The dependence between asset returns varies. Its strength can become stronger or weaker. Also, its structure can change, for example, when asymmetries related to bull and bear markets become more or less pronounced. To analyze these different types of variations, we develop a model that separately accommodates these changes. It combines a mixture of structurally different copulas with time variation. Our model shows both types of changes in the dependence between several equity market returns. Ignoring them leads to biases in risk measures. An underestimation of Value-at-Risk by maximum 15% occurs exactly when most harmful, during crisis periods.
{"title":"Time Variation in Asset Return Dependence: Strength or Structure?","authors":"Thijs D. Markwat, E. Kole, Dick J. C. van Dijk","doi":"10.2139/ssrn.1460648","DOIUrl":"https://doi.org/10.2139/ssrn.1460648","url":null,"abstract":"The dependence between asset returns varies. Its strength can become stronger or weaker. Also, its structure can change, for example, when asymmetries related to bull and bear markets become more or less pronounced. To analyze these different types of variations, we develop a model that separately accommodates these changes. It combines a mixture of structurally different copulas with time variation. Our model shows both types of changes in the dependence between several equity market returns. Ignoring them leads to biases in risk measures. An underestimation of Value-at-Risk by maximum 15% occurs exactly when most harmful, during crisis periods.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-06-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126844040","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We model the internal capital market of a conglomerate where headquarters must rely on information reported by division managers to allocate limited resources across competing projects. Managers may exaggerate project quality to attract more capital, which limits the extent of winner-picking in capital budgeting. Focus (correlated projects) helps headquarters to infer information regarding project quality but makes winner-picking less crucial, whereas diversication (distinct projects) facilitates winner-picking but reduces managers’ incentive to report truthfully. We characterize conditions under which diversication improves and destroys rm value, and show that neither allocation eciency nor rm value varies with the degree of
{"title":"Discount or Premium? Diversification, Firm Value, and Capital Budgeting Efficiency","authors":"Fei Ding, Hyoung-Goo Kang","doi":"10.2139/ssrn.1459524","DOIUrl":"https://doi.org/10.2139/ssrn.1459524","url":null,"abstract":"We model the internal capital market of a conglomerate where headquarters must rely on information reported by division managers to allocate limited resources across competing projects. Managers may exaggerate project quality to attract more capital, which limits the extent of winner-picking in capital budgeting. Focus (correlated projects) helps headquarters to infer information regarding project quality but makes winner-picking less crucial, whereas diversication (distinct projects) facilitates winner-picking but reduces managers’ incentive to report truthfully. We characterize conditions under which diversication improves and destroys rm value, and show that neither allocation eciency nor rm value varies with the degree of","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"20 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125720240","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Rating agencies normally apply an issuer-pay model, which is acknowledged as a possible source of collusion risk. In order to control this risk, raters are requested to monitor only the yearly top customers’ revenues, without considering the value of multi-period relationships.Looking at Fitch, Moody’s and S&P customers for the time horizon 1999–2008, this paper evaluates the sensitivity of different concentration measures to the pricing policy adopted, highlighting the greater fitness of more comprehensive measures. The results also show that a multi-period horizon is less sensitive to changes in the discounting policy and more suitable for regulatory purposes.
{"title":"The Relationship Between Pricing Policies and Measures of the Economic Independence of Rating Agencies: Evidence from Fitch, Moody's and S&P","authors":"Lucia Gibilaro, G. Mattarocci","doi":"10.2139/ssrn.1452822","DOIUrl":"https://doi.org/10.2139/ssrn.1452822","url":null,"abstract":"Rating agencies normally apply an issuer-pay model, which is acknowledged as a possible source of collusion risk. In order to control this risk, raters are requested to monitor only the yearly top customers’ revenues, without considering the value of multi-period relationships.Looking at Fitch, Moody’s and S&P customers for the time horizon 1999–2008, this paper evaluates the sensitivity of different concentration measures to the pricing policy adopted, highlighting the greater fitness of more comprehensive measures. The results also show that a multi-period horizon is less sensitive to changes in the discounting policy and more suitable for regulatory purposes.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-11-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125918998","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
G. Stockport, Chris Perryer, M. Keane, William J. Ardrey
Classical economic theory suggests that for economic development, a nation needs people, resources and capital. In populous and resource-rich Southeast Asia, capital for investment is the critical ingredient for the transition of underdeveloped nations to more prosperous states. Sound prudential supervision, combining credit, market and operational risk management best practices, can collectively provide adequate levels of investment to sustain rapid economic growth, to improve living standards, and to begin tackling major systemic, infrastructure and environmental challenge. However, in Southeast Asian Transition Economies (SEATE’s), especially Vietnam, these nations remain dependent on foreign capital because reforms of the state-dominated banking system have further to go. This study, undertaken in Vietnam in the 2001-08 period, takes a three step process of reviewing Vietnamese legislation and local best practices at privately held “Joint Stock Banks”, comparisons to best practices such as those promulgated by the Bank for International Settlements and in leading banking journals, followed by a data collection effort involving semi-structured interviews from 28 joint stock bank senior managers in Vietnam from 15 joint stock banking institutions.
{"title":"Prudential Supervision, Banking and Economic Progress: Implementation of Risk Management Procedures in Joint Stock Banks in Vietnam","authors":"G. Stockport, Chris Perryer, M. Keane, William J. Ardrey","doi":"10.2139/ssrn.1463168","DOIUrl":"https://doi.org/10.2139/ssrn.1463168","url":null,"abstract":"Classical economic theory suggests that for economic development, a nation needs people, resources and capital. In populous and resource-rich Southeast Asia, capital for investment is the critical ingredient for the transition of underdeveloped nations to more prosperous states. Sound prudential supervision, combining credit, market and operational risk management best practices, can collectively provide adequate levels of investment to sustain rapid economic growth, to improve living standards, and to begin tackling major systemic, infrastructure and environmental challenge. However, in Southeast Asian Transition Economies (SEATE’s), especially Vietnam, these nations remain dependent on foreign capital because reforms of the state-dominated banking system have further to go. This study, undertaken in Vietnam in the 2001-08 period, takes a three step process of reviewing Vietnamese legislation and local best practices at privately held “Joint Stock Banks”, comparisons to best practices such as those promulgated by the Bank for International Settlements and in leading banking journals, followed by a data collection effort involving semi-structured interviews from 28 joint stock bank senior managers in Vietnam from 15 joint stock banking institutions.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"97 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126965179","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The role of ownership in performance of financial institutions is under-examined yet remains a topical issue. Whilst ownership changes in the banking sector have been evaluated in several studies, the link with other sectors has not been a focus of in depth analysis. A controlled comparison of performance between privatising banks and insurance firms in Australia is undertaken via a ‘meso’ approach of pairing privatising with comparator private institutions across the event period. Performance is evaluated using commercial CAMEL indicators and applying Wilcoxon rank tests (Otchere and Chan 2003) which provide statistically robust findings in the small annual data samples available around the privatisation event. Performance of privatising and private institutions is found to be quite similar before and after the event. For the privatising banks, some indicator medians improved to commercial levels (CBA) or were mostly unchanged (Colonial). By contrast one of the privatising insurance institutions (Suncorp) was found to outperform the private insurance comparator while there was little difference for the other (GIO).
{"title":"The Privatisation Experience in Banking and Insurance in Australia","authors":"M. McKenzie, M. Keneley","doi":"10.2139/ssrn.1458249","DOIUrl":"https://doi.org/10.2139/ssrn.1458249","url":null,"abstract":"The role of ownership in performance of financial institutions is under-examined yet remains a topical issue. Whilst ownership changes in the banking sector have been evaluated in several studies, the link with other sectors has not been a focus of in depth analysis. A controlled comparison of performance between privatising banks and insurance firms in Australia is undertaken via a ‘meso’ approach of pairing privatising with comparator private institutions across the event period. Performance is evaluated using commercial CAMEL indicators and applying Wilcoxon rank tests (Otchere and Chan 2003) which provide statistically robust findings in the small annual data samples available around the privatisation event. Performance of privatising and private institutions is found to be quite similar before and after the event. For the privatising banks, some indicator medians improved to commercial levels (CBA) or were mostly unchanged (Colonial). By contrast one of the privatising insurance institutions (Suncorp) was found to outperform the private insurance comparator while there was little difference for the other (GIO).","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125286373","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This research examines whether the risk of focused banks is higher than that of diversified ones. Focused banks are defined as those with a large proportion of assets in one of six narrow industry segments including agricultural loans, credit cards, commercial lending, mortgage lending, consumer lending, and other focused loans.This study takes a bank supervisor approach rather than adopting the perspective of a shareholder. It differs from similar work in the past because it compares focused banks to a sample including only diversified banks. Other studies, in contrast, compared one focused peer group to a comparator group of all banks but for the one focused group. Thus, the comparator group included both diversified and focused banks. The data in this study confirms the major hypothesis that banks following a diversified strategy are less risky than banks following an industry-focused approach. Interestingly, our study finds that, despite being more risky, the focused groups reported return-on-asset ratios below those of the diversified comparator groups in the majority of our comparisons.
{"title":"The Relative Riskiness of Various Asset Focus Alternatives in Banking","authors":"Mitchell Stan, M. L. McIntyre","doi":"10.2139/ssrn.1457359","DOIUrl":"https://doi.org/10.2139/ssrn.1457359","url":null,"abstract":"This research examines whether the risk of focused banks is higher than that of diversified ones. Focused banks are defined as those with a large proportion of assets in one of six narrow industry segments including agricultural loans, credit cards, commercial lending, mortgage lending, consumer lending, and other focused loans.This study takes a bank supervisor approach rather than adopting the perspective of a shareholder. It differs from similar work in the past because it compares focused banks to a sample including only diversified banks. Other studies, in contrast, compared one focused peer group to a comparator group of all banks but for the one focused group. Thus, the comparator group included both diversified and focused banks. The data in this study confirms the major hypothesis that banks following a diversified strategy are less risky than banks following an industry-focused approach. Interestingly, our study finds that, despite being more risky, the focused groups reported return-on-asset ratios below those of the diversified comparator groups in the majority of our comparisons.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"221 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126910612","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper introduces a new proxy for expected value-relevant earnings: the most optimistic (pessimistic) forecast of earnings that is higher (lower) than the median of all analysts’ earnings forecasts over the 90 days prior to the earnings announcement when the median falls short of (exceeds) actual earnings. While our measure is ex post in the sense that it occurs after the distribution of forecasts over the 90 days prior to the earnings announcement is known, it is ex ante in the sense that investors could base a trading strategy on our new measure of earnings surprise computed immediately after an earnings announcement. We expect our ex post measure of earnings surprise to have a moderating effect on the traditional earnings news measure based on the consensus of analysts’ forecasts. For example, if the consensus is less than actual earnings and the most optimistic forecast is close to (much greater than) the consensus, then we expect the traditional analyst forecast error to contain more (less) information about future earnings, and we expect a larger (smaller) contemporaneous and delayed market reaction to earnings surprise based on the consensus forecast. Our results confirm these expectations. Furthermore, we find that our new measure of earnings surprise contains unique value-relevant information about future earnings, some of which generates a statistically significant immediate contemporaneous market response and some of which generates a statistically and economically significant amount of post-earnings announcement drift.
{"title":"Stock Market Efficiency with Respect to a New Measure of Earnings News","authors":"Cameron Truong","doi":"10.2139/ssrn.1456814","DOIUrl":"https://doi.org/10.2139/ssrn.1456814","url":null,"abstract":"This paper introduces a new proxy for expected value-relevant earnings: the most optimistic (pessimistic) forecast of earnings that is higher (lower) than the median of all analysts’ earnings forecasts over the 90 days prior to the earnings announcement when the median falls short of (exceeds) actual earnings. While our measure is ex post in the sense that it occurs after the distribution of forecasts over the 90 days prior to the earnings announcement is known, it is ex ante in the sense that investors could base a trading strategy on our new measure of earnings surprise computed immediately after an earnings announcement. We expect our ex post measure of earnings surprise to have a moderating effect on the traditional earnings news measure based on the consensus of analysts’ forecasts. For example, if the consensus is less than actual earnings and the most optimistic forecast is close to (much greater than) the consensus, then we expect the traditional analyst forecast error to contain more (less) information about future earnings, and we expect a larger (smaller) contemporaneous and delayed market reaction to earnings surprise based on the consensus forecast. Our results confirm these expectations. Furthermore, we find that our new measure of earnings surprise contains unique value-relevant information about future earnings, some of which generates a statistically significant immediate contemporaneous market response and some of which generates a statistically and economically significant amount of post-earnings announcement drift.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116706840","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate the certification roles of lead bank retention in US syndicated loans with respect to interest rates, then explore how lead banks' reputation and previous relationships with the borrower alter such certification effects. Our findings support the certification hypothesis. Loan spreads are found to decrease with a higher retention ratio, after controlling for the endogeneity of loan price and retention. The magnitude of certification effect is reduced when the lead bank is a more reputable lender and when there are prior bank-borrower relationships. Lead bank reputation and prior lending relationships can therefore substitute for the need to certify.
{"title":"The Effects of Reputation and Relationships on Lead Banks’ Certification Roles","authors":"V. Do, Tram Vu","doi":"10.2139/ssrn.1458875","DOIUrl":"https://doi.org/10.2139/ssrn.1458875","url":null,"abstract":"We investigate the certification roles of lead bank retention in US syndicated loans with respect to interest rates, then explore how lead banks' reputation and previous relationships with the borrower alter such certification effects. Our findings support the certification hypothesis. Loan spreads are found to decrease with a higher retention ratio, after controlling for the endogeneity of loan price and retention. The magnitude of certification effect is reduced when the lead bank is a more reputable lender and when there are prior bank-borrower relationships. Lead bank reputation and prior lending relationships can therefore substitute for the need to certify.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"1361 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-08-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114116016","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we shed new light on the role of monetary policy in asset pricing by examining the case in which investors have heterogeneous expectations about future monetary policy. This case is realistic because central banks are typically less than perfectly open about their intentions. Accordingly, surveys of economists reveal that they frequently disagree in their expectations. Under heterogeneity in beliefs, investors place speculative bets against each other on the evolution of the money supply, and as a result the sharing of wealth in the economy evolves stochastically. Employing a continuous-time equilibrium model, we show that these fluctuations majorly affect the prices of all assets, as well as inflation. Our model could help explain some empirical puzzles. In particular, we find that the volatility of bond yields and stock market volatility could be significantly increased by the heterogeneity in beliefs, a conclusion supported by our empirical analyses. This paper was accepted by Wei Xiong, finance.
{"title":"Asset Pricing in a Monetary Economy with Heterogeneous Beliefs","authors":"Benjamin Croitoru, Lei Lu","doi":"10.2139/ssrn.1455904","DOIUrl":"https://doi.org/10.2139/ssrn.1455904","url":null,"abstract":"In this paper, we shed new light on the role of monetary policy in asset pricing by examining the case in which investors have heterogeneous expectations about future monetary policy. This case is realistic because central banks are typically less than perfectly open about their intentions. Accordingly, surveys of economists reveal that they frequently disagree in their expectations. Under heterogeneity in beliefs, investors place speculative bets against each other on the evolution of the money supply, and as a result the sharing of wealth in the economy evolves stochastically. Employing a continuous-time equilibrium model, we show that these fluctuations majorly affect the prices of all assets, as well as inflation. Our model could help explain some empirical puzzles. In particular, we find that the volatility of bond yields and stock market volatility could be significantly increased by the heterogeneity in beliefs, a conclusion supported by our empirical analyses. \u0000 \u0000This paper was accepted by Wei Xiong, finance.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129699366","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper provides empirical evidence on the link between industry pricing dynamics and industry capital structure. We find evidence of countercyclical mark-up behaviour as predicted by Chevelier and Scharfstein (1996). The mark-ups are more countercyclical for industries with higher debt ratio. Secondly, the paper analyzes growth in firm sales and profitability performance post an industry downturn under different financial structures. This methodology helps mitigate the endogenous nature of capital structure and firm performance, since it is assumed that the downturn was not anticipated by industry participants. Also, inclusion of lagged values of debt ratio (t-2) ensures that spurious relation between contemporaneous values of debt ratio and firm performance is not obtained. We find that firms which are over-levered compared to the industry median experience lower sales growth and lower profitability vis-a-vis a benchmark firm which assumes industry median characteristics. This lends support to the hypothesis that external financing induces financial fragility that leads to reduction in competitive spending at the time of distress.
{"title":"Capital Structure, Industry Pricing, and Firm Performance","authors":"V. Ramachandra, S. N. Nageswara Rao","doi":"10.2139/ssrn.1464588","DOIUrl":"https://doi.org/10.2139/ssrn.1464588","url":null,"abstract":"This paper provides empirical evidence on the link between industry pricing dynamics and industry capital structure. We find evidence of countercyclical mark-up behaviour as predicted by Chevelier and Scharfstein (1996). The mark-ups are more countercyclical for industries with higher debt ratio. Secondly, the paper analyzes growth in firm sales and profitability performance post an industry downturn under different financial structures. This methodology helps mitigate the endogenous nature of capital structure and firm performance, since it is assumed that the downturn was not anticipated by industry participants. Also, inclusion of lagged values of debt ratio (t-2) ensures that spurious relation between contemporaneous values of debt ratio and firm performance is not obtained. We find that firms which are over-levered compared to the industry median experience lower sales growth and lower profitability vis-a-vis a benchmark firm which assumes industry median characteristics. This lends support to the hypothesis that external financing induces financial fragility that leads to reduction in competitive spending at the time of distress.","PeriodicalId":326490,"journal":{"name":"ACCEPTED PAPERS","volume":"9 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2008-09-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131451853","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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