Pub Date : 2013-09-19DOI: 10.1142/S201013921350002X
M. Boyer, Monica Marin
We examine the use of foreign currency hedging instruments by US manufacturing firms during 1996–2004, and assess their impact on the firms' risk of financial distress. We derive measures of financial distress using the Black–Scholes–Merton option pricing model and find that the use of foreign currency hedging instruments reduces the firms' financial distress. The main findings are confirmed when examining alternate measures of foreign currency exposure, econometric specifications or measures of financial distress.
{"title":"Financial Distress Risk and the Hedging of Foreign Currency Exposure","authors":"M. Boyer, Monica Marin","doi":"10.1142/S201013921350002X","DOIUrl":"https://doi.org/10.1142/S201013921350002X","url":null,"abstract":"We examine the use of foreign currency hedging instruments by US manufacturing firms during 1996–2004, and assess their impact on the firms' risk of financial distress. We derive measures of financial distress using the Black–Scholes–Merton option pricing model and find that the use of foreign currency hedging instruments reduces the firms' financial distress. The main findings are confirmed when examining alternate measures of foreign currency exposure, econometric specifications or measures of financial distress.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"29 1","pages":"1350002"},"PeriodicalIF":0.7,"publicationDate":"2013-09-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84644831","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}
Pub Date : 2013-09-19DOI: 10.1142/S2010139213500055
S. Muzzioli
The aim of this paper is to comprehensively compare option-based measures of volatility, with the ultimate plan of devising a new volatility index for the Italian stock market. The performance of the different implied volatility measures in forecasting future volatility is evaluated both in a statistical and in an economic setting. The properties of the implied volatility measures are also explored, by looking at both the contemporaneous relationship between implied volatility changes and market returns and the usefulness of the proposed index in forecasting future market returns.The results of the paper are of practical importance for both policy-makers and investors. The volatility index, based on corridor measures, could be used to forecast market volatility, for value at risk purposes, in order to determine trading strategies on the underlying index and as an early warning for future market conditions.
{"title":"The Information Content of Option-Based Forecasts of Volatility: Evidence from the Italian Stock Market","authors":"S. Muzzioli","doi":"10.1142/S2010139213500055","DOIUrl":"https://doi.org/10.1142/S2010139213500055","url":null,"abstract":"The aim of this paper is to comprehensively compare option-based measures of volatility, with the ultimate plan of devising a new volatility index for the Italian stock market. The performance of the different implied volatility measures in forecasting future volatility is evaluated both in a statistical and in an economic setting. The properties of the implied volatility measures are also explored, by looking at both the contemporaneous relationship between implied volatility changes and market returns and the usefulness of the proposed index in forecasting future market returns.The results of the paper are of practical importance for both policy-makers and investors. The volatility index, based on corridor measures, could be used to forecast market volatility, for value at risk purposes, in order to determine trading strategies on the underlying index and as an early warning for future market conditions.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"198 1","pages":"1-46"},"PeriodicalIF":0.7,"publicationDate":"2013-09-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81385010","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}
Pub Date : 2013-09-01DOI: 10.1142/S2010139213500195
Ruoke Yang
In recent years, increasing effort has been devoted to the study of virtual world economies due to their potential of increasing our understanding of the real world economy, and vice versa. Due to a scarce availability of reliable global data, previous virtual world economic studies have been largely limited to qualitative observations. This paper presents novel financial data and is the first to apply a time series approach to the forecasting of virtual commodity prices. The results are assessed against the random walk and, from an efficient markets perspective, evaluates the potential of virtual worlds becoming experimental simulations for the real.
{"title":"Could the Virtual be Similar to the Real? A First Look from an Efficient Markets Perspective","authors":"Ruoke Yang","doi":"10.1142/S2010139213500195","DOIUrl":"https://doi.org/10.1142/S2010139213500195","url":null,"abstract":"In recent years, increasing effort has been devoted to the study of virtual world economies due to their potential of increasing our understanding of the real world economy, and vice versa. Due to a scarce availability of reliable global data, previous virtual world economic studies have been largely limited to qualitative observations. This paper presents novel financial data and is the first to apply a time series approach to the forecasting of virtual commodity prices. The results are assessed against the random walk and, from an efficient markets perspective, evaluates the potential of virtual worlds becoming experimental simulations for the real.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"62 1","pages":"1350019"},"PeriodicalIF":0.7,"publicationDate":"2013-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74090626","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}
Pub Date : 2013-09-01DOI: 10.1142/S2010139213500158
J. Stokes
The value of a college degree is often quantified as the difference in earnings between those with and without a degree. The research presented here operationalizes this idea in two important ways. First, since future income and tuition are uncertain, a contingent claims model is developed and the appropriate discount rate for valuing future earnings is, therefore, endogenized given an economy that does not permit arbitrage. Second, the model is sensitive to the valuation of the real option to obtain an advanced degree in addition to the valuation of the earnings for an individual with an undergraduate degree. In this framework, the value of a high school diploma is shown to be the sum of: (1) capitalized earnings, (2) the real option to obtain an undergraduate degree and (3) the embedded or compound real option to obtain an advanced degree. Numerical examples are presented that demonstrate the performance and key drivers of the model. One important finding is that by ignoring the real options to further one's education, the value of a college degree is likely significantly understated.
{"title":"What is the (Real Option) Value of a College Degree","authors":"J. Stokes","doi":"10.1142/S2010139213500158","DOIUrl":"https://doi.org/10.1142/S2010139213500158","url":null,"abstract":"The value of a college degree is often quantified as the difference in earnings between those with and without a degree. The research presented here operationalizes this idea in two important ways. First, since future income and tuition are uncertain, a contingent claims model is developed and the appropriate discount rate for valuing future earnings is, therefore, endogenized given an economy that does not permit arbitrage. Second, the model is sensitive to the valuation of the real option to obtain an advanced degree in addition to the valuation of the earnings for an individual with an undergraduate degree. In this framework, the value of a high school diploma is shown to be the sum of: (1) capitalized earnings, (2) the real option to obtain an undergraduate degree and (3) the embedded or compound real option to obtain an advanced degree. Numerical examples are presented that demonstrate the performance and key drivers of the model. One important finding is that by ignoring the real options to further one's education, the value of a college degree is likely significantly understated.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"48 1","pages":"1350015"},"PeriodicalIF":0.7,"publicationDate":"2013-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80831008","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}
Pub Date : 2013-06-01DOI: 10.1142/S2010139213500122
R. Jarrow, Hao Li
In a frictionless and competitive economy, where high frequency (HF) traders possess no market power, this paper characterizes necessary and sufficient conditions on the price process and information sets for HF traders to earn abnormal trading profits. Two sufficient conditions shown to generate abnormal returns are that HF trading enables the observation of short-term price momentum/reversals, not otherwise visible, or it enables the observation of signals correlated to future price movements. The welfare considerations of the existence of such abnormal trading profits are also discussed.
{"title":"Abnormal Profit Opportunities and the Informational Advantage of High Frequency Trading","authors":"R. Jarrow, Hao Li","doi":"10.1142/S2010139213500122","DOIUrl":"https://doi.org/10.1142/S2010139213500122","url":null,"abstract":"In a frictionless and competitive economy, where high frequency (HF) traders possess no market power, this paper characterizes necessary and sufficient conditions on the price process and information sets for HF traders to earn abnormal trading profits. Two sufficient conditions shown to generate abnormal returns are that HF trading enables the observation of short-term price momentum/reversals, not otherwise visible, or it enables the observation of signals correlated to future price movements. The welfare considerations of the existence of such abnormal trading profits are also discussed.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"75 1","pages":"1350012"},"PeriodicalIF":0.7,"publicationDate":"2013-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85739061","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}
Pub Date : 2012-12-01DOI: 10.1142/S2010139212500164
Dror Parnes
We contrast bankruptcy Section 363 Sales with the traditional path of Chapter 11 reorganization and find that among financial institutions, higher measures of creditors' coordination problems favor the Chapter 11 path, while greater profitability, available cash, asymmetric information between shareholders and creditors, and potential growth rate support the choice of 363 Sales. Among the non-financial firms, higher measures of creditors' coordination problem and available cash favor the course of Chapter 11, while greater profitability, liquidity, and asymmetric information support the path of 363 Sales. We further detect that bankruptcy Section 363 Sales exhibits lower direct fees, and it lasts significantly less time than formal Chapter 11 before the final emergence.
{"title":"Bankruptcy Section 363 Sales: Choices and Consequences","authors":"Dror Parnes","doi":"10.1142/S2010139212500164","DOIUrl":"https://doi.org/10.1142/S2010139212500164","url":null,"abstract":"We contrast bankruptcy Section 363 Sales with the traditional path of Chapter 11 reorganization and find that among financial institutions, higher measures of creditors' coordination problems favor the Chapter 11 path, while greater profitability, available cash, asymmetric information between shareholders and creditors, and potential growth rate support the choice of 363 Sales. Among the non-financial firms, higher measures of creditors' coordination problem and available cash favor the course of Chapter 11, while greater profitability, liquidity, and asymmetric information support the path of 363 Sales. We further detect that bankruptcy Section 363 Sales exhibits lower direct fees, and it lasts significantly less time than formal Chapter 11 before the final emergence.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"10 1","pages":"1250016"},"PeriodicalIF":0.7,"publicationDate":"2012-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88379654","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}
Pub Date : 2012-11-11DOI: 10.1142/S2010139212500127
O. Rytchkov
This paper applies a state space approach to the analysis of stock return predictability. It acknowledges that expected returns and expected dividends are unobservable and uses the Kalman filter to extract them from the observed history of realized dividends and returns. The suggested approach explicitly takes into account the time variation in expected dividend growth rates and exploits the present value relation. The obtained predictors for future returns are robust to structural breaks in the means of expected dividends and returns and more efficient than the dividend–price ratio. The likelihood ratio test reliably rejects the hypothesis of constant expected returns.
{"title":"Filtering Out Expected Dividends and Expected Returns","authors":"O. Rytchkov","doi":"10.1142/S2010139212500127","DOIUrl":"https://doi.org/10.1142/S2010139212500127","url":null,"abstract":"This paper applies a state space approach to the analysis of stock return predictability. It acknowledges that expected returns and expected dividends are unobservable and uses the Kalman filter to extract them from the observed history of realized dividends and returns. The suggested approach explicitly takes into account the time variation in expected dividend growth rates and exploits the present value relation. The obtained predictors for future returns are robust to structural breaks in the means of expected dividends and returns and more efficient than the dividend–price ratio. The likelihood ratio test reliably rejects the hypothesis of constant expected returns.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"48 1","pages":"1250012"},"PeriodicalIF":0.7,"publicationDate":"2012-11-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76941929","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}
Pub Date : 2012-10-01DOI: 10.1142/S2010139212500085
G. Duffee, Richard Stanton
We study the finite-sample properties of some of the standard techniques used to estimate modern term structure models. For sample sizes and models similar to those used in most empirical work, we reach three surprising conclusions. First, while maximum likelihood works well for simple models, it produces strongly biased parameter estimates when the model includes a flexible specification of the dynamics of interest rate risk. Second, despite having the same asymptotic efficiency as maximum likelihood, the small-sample performance of Efficient Method of Moments (a commonly used method for estimating complicated models) is unacceptable even in the simplest term structure settings. Third, the linearized Kalman filter is a tractable and reasonably accurate estimation technique, which we recommend in settings where maximum likelihood is impractical.
{"title":"Estimation of Dynamic Term Structure Models","authors":"G. Duffee, Richard Stanton","doi":"10.1142/S2010139212500085","DOIUrl":"https://doi.org/10.1142/S2010139212500085","url":null,"abstract":"We study the finite-sample properties of some of the standard techniques used to estimate modern term structure models. For sample sizes and models similar to those used in most empirical work, we reach three surprising conclusions. First, while maximum likelihood works well for simple models, it produces strongly biased parameter estimates when the model includes a flexible specification of the dynamics of interest rate risk. Second, despite having the same asymptotic efficiency as maximum likelihood, the small-sample performance of Efficient Method of Moments (a commonly used method for estimating complicated models) is unacceptable even in the simplest term structure settings. Third, the linearized Kalman filter is a tractable and reasonably accurate estimation technique, which we recommend in settings where maximum likelihood is impractical.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"44 1","pages":"1-51"},"PeriodicalIF":0.7,"publicationDate":"2012-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75614815","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}
Pub Date : 2012-10-01DOI: 10.1142/S2010139212500097
S. Shane
Investigation of the role of angel investing in financing private businesses in the US is important. Many observers consider angel investments to be one of the key drivers behind the startup and growth of new businesses (Council on Competitiveness, 2007), despite a paucity of information to confirm whether or not this is true. Unlike venture capital investments, angel investments are made by individual investors who do not make up a known population. Therefore, much of what is reported about angel investing comes from anecdotes and surveys of convenience samples, which are prone to biases and inaccuracies. Moreover, research on this topic is plagued by definitional confusion, in which different investigators confound informal investors, friends and family who invest in startups, accredited and unaccredited angel investors, and individual and group investing; this confusion makes it difficult to compare findings across studies. This report seeks to provide an accurate understanding of the role of angel investing in the entrepreneurial finance system. It defines angel investing and reviews the current state of understanding of the phenomenon, focusing on answering four questions: (1) How large is the angel capital market? (2) How much demand is there for angel capital? (3) What are the primary characteristics of angel investments? (4) What do the companies that receive angel financing look like? It answers these questions by reviewing the literature, providing a statistical evaluation of data sources drawn from representative samples of known populations, examining new non-representative surveys of angel investors, and comparing the results of these new analyses to previous studies of non-representative samples of business angels.
{"title":"The Importance of Angel Investing in Financing the Growth of Entrepreneurial Ventures","authors":"S. Shane","doi":"10.1142/S2010139212500097","DOIUrl":"https://doi.org/10.1142/S2010139212500097","url":null,"abstract":"Investigation of the role of angel investing in financing private businesses in the US is important. Many observers consider angel investments to be one of the key drivers behind the startup and growth of new businesses (Council on Competitiveness, 2007), despite a paucity of information to confirm whether or not this is true. Unlike venture capital investments, angel investments are made by individual investors who do not make up a known population. Therefore, much of what is reported about angel investing comes from anecdotes and surveys of convenience samples, which are prone to biases and inaccuracies. Moreover, research on this topic is plagued by definitional confusion, in which different investigators confound informal investors, friends and family who invest in startups, accredited and unaccredited angel investors, and individual and group investing; this confusion makes it difficult to compare findings across studies. This report seeks to provide an accurate understanding of the role of angel investing in the entrepreneurial finance system. It defines angel investing and reviews the current state of understanding of the phenomenon, focusing on answering four questions: (1) How large is the angel capital market? (2) How much demand is there for angel capital? (3) What are the primary characteristics of angel investments? (4) What do the companies that receive angel financing look like? It answers these questions by reviewing the literature, providing a statistical evaluation of data sources drawn from representative samples of known populations, examining new non-representative surveys of angel investors, and comparing the results of these new analyses to previous studies of non-representative samples of business angels.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"46 2 1","pages":"1250009"},"PeriodicalIF":0.7,"publicationDate":"2012-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82751595","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}
Pub Date : 2012-07-25DOI: 10.1142/S2010139212500024
R. Herring, E. Kane
US product-liability laws unwisely treat credit-rating organizations (CROs) as if they produce opinions rather than empirically-based economic research. In principle, trained professionals gather time-varying information ("financial news") and analyze it statistically to reduce it to a single dimension, allegedly for the benefit of investors, which, in turn, enables issuers to finance themselves at lower cost. In practice, the issuer-pays business model currently used for funding the production and distribution of ratings information creates an incentive to favor high-volume issuers by over-rating private-label securitizations. While the Dodd–Frank Act intensifies SEC oversight of CRO activity, the SEC has a history of being captured by regulatory clients. We argue that the fundamental solution is to create accountability in the ratings process so that private label securitizations can play a constructive role in the provision of credit and we go on to offer some conjectures about how this could be done.
{"title":"How to Reform the Credit-Rating Process to Support a Sustainable Revival of Private-Label Securitization ¤","authors":"R. Herring, E. Kane","doi":"10.1142/S2010139212500024","DOIUrl":"https://doi.org/10.1142/S2010139212500024","url":null,"abstract":"US product-liability laws unwisely treat credit-rating organizations (CROs) as if they produce opinions rather than empirically-based economic research. In principle, trained professionals gather time-varying information (\"financial news\") and analyze it statistically to reduce it to a single dimension, allegedly for the benefit of investors, which, in turn, enables issuers to finance themselves at lower cost. In practice, the issuer-pays business model currently used for funding the production and distribution of ratings information creates an incentive to favor high-volume issuers by over-rating private-label securitizations. While the Dodd–Frank Act intensifies SEC oversight of CRO activity, the SEC has a history of being captured by regulatory clients. We argue that the fundamental solution is to create accountability in the ratings process so that private label securitizations can play a constructive role in the provision of credit and we go on to offer some conjectures about how this could be done.","PeriodicalId":45339,"journal":{"name":"Quarterly Journal of Finance","volume":"20 1","pages":"1250002"},"PeriodicalIF":0.7,"publicationDate":"2012-07-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88737717","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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