nep-fmk New Economics Papers
on Financial Markets
Issue of 2007‒01‒02
nine papers chosen by



  1. Modelling Term-Structure Dynamics for Risk Management: A Practitioner's Perspective By David Jamieson Bolder
  2. When target CEOs contract with acquirers: evidence from bank mergers and acquisitions By Elijah Brewer, III; William E. Jackson, III; Larry D. Wall
  3. Why do borrowers pledge collateral? new empirical evidence on the role of asymmetric information By Allen N. Berger; Marco A. Espinosa-Vega; W. Scott Frame; Nathan H. Miller
  4. Jump starting GARCH: pricing and hedging options with jumps in returns and volatilities By Jin-Chuan Duan; Peter Ritchken; Zhiqiang Sun
  5. Do bonds span volatility risk in the U.S. Treasury market? a specification test for affine term structure models By Torben G. Andersen; Luca Benzoni
  6. How did the 2003 dividend tax cut affect stock prices? By Eugene Amromin; Paul Harrison; Steven Sharpe
  7. The expectation hypothesis of the term structure of very short-term rates: statistical tests and economic value By Pasquale Della Corte; Lucio Sarno; Daniel L. Thornton
  8. On the Use of Data Envelopment Analysis in Hedge Fund Performance Appraisal By Huyen Nguyen-Thi-Thanh
  9. Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability By Lubos Pastor; Lucian Taylor; Pietro Veronesi

  1. By: David Jamieson Bolder
    Abstract: Modelling term-structure dynamics is an important component in measuring and managing the exposure of portfolios to adverse movements in interest rates. Model selection from the enormous term-structure literature is far from obvious and, to make matters worse, a number of recent papers have called into question the ability of some of the more popular models to adequately describe interest rate dynamics. The author, in attempting to find a relatively simple term-structure model that does a reasonable job of describing interest rate dynamics for risk-management purposes, examines two sets of models. The first set involves variations of the Gaussian affine term-structure model by modestly building on the recent work of Dai and Singleton (2000) and Duffee (2002). The second set includes and extends Diebold and Li (2003). After working through the mathematical derivation and estimation of these models, the author compares and contrasts their performance on a number of in- and out-of-sample forecasting metrics, their ability to capture deviations from the expectations hypothesis, and their predictions in a simple portfolio-optimization setting. He finds that the extended Nelson-Siegel model and an associated generalization, what he terms the "exponential-spline model," provide the most appealing modelling alternatives when considering the various model criteria.
    Keywords: Interest rates; Econometric and statistical methods; Financial markets
    JEL: C0 C6 E4 G1
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:bca:bocawp:06-48&r=fmk
  2. By: Elijah Brewer, III; William E. Jackson, III; Larry D. Wall
    Abstract: This paper investigates the impact of the target chief executive officer’s (CEO) postmerger position on the purchase premium and target shareholders’ abnormal returns around the announcement of the deal in a sample of bank mergers during the period 1990–2004. We find evidence that the target shareholders’ returns are negatively related to the postmerger position of their CEO. However, these lower returns are not matched by higher returns to the acquirer’s shareholders, suggesting little or no wealth transfers. Additionally, our evidence suggests that the target CEO becoming a senior officer of the combined firm does not boost the overall value of the merger transaction.
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2006-28&r=fmk
  3. By: Allen N. Berger; Marco A. Espinosa-Vega; W. Scott Frame; Nathan H. Miller
    Abstract: An impressive theoretical literature motivates collateral as a mechanism that reduces equilibrium credit rationing and other problems arising from asymmetric information between borrowers and lenders. However, no clear empirical evidence exists regarding the theory’s central implication: that reducing asymmetric information reduces the incidence of collateral. We provide such evidence by exploiting exogenous variation in lender information sets related to their adoption of a new information technology and by comparing collateral outcomes before and after adoption. Our results are consistent with the central implication of the theoretical models and may also have efficiency and macroeconomic implications.
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:fip:fedawp:2006-29&r=fmk
  4. By: Jin-Chuan Duan; Peter Ritchken; Zhiqiang Sun
    Abstract: This paper considers the pricing of options when there are jumps in the pricing kernel and correlated jumps in asset returns and volatilities. Our model nests Duan’s GARCH option models, where conditional returns are constrained to being normal, as well as mixed jump processes as used in Merton. The diffusion limits of our model have been shown to include jump diffusion models, stochastic volatility models and models with both jumps and diffusive elements in both returns and volatilities. Empirical analysis on the S&P 500 index reveals that the incorporation of jumps in returns and volatilities adds significantly to the description of the time series process and improves option pricing performance. In addition, we provide the first-ever hedging effectiveness tests of GARCH option models.
    Keywords: Options (Finance) ; Hedging (Finance)
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:fip:fedcwp:0619&r=fmk
  5. By: Torben G. Andersen; Luca Benzoni
    Abstract: We investigate whether bonds span the volatility risk in the U.S. Treasury market, as predicted by most 'affine' term structure models. To this end, we construct powerful and model-free empirical measures of the quadratic yield variation for a cross-section of fixed- maturity zero-coupon bonds ('realized yield volatility') through the use of high-frequency data. We find that the yield curve fails to span yield volatility, as the systematic volatility factors are largely unrelated to the cross- section of yields. We conclude that a broad class of affine diffusive, Gaussian-quadratic and affine jump-diffusive models is incapable of accommodating the observed yield volatility dynamics. An important implication is that the bond markets per se are incomplete and yield volatility risk cannot be hedged by taking positions solely in the Treasury bond market. We also advocate using the empirical realized yield volatility measures more broadly as a basis for specification testing and (parametric) model selection within the term structure literature.
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-15&r=fmk
  6. By: Eugene Amromin; Paul Harrison; Steven Sharpe
    Abstract: We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus lowered the cost of equity. Using an event- study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of U.S. common stock prices to that of European stocks and real estate investment trusts. We also examine the relative cross-sectional response of prices on high-dividend versus low-dividend paying stocks. We do not find any imprint of the dividend tax cut news on the value of the aggregate U.S. stock market. On the other hand, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows, suggesting that the tax cut did induce asset reallocation within equity portfolios. Finally, the positive abnormal returns on non-dividend paying U.S. stocks in 2003 do not appear to be tied to tax-cut news.
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-06-17&r=fmk
  7. By: Pasquale Della Corte; Lucio Sarno; Daniel L. Thornton
    Abstract: This paper re-examines the validity of the Expectation Hypothesis (EH) of the term structure of US repo rates ranging in maturity from overnight to three months. We extend the work of Longstaff (2000) in two directions: (i) we implement statistical tests designed to increase test power in this context; (ii) we assess the economic value of departures from the EH based on criteria of profitability and economic significance. The EH is rejected throughout the term structure examined on the basis of the statistical tests. The results of our economic analysis are less uniform and more favorable to the EH, suggesting that the statistical rejections of the EH are not economically significant for rates with maturities of one month and longer.
    Date: 2006
    URL: http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-061&r=fmk
  8. By: Huyen Nguyen-Thi-Thanh
    Abstract: This paper aims to show that Data Envelopment Analysis (DEA) is an efficient tool to assist investors in multiple criteria decision-making tasks like assessing hedge fund performance. DEA has the merit of offering investors the possibility to consider simultaneously multiple evaluation criteria with direct control over the priority level paid to each criterion. By addressing main methodological issues regarding the use of DEA in evaluating hedge fund performance, this paper attempts to provide investors sufficient guidelines for tailoring their own performance measure which reflect successfully their own preferences. Although these guidelines are formulated in the hedge fund context, they can also be applied to other kinds of investment funds.
    Keywords: hedge fund, mutual fund, alternative investment, data envelopment analysis, performance<br />measures, Sharpe ratio
    Date: 2006–12–14
    URL: http://d.repec.org/n?u=RePEc:hal:papers:halshs-00120292_v1&r=fmk
  9. By: Lubos Pastor; Lucian Taylor; Pietro Veronesi
    Abstract: We develop a model in which an entrepreneur learns about the average profitability of a private firm before deciding whether to take the firm public. In this decision, the entrepreneur trades off diversification benefits of going public against benefits of private control. The model predicts that firm profitability should decline after the IPO, on average, and that this decline should be larger for firms with more volatile profitability and firms with less uncertain average profitability. These predictions are supported empirically in a sample of 7,183 IPOs in the U.S. between 1975 and 2004.
    JEL: G1 G3
    Date: 2006–12
    URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:12792&r=fmk

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