nep-fmk New Economics Papers
on Financial Markets
Issue of 2011‒04‒02
six papers chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Why Are U.S. Stocks More Volatile? By Bartram, Sohnke M.; Brown, Gregory; Stulz, Rene M.
  2. Do Hedge Funds Manipulate Stock Prices? By Ben-David, Itzhak; Franzoni, Francesco; Landier, Augustin; Moussawi, Rabih
  3. The expected real return to equity By Missaka Warusawitharana
  4. A Note on Delta Hedging in Markets with Jumps By Aleksandar Mijatovi\'c; Mikhail Urusov
  5. Taxing Financial Transactions: Issues and Evidence By Thornton Matheson
  6. Regulation, Credit Risk Transfer, and Bank Lending By Thilo Pausch; Peter Welzel

  1. By: Bartram, Sohnke M. (Lancaster University); Brown, Gregory (University of NC); Stulz, Rene M. (OH State University)
    Abstract: Using a sample of control cross-border acquisitions from 61 countries from 1990 to 2007, we find that acquirers from countries with better governance gain more from such acquisitions and their gains are higher when targets are from countries with worse governance. Other acquirer country characteristics are not consistently related to acquisition gains. For instance, the anti-self-dealing index of the acquirer has opposite associations with acquirer returns depending on whether the acquisition of a public firm is paid for with cash or equity. Strikingly, global effects in acquisition returns are at least as important as acquirer country effects. First, the acquirer's industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. We find strong evidence that better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance.
    JEL: G12 G15
    Date: 2011–02
  2. By: Ben-David, Itzhak (OH State University); Franzoni, Francesco (Swiss Finance Institute and University of Ligano); Landier, Augustin (Toulouse School of Economics); Moussawi, Rabih (University of PA)
    Abstract: We find evidence of significant price manipulation at the stock level by hedge funds on critical reporting dates. Stocks in the top quartile by hedge fund holdings exhibit abnormal returns of 30 basis points in the last day of the month and a reversal of 25 basis points in the following day. Using intraday data, we show that a significant part of the return is earned during the last minutes of the last day of the month, at an increasing rate towards the closing bell. This evidence is consistent with hedge funds' incentive to inflate their monthly performance by buying stocks that they hold in their portfolios. Higher manipulations occur with funds that have higher incentives to improve their ranking relative to their peers and a lower cost of doing so.
    Date: 2011–02
  3. By: Missaka Warusawitharana
    Abstract: The expected return to equity--typically measured as a historical average--is a key variable in the decision making of investors. A recent literature based on analysts forecasts and practitioner surveys finds estimates of expected returns that are sometimes much lower than historical averages. This study presents a novel method that estimates the expected return to equity using only observable data. The method builds on a present value relationship that links dividends, earnings, and investment to market values via expected returns. Given a model that captures this relationship, one can infer the expected return. Using this method, the estimated expected real return to equity ranges from 4 to 5.5 percent. Furthermore, the analysis indicates that expected returns have declined by about 2 percentage points over the past forty years. These results indicate that future returns to equity may be lower than past realized returns.
    Keywords: Stock - Prices ; Forecasting ; Investments ; Securities
    Date: 2011
  4. By: Aleksandar Mijatovi\'c; Mikhail Urusov
    Abstract: Modelling stock prices via jump processes is common in financial markets. In practice, to hedge a contingent claim one typically uses the so-called delta-hedging strategy. This strategy stems from the Black--Merton--Scholes model where it perfectly replicates contingent claims. From the theoretical viewpoint, there is no reason for this to hold in models with jumps. However in practice the delta-hedging strategy is widely used and its potential shortcoming in models with jumps is disregarded since such models are typically incomplete and hence most contingent claims are non-attainable. In this note we investigate a complete model with jumps where the delta-hedging strategy is well-defined for regular payoff functions and is uniquely determined via the risk-neutral measure. In this setting we give examples of (admissible) delta-hedging strategies with bounded discounted value processes, which nevertheless fail to replicate the respective bounded contingent claims. This demonstrates that the deficiency of the delta-hedging strategy in the presence of jumps is not due to the incompleteness of the model but is inherent in the discontinuity of the trajectories.
    Date: 2011–03
  5. By: Thornton Matheson
    Abstract: In reaction to the recent financial crisis, increased attention has recently been given to financial transaction taxes (FTTs) as a means of (1) raising revenue for a variety of possible purposes and/or (2) helping to curb financial market excesses. This paper reviews existing theory and evidence on the efficacy of an FTT in fulfilling those tasks, on its potential impact, and on key issues to be faced in designing taxes of this kind.
    Keywords: Cross country analysis , Economic models , Financial assets , Financial sector , Group of Twenty , Revenue measures , Securities markets , Stock markets , Tax rates , Taxation , Taxes ,
    Date: 2011–03–11
  6. By: Thilo Pausch (Deutsche Bundesbank Frankfurt); Peter Welzel (University of Augsburg, Department of Economics)
    Abstract: We integrate Basel II (and III) regulations into the industrial organization approach to banking and analyze lending behavior and risk sensitivity of a risk-neutral bank. The bank is exposed to credit risk and may use credit default swaps (CDS) for hedging purposes. Regulation is found to induce the risk-neutral bank to behave in a more risk-sensitive way: Compared to a situation without regulation the optimal volume of loans decreases more as the riskiness of loans increases. CDS trading is found to interact with the former effect when regulation accepts CDS as an instrument to mitigate credit risk. Under the Substitution Approach in Basel II (and III) a risk-neutral bank will over-, fully or under-hedge its total exposure to credit risk conditional on the CDS price being downward biased, unbiased or upward biased. This interaction promotes the intention of the Basel II (and III) regulations to “strengthen the soundness and stability of banks”, since capital adequacy regulation without accounting for the risk-mitigating effect of CDS trading would stimulate a risk-neutral bank to take more extreme positions in the CDS market.
    Keywords: banking, regulation, credit risk
    JEL: G21 G28
    Date: 2011–02

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