We propose and test novel multifactor models of daily mutual fund performance. To this aim, we set up equity style indices and derive risk factors, which nest the established Fama and French (1992) and Carhart (1997) factors. We add two additional risk factors, namely idiosyncratic risk and Amihud (2002) liquidity. Our sample contains 528 actively managed mutual funds with European stock market focus during 2002 to 2009. Model estimation reveals that—while market excess return and size appear significant for the cross-section of all funds—the remainder factors explain the performance of subsets of funds. About one third of the funds exhibit significant factor sensitivities not only with respect to valuation or momentum, but also with respect to liquidity or idiosyncratic risk. No single risk factor is dominated and hence our six factor model may serve as a valid performance benchmark. In a four factor model setting, the Carhart model and a model with valuation replaced by liquidity perform best. Our results remain stable under various robustness checks. We further document that managers on average prefer liquid stocks, show no aggregate idiosyncratic risk preference and deliver results that are consistent with equilibrium models of fund performance.
{"title":"A New Family of Equity Style Indices and Mutual Fund Performance: Do Liquidity and Idiosyncratic Risk Matter?","authors":"N. Wagner, E. Winter","doi":"10.2139/ssrn.1274618","DOIUrl":"https://doi.org/10.2139/ssrn.1274618","url":null,"abstract":"We propose and test novel multifactor models of daily mutual fund performance. To this aim, we set up equity style indices and derive risk factors, which nest the established Fama and French (1992) and Carhart (1997) factors. We add two additional risk factors, namely idiosyncratic risk and Amihud (2002) liquidity. Our sample contains 528 actively managed mutual funds with European stock market focus during 2002 to 2009. Model estimation reveals that—while market excess return and size appear significant for the cross-section of all funds—the remainder factors explain the performance of subsets of funds. About one third of the funds exhibit significant factor sensitivities not only with respect to valuation or momentum, but also with respect to liquidity or idiosyncratic risk. No single risk factor is dominated and hence our six factor model may serve as a valid performance benchmark. In a four factor model setting, the Carhart model and a model with valuation replaced by liquidity perform best. Our results remain stable under various robustness checks. We further document that managers on average prefer liquid stocks, show no aggregate idiosyncratic risk preference and deliver results that are consistent with equilibrium models of fund performance.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2011-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79943971","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops an n-dimensional Markov-functional interest rate model, i.e. a model driven by an n-dimensional state process and constructed using Markov-functional techniques. It is shown that this model is very similar to an n-factor LIBOR market model hence allowing intuition from the LIBOR market model to be transferred to the Markov-functional model. This generalises the results of Bennett & Kennedy (2005) from one-dimensional to n-dimensional driving state processes. The model is suitable for pricing certain type of exotic interest rate derivative products such as TARNs on LIBORs or CMS spreads. For these products, the n-dimensional Markov-functional model may be used as a benchmark model allowing for powerful and flexible control of both correlations between different rates as well as skews/smiles in implied volatilities.
{"title":"An N-Dimensional Markov-Functional Interest Rate Model","authors":"Linus Kaisajuntti, J. Kennedy","doi":"10.2139/ssrn.1081337","DOIUrl":"https://doi.org/10.2139/ssrn.1081337","url":null,"abstract":"This paper develops an n-dimensional Markov-functional interest rate model, i.e. a model driven by an n-dimensional state process and constructed using Markov-functional techniques. It is shown that this model is very similar to an n-factor LIBOR market model hence allowing intuition from the LIBOR market model to be transferred to the Markov-functional model. This generalises the results of Bennett & Kennedy (2005) from one-dimensional to n-dimensional driving state processes. The model is suitable for pricing certain type of exotic interest rate derivative products such as TARNs on LIBORs or CMS spreads. For these products, the n-dimensional Markov-functional model may be used as a benchmark model allowing for powerful and flexible control of both correlations between different rates as well as skews/smiles in implied volatilities.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2011-07-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88372019","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The goal of this article is to analyze the impact of equity tax shields, that were allowed in Austria from 2000 to 2004, on the capital structure of Austrian firms, both at book values and at market values. We see that the choice of the leverage ratio determines whether or not one can find an impact of equity tax shields on the capital structure of firms. Precisely, equity tax shields reduce the long-term liabilities to assets ratio and on the long-term liabilities to long-term capital ratio, but have no impact on the total liabilities to assets ratio. Although the Austrian system granted only a rather small dose of equity tax shields, we find that the tax regime achieved its goal to reduce the leverage (ignoring short-term liabilities). Interestingly, even though it is the book value capital structure that determines the size of equity tax shields, this effect was slightly stronger and more significant for the capital structure at market values than for the book value capital structure. We find that the government could influence the capital structure by changing the level of the equity interest rate allowed. We observe that small firms reduced their capital structure more in response to equity tax shields than big firms. Similarly, we find that firms that were included in the Austrian Traded Index (ATX) did not react to equity tax shields. By contrast, firms that were not included in the ATX strongly reacted to the equity tax shields. Moreover, we find that financial firms did not react to the equity tax shields whereas non-financial firms showed at least some reaction. In addition, with this equity tax shield regime we find strong evidence against the debt substitution hypothesis of De Angelo/Masulis (1980).
{"title":"Do Equity Tax Shields Reduce Leverage? The Austrian Case","authors":"M. Frühwirth, M. Kobialka","doi":"10.2139/ssrn.1458245","DOIUrl":"https://doi.org/10.2139/ssrn.1458245","url":null,"abstract":"The goal of this article is to analyze the impact of equity tax shields, that were allowed in Austria from 2000 to 2004, on the capital structure of Austrian firms, both at book values and at market values. We see that the choice of the leverage ratio determines whether or not one can find an impact of equity tax shields on the capital structure of firms. Precisely, equity tax shields reduce the long-term liabilities to assets ratio and on the long-term liabilities to long-term capital ratio, but have no impact on the total liabilities to assets ratio. Although the Austrian system granted only a rather small dose of equity tax shields, we find that the tax regime achieved its goal to reduce the leverage (ignoring short-term liabilities). Interestingly, even though it is the book value capital structure that determines the size of equity tax shields, this effect was slightly stronger and more significant for the capital structure at market values than for the book value capital structure. We find that the government could influence the capital structure by changing the level of the equity interest rate allowed. We observe that small firms reduced their capital structure more in response to equity tax shields than big firms. Similarly, we find that firms that were included in the Austrian Traded Index (ATX) did not react to equity tax shields. By contrast, firms that were not included in the ATX strongly reacted to the equity tax shields. Moreover, we find that financial firms did not react to the equity tax shields whereas non-financial firms showed at least some reaction. In addition, with this equity tax shield regime we find strong evidence against the debt substitution hypothesis of De Angelo/Masulis (1980).","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2011-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79993344","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates whether ownership structure and board characteristics determine CEO turnover in a sample of largest French-listed firms from 1994 to 2001. The results show that CEO turnover is negatively and significantly related to prior accounting and stock performance. Controlling for prior performance, ownership structure and characteristics of boards of directors impact the sensitivity of CEO turnover to prior performance. Firms with blockholders, high government ownership, two-tier boards, and larger boards are less likely to dismiss CEOs for poor performance. Institutional investors and their co-existence with large blockholders, do not impact the sensitivity of CEO turnover to prior performance
{"title":"Ownership Structure and Board Characteristics as Determinants of CEO Turnover in French-Listed Companies","authors":"B. Nguyen","doi":"10.2139/ssrn.1456851","DOIUrl":"https://doi.org/10.2139/ssrn.1456851","url":null,"abstract":"This paper investigates whether ownership structure and board characteristics determine CEO turnover in a sample of largest French-listed firms from 1994 to 2001. The results show that CEO turnover is negatively and significantly related to prior accounting and stock performance. Controlling for prior performance, ownership structure and characteristics of boards of directors impact the sensitivity of CEO turnover to prior performance. Firms with blockholders, high government ownership, two-tier boards, and larger boards are less likely to dismiss CEOs for poor performance. Institutional investors and their co-existence with large blockholders, do not impact the sensitivity of CEO turnover to prior performance","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2011-04-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"77825652","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The paper proposes a two systematic factor model to capture a retail portfolio probability of default (PD) and loss given default (LGD) parameters, in particular their mutual correlation. We argue that the standard one factor models standing behind the Basel II formula and used by a number of studies cannot capture well the correlation between PD and LGD on a large (asymptotic) portfolio. The proposed model is implemented on real banking data giving an estimate of a positive PD and LGD correlation implied by the model slightly above 10%.
{"title":"A Two-Factor Model for PD and LGD Correlation","authors":"J. Witzany","doi":"10.2139/ssrn.1476305","DOIUrl":"https://doi.org/10.2139/ssrn.1476305","url":null,"abstract":"The paper proposes a two systematic factor model to capture a retail portfolio probability of default (PD) and loss given default (LGD) parameters, in particular their mutual correlation. We argue that the standard one factor models standing behind the Basel II formula and used by a number of studies cannot capture well the correlation between PD and LGD on a large (asymptotic) portfolio. The proposed model is implemented on real banking data giving an estimate of a positive PD and LGD correlation implied by the model slightly above 10%.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2011-02-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78558715","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2010-10-01DOI: 10.1080/1351847X.2010.495479
J. D. da Fonseca
This article studies the performance of the national stock markets of 16 European countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Ireland, Italy, Norway, Portugal, Spain, Sweden, Switzerland and the UK), using daily data covering the period between 2 January 2001 and 30 May 2009. Daily expected returns, and the conditional volatility of each index, were calculated using a model combining the market model and an implicit long-term relation between the index prices. Finally, time-varying (conditional) Sharpe ratios were calculated for each index. These were used as the basis for a statistical comparison of the performance of the stock indexes of this group of countries, throughout different sub-periods corresponding to different conditions (of expansion and depression) in the stock markets.
{"title":"The performance of the European stock markets: a time-varying Sharpe ratio approach","authors":"J. D. da Fonseca","doi":"10.1080/1351847X.2010.495479","DOIUrl":"https://doi.org/10.1080/1351847X.2010.495479","url":null,"abstract":"This article studies the performance of the national stock markets of 16 European countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Ireland, Italy, Norway, Portugal, Spain, Sweden, Switzerland and the UK), using daily data covering the period between 2 January 2001 and 30 May 2009. Daily expected returns, and the conditional volatility of each index, were calculated using a model combining the market model and an implicit long-term relation between the index prices. Finally, time-varying (conditional) Sharpe ratios were calculated for each index. These were used as the basis for a statistical comparison of the performance of the stock indexes of this group of countries, throughout different sub-periods corresponding to different conditions (of expansion and depression) in the stock markets.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2010-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"https://sci-hub-pdf.com/10.1080/1351847X.2010.495479","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"59716510","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study examines empirically how bank regulations adopted in lender countries influence the characteristics of loan contracts, using a sample of 46,453 loans made by 278 large commercial banks around 39 countries, to borrowers in 83 countries, in the period from 1998 to 2006. Our findings indicate that the stringency of capital regulations have an inverse U-shaped relationship with priced risk characteristics (spread and maturity) of loan contracts. In addition, more powerful official supervision is associated with riskier loan contracts. Both official supervisory power and private monitoring work as substitutes to capital regulation to reduce the (priced) risk measures of loan contracts when capital stringency is low. For higher capital stringency, supervision and private monitoring complement capital regulation in reducing loan contracts risk measures. Finally, we found that a country’s degrees of legal enforcement and bank industry competition complement capital and private monitoring regulations to improve risk characteristics of loan contracts. The evidence highlights the importance of how bank lending practices are affected by bank regulations and their interactions with themselves and other institutional country factors.
{"title":"Bank Regulations and Loan Contracts","authors":"Romulo Magalhaes, Josep A. Tribó","doi":"10.2139/ssrn.1343845","DOIUrl":"https://doi.org/10.2139/ssrn.1343845","url":null,"abstract":"This study examines empirically how bank regulations adopted in lender countries influence the characteristics of loan contracts, using a sample of 46,453 loans made by 278 large commercial banks around 39 countries, to borrowers in 83 countries, in the period from 1998 to 2006. Our findings indicate that the stringency of capital regulations have an inverse U-shaped relationship with priced risk characteristics (spread and maturity) of loan contracts. In addition, more powerful official supervision is associated with riskier loan contracts. Both official supervisory power and private monitoring work as substitutes to capital regulation to reduce the (priced) risk measures of loan contracts when capital stringency is low. For higher capital stringency, supervision and private monitoring complement capital regulation in reducing loan contracts risk measures. Finally, we found that a country’s degrees of legal enforcement and bank industry competition complement capital and private monitoring regulations to improve risk characteristics of loan contracts. The evidence highlights the importance of how bank lending practices are affected by bank regulations and their interactions with themselves and other institutional country factors.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2010-04-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76668983","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article shows that portfolio constraints can give rise to rational asset pricing bubbles in equilibrium even if there are unconstrained agents in the economy who can benefit from the induced limited arbitrage opportunities. Furthermore, it is shown that bubbles can lead to both multiplicity and real indeterminacy of equilibria. The general results are illustrated by two explicitly solved examples where seemingly innocuous portfolio constraints make bubbles a necessary condition for the existence of an equilibrium.
{"title":"Rational asset pricing bubbles and portfolio constraints","authors":"J. Hugonnier","doi":"10.2139/ssrn.1288380","DOIUrl":"https://doi.org/10.2139/ssrn.1288380","url":null,"abstract":"This article shows that portfolio constraints can give rise to rational asset pricing bubbles in equilibrium even if there are unconstrained agents in the economy who can benefit from the induced limited arbitrage opportunities. Furthermore, it is shown that bubbles can lead to both multiplicity and real indeterminacy of equilibria. The general results are illustrated by two explicitly solved examples where seemingly innocuous portfolio constraints make bubbles a necessary condition for the existence of an equilibrium.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2010-04-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82294972","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Over the years, U.S. banks have increasingly relied on the bond market to finance their business. This created the potential for a link between the bond market and the corporate sector whereby borrowers, including those that do not rely on bond funding, became exposed to the conditions in the bond market. We investigate the importance of this link.
Our results show that when the cost to access the bond market goes up, banks that rely on bond financing charge higher interest rates on their loans. Banks that rely exclusively on deposit funding follow bond financing banks and increase the interest rates on their loans, though by smaller amounts. Further, banks pass the bond market shocks predominantly to their risky borrowers that have access to the bond market and to their borrowers that do not have access to the bond market. These results show that banks propagate shocks to the bond market by passing them through their loan policies to their borrowers, including those that do not use bond financing.
{"title":"Do Banks Propagate Debt Market Shocks?","authors":"G. Hale, João A. C. Santos","doi":"10.2139/ssrn.1488553","DOIUrl":"https://doi.org/10.2139/ssrn.1488553","url":null,"abstract":"Over the years, U.S. banks have increasingly relied on the bond market to finance their business. This created the potential for a link between the bond market and the corporate sector whereby borrowers, including those that do not rely on bond funding, became exposed to the conditions in the bond market. We investigate the importance of this link.<br><br>Our results show that when the cost to access the bond market goes up, banks that rely on bond financing charge higher interest rates on their loans. Banks that rely exclusively on deposit funding follow bond financing banks and increase the interest rates on their loans, though by smaller amounts. Further, banks pass the bond market shocks predominantly to their risky borrowers that have access to the bond market and to their borrowers that do not have access to the bond market. These results show that banks propagate shocks to the bond market by passing them through their loan policies to their borrowers, including those that do not use bond financing.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2010-03-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84464551","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine firm characteristics of early adoption of international financial reporting standards (IFRS) including company’s value, business complexity, corporate governance characteristics, and national levels of bureaucratic formalities in business. Because early adopters benefit from a positive network effect, they represent a driving force in harmonization and convergence. Therefore, we identify how a company’s characteristics impact its decision for early IFRS adoption. We test three groups of firms: those that adopted IFRS before the mandatory date; those that adopted IFRS on that date; and those that postponed IFRS adoption. We provide evidence, that firms’ business complexity, value, and choice of an auditor have a significant impact on early IFRS adoption. We also document that the extenuating effects of jurisdictions and national levels of bureaucratic formalities in business are factors that affect the decision to adopt IFRS.
{"title":"Analysis of Characteristics Motivating Firms’ IFRS Adoption: Evidence from the European Union","authors":"Victoria Krivogorsky, Jui-Chin Chang, E. Black","doi":"10.2139/ssrn.1488336","DOIUrl":"https://doi.org/10.2139/ssrn.1488336","url":null,"abstract":"We examine firm characteristics of early adoption of international financial reporting standards (IFRS) including company’s value, business complexity, corporate governance characteristics, and national levels of bureaucratic formalities in business. Because early adopters benefit from a positive network effect, they represent a driving force in harmonization and convergence. Therefore, we identify how a company’s characteristics impact its decision for early IFRS adoption. We test three groups of firms: those that adopted IFRS before the mandatory date; those that adopted IFRS on that date; and those that postponed IFRS adoption. We provide evidence, that firms’ business complexity, value, and choice of an auditor have a significant impact on early IFRS adoption. We also document that the extenuating effects of jurisdictions and national levels of bureaucratic formalities in business are factors that affect the decision to adopt IFRS.","PeriodicalId":47599,"journal":{"name":"European Journal of Finance","volume":null,"pages":null},"PeriodicalIF":2.5,"publicationDate":"2010-03-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"81430160","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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