nep-fmk New Economics Papers
on Financial Markets
Issue of 2008‒08‒14
four papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. The Effects of Derivatives on Firm Risk and Value By Bartram, Söhnke M.; Brown, Gregory W.; Conrad, Jennifer
  2. Yield Curve Factors, Term Structure Volatility, and Bond Risk Premia By Nikolaus Hautsch; Yangguoyi Ou
  3. Taxation and bond market investment strategies: Evidence from the market for Government of Canada bonds By Landon, Stuart; Smith, Constance
  4. Detecting shift and pure contagion in East Asian equity markets: A Unified Approach. By Thomas J. flavin; Ekaterini Panopoulou

  1. By: Bartram, Söhnke M.; Brown, Gregory W.; Conrad, Jennifer
    Abstract: Using a sample of 6,888 non-financial firms from 47 countries, we examine the effect of derivative use on firms’ risk measures and value. We control for endogeneity by matching users and non-users on the basis of their propensity to hedge. We also use a new technique to estimate the effect of omitted variable bias on our inferences. We find strong evidence that the use of financial derivatives reduces both total risk and systematic risk. The effect of derivative use on firm value is positive but weak, and is more sensitive to endogeneity and omitted variable concerns. This increased sensitivity could account for the mixed evidence in the literature on the effect of hedging on firm value.
    Keywords: Derivatives; risk management; hedging; international finance
    JEL: F4 F3 G3
    Date: 2006–10–01
  2. By: Nikolaus Hautsch; Yangguoyi Ou
    Abstract: We introduce a Nelson-Siegel type interest rate term structure model with the underlying yield factors following autoregressive processes revealing time-varying stochastic volatility. The factor volatilities capture risk inherent to the term struc- ture and are associated with the time-varying uncertainty of the yield curve’s level, slope and curvature. Estimating the model based on U.S. government bond yields applying Markov chain Monte Carlo techniques we find that the yield factors and factor volatilities follow highly persistent processes. Using the extracted factors to explain one-year-ahead bond excess returns we observe that the slope and cur- vature yield factors contain the same explanatory power as the return-forecasting factor recently proposed by Cochrane and Piazzesi (2005). Moreover, we identify slope and curvature risk as important additional determinants of future excess returns. Finally, we illustrate that the yield and volatility factors are closely con- nected to variables reflecting macroeconomic activity, inflation, monetary policy and employment growth. It is shown that the extracted yield curve components have long-term prediction power for macroeconomic fundamentals.
    Keywords: Term Structure Modelling; Yield Curve Risk; Stochastic Volatility; Factor Models; Macroeconomic Fundamentals
    JEL: C5 E4 G1
    Date: 2008–07
  3. By: Landon, Stuart; Smith, Constance
    Abstract: This paper shows that, contrary to the suggestion of some investment advisors, for an individual Canadian investor subject to personal income taxation, the after-tax yield on a discount bond is always higher (or, at worse, equal) to the yield on a premium bond. This follows because the tax rate on capital gains is lower than the tax rate on coupon income in Canada. It is also shown that a decline in the capital gains tax rate raises the after-tax yield on discount bonds, but reduces the after-tax yield on premium bonds, and may even cause the yield on premium bonds to become negative. Further, a cut in the tax rate on interest income raises the after-tax yield on all bonds, but raises the yield on premium bonds relative to discount bonds. While the lower after-tax yields on higher coupon bonds might be expected to cause the pre-tax yields on these bonds to rise, no evidence of such tax capitalization is found using a large dataset of matched pairs of Government of Canada bonds for the period 1986-2006. The observed near equality of pre-tax yields since 1995 for bonds with different coupons implies that individuals in Canada earn a significantly smaller after-tax yield from holding premium bonds than discount bonds.
    Keywords: taxation; bonds; after tax returns
    JEL: G12 H24
    Date: 2008–05
  4. By: Thomas J. flavin (Economics, National University of Ireland, Maynooth); Ekaterini Panopoulou (Department of Statistics and Insurance Science, University of Piraeus, Greece)
    Abstract: We test for contagion between pairs of East Asian equity markets over the period 1990-2007.We develop an econometric methodology that allows us to test for both 'shift'and 'pure' contagion within a unified framework. Using both Hong Kong and Thailand as potential shock sources, we find strong evidence of both types of contagion. Therefore during episodes of high-volatility, equity returns are influenced by changes in the transmission of common shocks and additionally by the diffusion of idiosyncratic shocks through linkages which do not exist during normal times.
    Keywords: Shift contagion; Pure contagion; Financial market crises; Regime switching
    JEL: F42 G15 C32
    Date: 2008

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