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on Financial Markets |
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Issue of 2017‒02‒12
eleven papers chosen by |
| By: | Jimmy Saravia; Carlos Garcia; Paula Almonacid |
| Abstract: | This paper investigates how of systematic risk varies over the lifecycle of the firm. If market equity beta is determined by firm characteristics as the literature on the determinants of systematic risk holds, and if those characteristics change over the lifecycle of the firm following a definite pattern as firm lifecycle theory suggests, then market equity beta should change over the lifecycle of the firm following a predictable pattern. Our findings indicate that, holding other determinants of beta constant, the coefficient of systematic risk tends to fall in magnitude following a nonlinear pattern as firm age increases. In addition, we find that the volatility of market equity beta also tends to fall over the lifecycle of the firm. We argue that our main variable of concern, i.e. firm age, proxies for variables that have hitherto been omitted in the literature on the determinants of systematic risk. In particular, we maintain that firm age may proxy for the positive reputation that firms acquire over time with shareholders. This research is useful for both practitioners and researchers in that it may suggest ways to adjust empirical estimates of systematic risk. In addition, our results are important for research on beta forecasting as they show that the length of the stationary interval of betas is shorter for young companies, so that beta forecasting may be less accurate for firms in the early stages of their lifecycle compared to beta forecasting for mature firms. |
| Keywords: | Systematic risk, firm lifecycle, intrinsic business risk, financial leverage, operating risk. |
| JEL: | G11 G12 |
| Date: | 2016–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:015299&r=fmk |
| By: | Assaf Eisdorfer (University of Connecticut); Amit Goyal (University of Lausanne; Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Alexei Zhdanov (Pennsylvania State University) |
| Abstract: | Return anomalies are most pronounced among distressed stocks. We attribute this finding to the role of misvaluation and investors' inability to value distressed stocks correctly. We treat distressed stocks as options and construct a valuation model that explicitly takes into account the value of the option to default (or abandon the firm). We show that anomalies exist only among the subset of distressed stocks classified as misvalued by our model. There is little evidence that more misvalued stocks are harder to arbitrage than less misvalued stocks. |
| Keywords: | Financial Distress, Return Anomalies, Misvaluation |
| JEL: | G12 G13 G33 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1212&r=fmk |
| By: | Rajna Gibson (University of Geneva, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Songtao Wang (Shanghai Jiao Tong University) |
| Abstract: | This paper studies the effect of market belief risk on the cross-section of stock returns. Using actual and analyst EPS forecast data, we construct the market belief as the cross-sectional average of individual beliefs for all sample stocks, with individual belief defined as the mean analyst EPS forecast minus the one derived from the Brown and Roze (1979) EPS model. We observe that a portfolio that is long in stocks with the highest sensitivities and short in stocks with the lowest sensitivities to innovations in market belief earns an average yearly return of 5.4%. This positive relationship between market belief risk and stock returns persists after accounting for traditional risk factors and is particularly strong for large-cap stocks. These findings are robust when considering alternative specifications of market belief risk. Finally, we find that stocks' exposure to market belief risk increases with their market beta, volatility, turnover rate, and their sale-to-asset ratio and decreases with their size, momentum, and analyst coverage. |
| Keywords: | Analysts' EPS Forecasts, Heterogeneous Beliefs, Market Belief Risk, Cross-Section of Stock Returns |
| JEL: | G11 G12 G23 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1237&r=fmk |
| By: | Volodymyr Vovchak (Swiss Finance Institute) |
| Abstract: | This paper examines the relative importance of liquidity level and liquidity risk for the cross-section of stock returns. A portfolio analysis is implemented to make inferences about the pricing ability of liquidity as a characteristic or as a risk. I find that the ratio of absolute returns-to-volume, the Amihud liquidity measure, is able to explain more variance in stock returns than a battery of liquidity risk measures. My results suggest that trading cost and frictions impact financial markets more than the systemic components of liquidity. |
| Keywords: | Liquidity, Liquidity risk, Asset pricing |
| JEL: | G11 G12 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1244&r=fmk |
| By: | Andreas D. Huesler (ETH Zürich); Yannick Malevergne (University of Saint Etienne); Didier Sornette (Swiss Finance Institute and ETH Zürich) |
| Abstract: | Why do investors keep buying underperforming mutual funds? To address this issue, we develop a one-period principal-agent model with a representative investor and a fund manager in an asymmetric information framework. This model shows that the investor’s perception of the fund plays the key role in the fund’s fee-setting mechanism. Using a simple relation between fees and funds’ performance, empirical evidence suggests that most US domestic equity mutual funds have added high markups during the period from July 2003 to March 2007. For these fees to be justified, we show that the investor would have expected the fund manager to deliver an overall annual net excess-return of around 1.5% the S&P 500 on a risk adjusted basis. In addition, our model offers a new classification of funds, based on their ability to provide benefits to investors’ portfolios. |
| Keywords: | Mutual Fund Fee, Mutual Fund, Asymmetric Information, Principal-Agent Relationship, Markup |
| JEL: | G23 G11 D82 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1201&r=fmk |
| By: | Giovanni Barone-Adesi (Swiss Finance Institute); Chiara Legnazzi (Swiss Finance Institute); Carlo Sala (ESADE Business School) |
| Abstract: | The forward looking nature of option prices provides a natural model-free way to extract different risk measures. Not relying on any distributional assumptions, the option implied VaR and CVaR are naturally back testable risk measures where the elicitability requirement is no longer an issue. Tested on the 2005-2015 S&P 500 Index and options data and placing a focus on the financial crisis, the obtained results appear to be superior with respect to the classical risk measures. This is especially true in periods of high volatility, where a proper risk estimation is needed the most. |
| Keywords: | Option Prices, Risk Measures, VaR and CvaR, Elicitability, S&P 500 Index |
| JEL: | G13 G17 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1662&r=fmk |
| By: | Chia-Lin Chang (Department of Applied Economics Department of Finance National Chung Hsing University Taichung, Taiwan.); Tai-Lin Hsieh (Department of Applied Economics National Chung Hsing University Taichung, Taiwan.); Michael McAleer (Department of Quantitative Finance National Tsing Hua University, Taiwan and Econometric Institute Erasmus School of Economics Erasmus University Rotterdam, The Netherlands and Department of Quantitative Economics Complutense University of Madrid, Spain And Institute of Advanced Sciences Yokohama National University, Japan.) |
| Abstract: | As stock market indexes are not tradeable, the importance and trading volume of Exchange Traded Funds (ETFs) cannot be understated. ETFs track and attempt to replicate the performance of a specific index. Numerous studies have demonstrated a strong relationship between the S&P500 Composite Index and the Volatility Index (VIX), but few empirical studies have focused on the relationship between VIX and ETF returns. The purpose of the paper is to investigate whether VIX returns affect ETF returns by using vector autoregressive (VAR) models to determine whether daily VIX returns with different moving average processes affect ETF returns. The ARCH-LM test shows conditional heteroskedasticity in the estimation of ETF returns, so that the diagonal BEKK model is used to accommodate multivariate conditional heteroskedasticity in the VAR estimates of ETF returns. Daily data on ETF returns that follow different stock indexes in the USA and Europe are used in the empirical analysis. The estimates show that daily VIX returns have: (1) significant negative effects on European ETF returns in the short run; (2) stronger significant effects on single market ETF returns than on European ETF returns; and (3) lower impacts on the European ETF returns than on S&P500 returns. |
| Keywords: | Stock market indexes, Exchange Traded Funds, Volatility Index (VIX), Vector autoregressions, Moving average processes, Conditional heteroskedasticity, Diagonal BEKK. |
| JEL: | C32 C58 G12 G15 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:1708&r=fmk |
| By: | Ines Chaieb (University of Geneva and Swiss Finance Institute); Vihang R. Errunza (McGill University); Rajna Gibson (University of Geneva and Swiss Finance Institute) |
| Abstract: | We observe significant heterogeneity across countries and maturities in the degree and dynamics of sovereign bond market integration. We analyze the role of credit quality, political and inflation risks, liquidity and investor sentiment in integrating developed and emerging bond markets and show that political risk and credit quality are the dominant factors. Bond market integration is significantly negatively related to sovereign CDS spreads. A one percent increase in integration corresponds to an average decrease in the cost of funding of about 3% of the average observed 5-year CDS spreads across all developed bond markets. |
| Keywords: | credit quality, CDS spreads, funding cost, liquidity, macroeconomic risk, market integration, political risk, sovereign bond markets |
| JEL: | G15 G12 E44 F31 C5 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1652&r=fmk |
| By: | Umit Yilmaz (Swiss Finance Institute and University of Lugano) |
| Abstract: | This paper empirically analyses the effect of foreign block acquisitions on the U.S. target firms' credit risk as captured by their CDS. The involvement of foreign investors triggers a major increase, about 42 basis points, in the target firm's CDS. This effect is mostly pronounced for firms with majority control transactions, with acquirers from developed markets, and with diversifying deals. The findings are consistent with the asymmetric information hypothesis. Indeed, foreign block purchases are significantly associated with higher exposure to idiosyncratic stock volatility. |
| Keywords: | Foreign block acquisitions; Credit risk; CDS spreads; Stock volatility |
| JEL: | F30 F21 G34 G12 G14 G15 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1650&r=fmk |
| By: | Per Östberg (University of Zurich, Ecole Polytechnique Fédérale de Lausanne, and Swiss Finance Institute); Christoph Wenk (University of Zurich) |
| Abstract: | This paper considers changes in market comovement of merging US firms. Comparing the expected to the actual post merger comovement, we find that the post merger beta exhibits excess comovement with the acquiring firm. This suggests that the firm’s comovement is at least partly determined by its investors. We find that the excess comovement is significantly greater in cash transactions, when target shareholders tender their entire stake, than in pure stock transactions. Additionally, we document that the excess comovement is greater when the target is included in the S&P 500 as a result of the merger. |
| Keywords: | Mergers, Comovement, Segmentation, Method of Payment, Index Inclusion |
| JEL: | G34 G12 G02 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1233&r=fmk |
| By: | Md. Mahmudul Alam; Kazi Ashraful Alam; Md. Gazi Salah Uddin |
| Abstract: | It is customary that when security prices fully reflect all available information, the markets for those securities are said to be efficient. And if markets are inefficient, investors can use available information ignored by the market to earn abnormally high returns on their investments. In this context this paper tries to find evidence supporting the reality of weak-form efficiency of the Dhaka Stock Exchange (DSE) by examining the issues of market risk-return relationship and market depth or liquidity for DSE. The study uses a data set of daily market index and returns for the period of 1994 to 2005 and weekly market capital turnover in proportion of total market capital for the period of 1994 to 2005. The paper also looks about the market risk (systemic risk) and return where it is found that market rate of return of DSE is very low or sometimes negative. Eventually Capital Asset Pricing Model (CAPM), which envisages the relationship between risk and the expected rate of return on a risky security, is found unrelated in DSE market. As proper risk-return relationships of the market is seems to be deficient in DSE and the market is not liquid, interest of the available investors are bring into being very insignificant. All these issues are very noteworthy to the security analysts, investors and security exchange regulatory bodies in their policy making decisions to progress the market condition. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1702.01354&r=fmk |