, Capital Requirements, Volcker Rule, Ring Fencing
    JEL: G12 G14 G21 G24
    Date: 2015–02–10
  7. By: Carlson, Mark A. (Board of Governors of the Federal Reserve System (U.S.)); Duygan-Bump, Burcu (Board of Governors of the Federal Reserve System (U.S.)); Nelson, William R. (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: During the 2007-09 financial crisis, there were severe reductions in the liquidity of financial markets, runs on the shadow banking system, and destabilizing defaults and near-defaults of major financial institutions. In response, the Federal Reserve, in its role as lender of last resort (LOLR), injected extraordinary amounts of liquidity. In the aftermath, lawmakers and regulators have taken steps to reduce the likelihood that such lending would be required in the future, including the introduction of liquidity regulations. These changes were motivated in part by the argument that central bank lending entails extremely high costs and should be made unnecessary by liquidity regulations. By contrast, some have argued that the loss of liquidity was the result of market failures, and that central banks can solve such failures by lending, making liquidity regulations unnecessary. In this paper, we argue that LOLR lending and liquidity regulations are complementary tools. Liquidity shortfalls can arise for two very different reasons: First, sound institutions can face runs or a deterioration in the liquidity of markets they depend on for funding. Second, solvency concerns can cause creditors to pull away from troubled institutions. Using examples from the recent crisis, we argue that central bank lending is the best response in the former situation, while orderly resolution (by the institution as it gets through the problem on its own or via a controlled failure) is the best response in the second situation. We also contend that liquidity regulations are a necessary tool in both situations: They help ensure that the authorities will have time to assess the nature of the shortfall and arrange the appropriate response, and they provide an incentive for banks to internalize the externalities associated with any liquidity risks.
    Keywords: Lender of last resort; central banks; financial crises; liquidity regulation
    JEL: E58 G01 G28
    Date: 2015–02–10
  8. By: Sweder van Wijnbergen (University of Amsterdam); Christiaan van der Kwaak (University of Amsterdam)
    Abstract: This paper resulted in a publication in the <A href="">'Journal of Economic Dynamics and Control'</A>, 2014, 43, 218-240.<P> We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our model balance sheet constrained financial intermediaries finance both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face the risk of a (partial) default of the government on its debt obligations. We analyse the impact of a financial crisis, first under full government credibility and then with an endogenous sovereign debt discount. We introduce long term government debt, which gives rise to the possibility of capital losses on bank balance sheets. The negative feedback effects from falling bond prices on the economy are shown to increase with the average duration of the government bonds, as higher interest rates on new debt lead to capital losses on banks' holding of existing long term (government) debt. The associated increase in credit tightness leads to a negative amplification effect, significantly increasing output losses and declines in investment after a financial crisis. We introduce sovereign default risk through the existence of a maximum sustainable level of debt, derived from the maximum level of taxation that is politically feasible. When close to this limit, sovereign discounts emerge reflecting potential defaults on debt, creating a strong link between sovereign default risk and financial fragility emerges. A debt-financed recapitalisation of the financial intermediaries causes bond prices to drop triggering capital losses at the bank under intervention. This mechanism shows the limits to conventional bank bail-outs in countries with fragile public creditworthiness, limits that became very visible during the Great Recession in Southern Europe.
    Keywords: Financial Intermediation; Macrofinancial Fragility; Fiscal Policy; Sovereign Default Risk
    JEL: E44 E62 H30
    Date: 2013–10–25
  9. By: Enrico Perotti (University of Amsterdam, the Netherlands); Rafael Matta (University of Amsterdam, the Netherlands)
    Abstract: Does demand for safety create instability ? Secured (repo) funding can be made so safe that it never runs, but shifts risk to unsecured creditors. We show that this triggers more frequent runs by unsecured creditors, even in the absence of fundamental risk. This effect is separate from the liquidation externality caused by fire sales of seized collateral upon default. As more secured debt causes larger fire sales, it leads to higher haircuts which further increase the frequency of runs. While secured funding combined with high yield unsecured debt may reduce instability, the private choice of repo funding always increases it. Regulators need to contain its reinforcing effect on liquidity risk, trading off its role in expanding funding by creating a safe asset.
    Keywords: Secured credit, repo, bank runs, haircuts
    JEL: G21 G28
    Date: 2015–03–16
  10. By: Marius A. Zoican (VU University Amsterdam); Lucyna A. Górnicka (University of Amsterdam)
    Abstract: A banking union limits international bank default contagion, eliminating inefficient liquidations. For particularly low short term returns, it also stimulates interbank flows. Both effects improve welfare. An undesirable effect arises for moderate moral hazard, as the banking union encourages risk taking by systemic institutions. If banks hold opaque assets, the net welfare effect of a banking union can be negative. Restricting the banking union mandate restores incentives, improving welfare. The optimal mandate depends on moral hazard intensity and expected returns. Net creditor countries should contribute most to the joint resolution fund, less so if a banking union distorts incentives.
    Keywords: banking, financial intermediation, risk shifting, banking union
    JEL: G15 G18 G21 G33
    Date: 2013–11–12
  11. By: Daniël Linders (KU Leuven, Leuven, Belgium); Jan Dhaene (KU Leuven, Leuven, Belgium); Wim Schoutens (KU Leuven, Leuven, Belgium)
    Abstract: In this paper, we introduce two classes of indices which can be used to measure the market perception concerning the degree of dependency that exists between a set of random variables, representing di¤erent stock prices at a …xed future date. The construction of these measures is based on the theory of comonotonicity. Both types of herd behavior indices are model-free and risk-neutral, derived from available option data. Depending on its particular de…nition, each index represents a particular aspect of the market sentiment concerning future co-movement of the underlying stock prices.
    Keywords: comonotonicity, herd behavior, HIX, index options, market fear, Model-free measures, VIX
    JEL: G13 G14
    Date: 2015–01–06
  12. By: Lin Zhao (University of Amsterdam, Duisenberg School of Finance); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: Real option theory has remained a fringe field; practitioners believe it is not practically applicable in complex real world environments. We show that this view is mistaken. We apply real option theory to a highly complex energy problem with unhedgeable risk, time varying volatilities and endogenous exercise dates (non-European options). Investment decisions in the energy industry are often undertaken sequentially and are sensitive to information on markets and geographic conditions. Information may arrive gradually over time and as a consequence of early stage decisions. Contrary to real option analysis (ROA), standard NPV-based frameworks are unsuitable because they do not allow for the fact that new information may change later stage decisions. We apply the approach to exploitation decisions for a Dutch cluster of gas fields, where gas prices and field reservoir size are the two main sources of uncertainty. Gas price returns show volatility clustering , which we model using a GARCH specification. Reservoir size uncertainty is unhedgeable, which necessitates an approach dealing with incomplete markets. Finally investment decisions can be postponed or delayed, which implies an non-European option setting, for which no analytical solutions exist. Correctly modeling the structure of volatility has a major impact: Option values shrink by 50% if the time varying nature of volatility is ignored. We also show that a high correlation between reservoir size at different locations creates large option values. The non-standard features of our approach have a major impact: option values are large so real options based valuations substantially exceed corresponding NPV calculations.
    Keywords: real options, unhedgeable risks, volatility clustering, gas field valuation, pricing flexibility
    JEL: C61 G31 G32 Q4
    Date: 2013–09–02
  13. By: Sweder van Wijnbergen (University of Amsterdam); Timotej Homar (University of Amsterdam)
    Abstract: Systemic banking crises often continue into recessions with large output losses (Reinhart & Rogoff 2009a). In this paper we ask whether the way Governments intervene in the financial sector has an impact on the economy's subsequent performance. Our theoretical analysis focuses on bank incentives to manage bad loans. We show that interventions involving bank restructuring provide banks with incentives to restructure bad loans and free up resources for new economic activity. Other interventions lead banks to roll over bad loans, tying up resources in distressed firms. Our analysis suggests that zombie banks are a drag on economic recovery. We then analyze 65 systemic banking crises from the period 1980-2012, of which 25 are part of the recent global financial crisis, to answer the question: how effective are intervention measures from the macro perspective, in particular how do they affect recession duration? We find that bank restructuring, which includes bank recapitalizations, significantly reduces recession duration. The effect of liquidity support on the probability of recovery is positive but smaller. Blanket guarantees on bank liabilities and monetary policy do not have a significant effect.
    Keywords: Financial crises, intervention policies, zombie banks, economic recovery, bank restructuring, bank recapitalization
    JEL: E44 E58 G21 G28
    Date: 2013–03–04
  14. By: Amelia Pais (Massey University, College of Business, School of Economics and Finance, Auckland, New Zealand); Philip A. Stork (VU University Amsterdam, and Duisenberg School of Finance)
    Abstract: During the Global Financial Crisis, regulators imposed short-selling bans to protect financial institutions. The rationale behind the bans was that “bear raids”, driven by short-sellers, would increase the individual and systemic risk of financial institutions, especially for institutions with high leverage. This study uses Extreme Value Theory to estimate the effect of short-selling on financial institutions’ individual and systemic risks in France, Italy and Spain; it also analyses the relationship between financial institutions’ leverage and short-selling. The results show that short-sellers appear to specifically target institutions with lower capital levels. Furthermore, institutions’ risk-levels and changes in short-selling positions tend to move in tandem.
    Keywords: bear raids, short-selling bans, financial institutions’ risk, systemic risk, leverage capital requirements, Extreme Value Theory
    JEL: C14 G01 G15 G21
    Date: 2013–11–15
  15. By: Peng, Fei; Kang, Lili; Yang, Xiaocong
    Abstract: This paper endeavors to explore the roles that institutional investors play in acquisition decision of Chinese Public Listed Companies (PLCs). Acquisition decision is assumed as a cost-benefit analysis process of shareholders as strategic alliances. Using micro data in the Chinese stock market during 2003-2008, we find that institutional investors including Qualified Foreign Institutional Investors (QFII), Social Security Funds (SSF), Security Firms (SF) and Security Investment Funds (SIF), as well as tradable share (TS) concentration affect a PLC’s acquisition likelihood rather than its annual acquisition size. SSF, SIF and TS concentration can increase acquisition likelihood while QFII decrease it. This paper suggests a strategic alliance model in which institutional investors choose whether to coordinate with controlling shareholder and management. Our paper contributes to the published literature in three ways. First, we offer a conceptual framework to understand the coordination process of acquisition decision in China. Second, we identify which institutional investors could benefit from their monitoring on corporate acquisition through better post-acquisition performance and which could not. Third, we investigate whether institutional investors effectively monitor acquisiton decision or just pick cherry.
    Keywords: Corporate Governance; Institutional Monitoring; Acquisition Decision; Coordination
    JEL: G23 G34 P11
    Date: 2014–06
  16. By: Chia-Lin Chang (National Chung Hsing University, Taiwan); David E. Allen (Edith Cowan University, Australia); Michael McAleer (Erasmus University Rotterdam, Complutense University of Madrid, Spain, and Kyoto University); Teodosio Perez Amaral (Complutense University of Madrid, Spain)
    Abstract: The papers in this special issue of Mathematics and Computers in Simulation are substantially revised versions of the papers that were presented at the 2011 Madrid International Conference on “Risk Modelling and Management” (RMM2011). The papers cover the following topics: currency hedging strategies using dynamic multivariate GARCH, risk management of risk under the Basel Accord: A Bayesian approach to forecasting value-at-risk of VIX futures, fast clustering of GARCH processes via Gaussian mixture models, GFC-robust risk management under the Basel Accord using extreme value methodologies, volatility spillovers from the Chinese stock market to economic neighbours, a detailed comparison of Value-at-Risk estimates, the dynamics of BRICS's country risk ratings and domestic stock markets, U.S. stock market and oil price, forecasting value-at-risk with a duration-based POT method, and extreme market risk and extreme value theory.
    Keywords: Currency hedging strategies, Basel Accord, risk management, forecasting, VIX futures, fast clustering, mixture models, extreme value methodologies, volatility spillovers, Value-at-Risk, country risk ratings, BRICS, extreme market risk
    JEL: C14 C32 C53 C58 G11 G32
    Date: 2013–06–25
  17. By: Maurizio Montone (Erasmus University Rotterdam, the Netherlands); Remco C.J. Zwinkels (VU University Amsterdam, the Netherlands)
    Abstract: We find that investor sentiment should affect a firm's employment policy in a world with moral hazard and noise traders. Consistent with the model's predictions, we show that higher sentiment among US investors leads to: (1) higher employment growth worldwide; (2) lower labor productivity, as the growth in employment is not matched by real value added growth; and (3) positive wage growth in countries with a greater proportion of high-skill labor, but negative wage growth otherwise. We also find evidence that sentiment induces greater labor instability during financial crises, which sheds new light on the view that financial development has a "dark side". Overall, the results suggest that sentiment has real effects, especially in countries that attract more foreign direct investments from the US and that are perceived as more popular among US investors.
    Keywords: Investor sentiment, labor market, financial development, financial crises
    JEL: G10 G30 F21 J30
    Date: 2015–04–02
  18. By: Michael McAleer (National Tsing Hua University, Taiwan, Econometric Institute Erasmus School of Economics Erasmus University Rotterdam, and Complutense University of Madrid, Spain); Christian M. Hafner (Université catholique de Louvain, Belgium)
    Abstract: One of the most popular univariate asymmetric conditional volatility models is the exponential GARCH (or EGARCH) specification. In addition to asymmetry, which captures the different effects on conditional volatility of positive and negative effects of equal magnitude, EGARCH can also accommodate leverage, which is the negative correlation between returns shocks and subsequent shocks to volatility. However, there are as yet no statistical properties available for the (quasi-) maximum likelihood estimator of the EGARCH parameters. It is often argued heuristically that the reason for the lack of statistical properties arises from the presence in the model of an absolute value of a function of the parameters, which does not permit analytical derivatives or the derivation of statistical properties. It is shown in this paper that: (i) the EGARCH model can be derived from a random coefficient complex nonlinear moving average (RCCNMA) process; and (ii) the reason for the lack of statistical properties of the estimators of EGARCH is that the stationarity and invertibility conditions for the RCCNMA process are not known.
    Keywords: Leverage, asymmetry, existence, random coefficient models, complex nonlinear moving average process
    JEL: C22 C52 C58 G32
    Date: 2014–06–16
  19. By: Franz R. Hahn (WIFO)
    Abstract: The prevailing view in the banking industry is that increased bank capital requirements drag down bank lending. This is because capital is assumed to impose higher funding costs on banks than debts. The leading scholarly view in finance maintains the contrary. We are able to present microeconometric evidence in support of the theoretical proposition that the bank capital-bank lending linkage remains positive under a minimum capital requirement regime. Most importantly, the empirical analysis indicates that this finding may hold well in both short and long run.
    Keywords: Bank capital, Credit crunch, Minimum capital requirement
    Date: 2015–04–16
  20. By: Lin Zhao (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: We apply utility indifference pricing to solve a contingent claim problem, valuing a connected pair of gas fields where the underlying process is not standard Geometric Brownian motion and the assumption of complete markets is not fulfilled. First, empirical data are often characterized by time-varying volatility and fat tails; therefore we use Gaussian GAS (Generalized AutoRegressive Score) and GARCH models, extending them to Student's t-GARCH and t-GAS. Second, an important risk (reservoir size) is not hedgeable. Thus markets are incomplete which also makes preference free pricing impossible and thus standard option pricing inapplicable. Therefore we parametrize the investor's risk preference and use utility indifference pricing techniques. We use Lease Square Monte Carlo simulations as a dimension reduction technique. Moreover, an investor often only has an approximate idea of the true probabilistic model underlying variables, making model ambiguity a relevant problem. We show empirically how model ambiguity affects project values, and importantly, how option values change as model ambiguity gets resolved in later phases of the projects considered. We show that traditional valuation approaches will consistently underestimate the value of project flexibility and in general lead to overly conservative investment decisions in the presence of time dependent stochastic structures.
    Keywords: real options, time varying volatility and fat tails, GAS models, model ambiguity, decision making in incomplete markets, utility indifference pricing
    JEL: C61 D81 G01 G31 G34 Q40
    Date: 2014–12–01
  21. By: Chia-Lin Chang (National Chung Hsing University, Taiwan); Hui-Kuang Hsu (National Pingtung Institute of Commerce, Taiwan); Michael McAleer (National Tsing Hua University, Hsinchu, Taiwan, Erasmus University Rotterdam, The Netherlands, and Complutense University of Madrid, Spain)
    Abstract: This discussion paper resulted in a publication in <I>The North American Journal of Economics and Finance</I> (2014). Volume 29(C), pages 381-401.<P> This paper investigates the stock returns and volatility size effects for firm performance in the Taiwan tourism industry, especially the impacts arising from the tourism policy reform that allowed mainland Chinese tourists to travel to Taiwan. Four conditional univariate GARCH models are used to estimate the volatility in the stock indexes for large and small firms in Taiwan. Daily data from 30 November 2001 to 27 February 2013 are used, which covers the period of Cross-Straits tension between China and Taiwan. The full sample period is divided into two subsamples, namely prior to and after the policy reform that encouraged Chinese tourists to Taiwan. The empirical findings confirm that there have been important changes in the volatility size effects for firm performance, regardless of firm size and estimation period. Furthermore, the risk premium reveals insignificant estimates in both time periods, while asymmetric effects are found to exist only for large firms after the policy reform. The empirical findings should be useful for financial managers and policy analysts as it provides insight into the magnitude of the volatility size effects for firm performance, how it can vary with firm size, the impacts arising from the industry policy reform, and how firm size is related to financial risk management strategy.
    Keywords: Tourism, firm size, stock returns, conditional volatility models, volatility size effects, asymmetry, tourism policy reform
    JEL: C22 G18 G28 G32 L83
    Date: 2013–08–16
  22. By: Shawkat Hammoudeh (Drexel University, Philadelphia, United States); Michael McAleer (National Tsing Hua University, Taiwan; Erasmus University Rotterdam, the Netherlands; Complutense University of Madrid, Italy)
    Abstract: Financial risk management is difficult at the best of times, but especially so in the presence of economic uncertainty and financial crises. The purpose of this special issue on “Advances in Financial Risk Management and Economic Policy Uncertainty” is to highlight some areas of research in which novel econometric, financial econometric and empirical finance methods have contributed significantly to the analysis of financial risk management when there is economic uncertainty, especiallythe power of print: uncertainty shocks, markets, and the economy, determinants of the banking spread in the Brazilian economy: the role of micro and macroeconomic factors, forecasting value-at-risk using block structure multivariate stochastic volatility models, the time-varying causality between spot and futures crude oil prices: a regime switching approach, a regime-dependent assessment of the information transmission dynamics between oil prices, precious metal prices and exchange rates, a practical approach to constructing price-based funding liquidity factors, realized range volatility forecasting: dynamic features and predictive variables, modelling a latent daily tourism financial conditions index, bank ownership, financial segments and the measurement of systemic risk: an application of CoVaR, model-free volatility indexes in the financial literature: a review, robust hedging performance and volatility risk in option markets: application to Standard and Poor’s 500 and Taiwan index options, price cointegration between sovereign CDS and currency option markets in the global financial crisis, whether zombie lending should always be prevented, preferences of risk-averse and risk-seeking investors for oil spot and futures before, during and after the global financial crisis, managing financial risk in Chinese stock markets: option pricing and modeling under a multivariate threshold autoregression, managing systemic risk in The Netherlands, mean-variance portfolio methods for energy policy risk management, on robust properties of the SIML estimation of volatility under micro-market noise and random sampling, asymmetric large-scale (I)GARCH with hetero-tails, the economic fundamentals and economic policy uncertainty of Mainland China and their impacts on Taiwan and Hong Kong, prediction and simulation using simple models characterized by nonstationarity and seasonality, and volatility forecast of stock indexes by model averaging using high frequency data.
    Keywords: Financial risk management, Economic policy uncertainty, Financial econometrics, Empirical finance
    JEL: C58 D81 E60 G32
    Date: 2014–06–23
  23. By: Bibek Ray Chaudhuri (Indian Institute of Foreign Trade, Kolkata, India); Shubhasree Bhadra (Department of Business Management, University of Calcutta)
    Abstract: The present study attempts to empirically examine the total factor productivity change (TFPG) of Indian microfinance institutions, using balanced panel data set of 55 MFIs in India between 2008 and 2010. A non parametric Malmquist Productivity Index has been used for this purpose. Efficiency of Indian MFIs has been calculated based on production approach. It was found that technological change has played a significant role in increase of TFPG in the terminal year considered. Further, significant change of scale efficiency in terms of women borrowers also enhances TFPG. Moreover, it was found that operational self sufficiency, return on asset and lagged capital-asset ratio, are significant determinants of TFPG. PAR>30 was also found to be positively related to TFPG.
    Keywords: Productivity change, efficiency, microfinance institution, index number
    JEL: D24 G21 C43
    Date: 2015–02

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