Business Commons^™

Banking Industry Sustainable Growth Rate Under Risk: Empirical Study Of The Banking Industry In Asean Countries, Isnurhadi, Sulastri, Yulia Saftiana, Ferry Jie

Research outputs 2022 to 2026

This research examines how the banking industry maintains its sustainable growth rate. The sample consists of 328 commercial banks in the ASEAN area. A fixed effect model is employed to analyze the data. The study reveals several findings: (1) The countries with the most risk in the banking industry are Indonesia, Thailand, Philippines, Malaysia, and Singapore. (2) Operational risk has a negative effect on sustainable growth and a positive effect on actual growth. Asset utilization positively affects sustainable growth and positively affects actual growth. (3) Business risk has a positive effect on sustainable growth but a negative on actual growth. …

Simplified Portfolio Optimization Using Cramer’S Rule In Excel, Tom Arnold, Joseph Farizo, Terry D. Nixon

Finance Faculty Publications

The matrix algebra associated with finding minimum variance portfolio weights, mapping the efficient frontier, and determining the tangency portfolio weights is greatly simplified in Excel by applying Cramer’s Rule. Only a scant knowledge of linear algebra is necessary for producing a very intuitive presentation for a multi-asset portfolio. The technique is very easily replicated for an assignment or for providing a classroom resource.

Third Party Moral Hazard And The Problem Of Insurance Externalities, Gideon Parchomovsky, Peter Siegelman

All Faculty Scholarship

Insurance can lead to loss or claim-creation not just by insureds themselves, but also by uninsured third parties. These externalities—which we term “third party moral hazard”—arise because insurance creates opportunities both to extract rents and to recover for otherwise unrecoverable losses. Using examples from health, automobile, kidnap, and liability insurance, we demonstrate that the phenomenon is widespread and important, and that the downsides of insurance are greater than previously believed. We explain the economic, social and psychological reasons for this phenomenon, and propose policy responses. Contract-based methods that are traditionally used to control first-party moral hazard can be welfare-reducing in …

Do Animated Line Graphs Increase Risk Inferences?, Junghan Kim, Arun Lakshmanan

Research Collection Lee Kong Chian School Of Business

This article shows that animated display of time-varying data (e.g., stock or commodity prices) enhances risk judgments. We outline a process whereby animated display enhances the visual salience of transitions in a trajectory (i.e., successive changes in data values), which leads to transitions being utilized more to form cognitive inferences about risk. In turn, this leads to inflated risk judgments. The studies reported in this article provide converging evidence via eye tracking (Study 1), serial mediation analyses (Studies 2 and 3), and experimental manipulations of transition salience (graph type; Study 3) and utilization of transitions (global trend; Study 4 and …

Uri And Its Students: A Contract For The Provision Of A Safe Environment, Danielle Joan Beatrice

Senior Honors Projects

DANIELLE BEATRICE (English; Philosophy; Business) URI and Its Students: A Contract for the Provision of a Safe Environment

Sponsor: Judith Swift (Communication Studies, Coastal Institute)

When students begin to attend college, they expect to be consumed with busy schedules, heavy workloads, and an exciting social life. Students do not anticipate being in dangerous situations. However, this does not mean that such situations do not occur. Therefore, it is essential to teach students to be active participants in educating themselves and their peers regarding prevention and response to emergency situations. My Honors Project aims to increase the awareness of safety-related issues …

International Portfolio Prospects And Concerns, Dimitrios V. Siskos

Publications

The recent financial crisis amplifies the need for an updated and more universal investment strategy for both individuals and corporate investors. Diversification satisfies that condition, as it provides access to different economies operating in different countries while, simultaneously, it spreads the risk across different asset allocation[1]. However, to benefit the advantages of a diversified portfolio, a sophisticated decision making process and appeal to re-planning are required. Otherwise, international investors have to face the consequences of political-country risk and currency risk. The goal of this research is to correlate the benefits of diversification with risk undertaking for either individual …

Sensation Seeking And Hedge Funds, Stephen Brown, Yan Lu, Sugata Ray, Song Wee Melvyn Teo

Research Collection Lee Kong Chian School Of Business

We show that motivated by sensation seeking, hedge fund managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios, information ratios, and alphas. Moreover, sensation-seeking managers trade more frequently, actively, and unconventionally, and prefer lottery-like stocks. We show further that some investors are themselves susceptible to sensation seeking and that sensation-seeking investors fuel the demand for sensation-seeking managers. While investors perceive sensation seekers to be less competent, they do not fully appreciate the superior investment skills of sensation-avoiding fund managers.

Short Selling And Economic Policy Uncertainty, Xiaping Cao, Yuchen Wang, Sili Zhou

Research Collection Lee Kong Chian School Of Business

We study the trading behavior of short sellers in the presence of economic policy uncertainty (EPU). Daily short selling activity at either the aggregate level or the individual stock level is increasing in the EPU index (Baker, Bloom and Davis, 2016). EPU has great explanatory power for short trading. Cross-sectional tests show that the increase in short interest under high political uncertainty is from shorting stocks characterized by higher mispricing, greater policy sensitivity, higher illiquidity, greater volatility or analyst dispersion. Short sellers earn abnormal profits by trading on public information related to EPU.

Sensation-Seeking Hedge Funds, Stephen Brown, Yan Lu, Sugata Ray, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Using a novel dataset of hedge fund manager automobile purchases, we show that, motivated by sensation seeking, hedge fund managers often take risk for personal and non-pecuniary reasons. In line with the sensation seeking view, managers who own powerful sports cars take on more investment risk but do not deliver higher returns, resulting in lower Sharpe ratios. Moreover, funds managed by performance car owners exhibit higher operational risk and are more likely to fail. Performance car owners demonstrate other attributes associated with sensation seeking, such as a preference for lottery-like stocks, unconventional strategies, and active trading.

Is Cash-Return Relation Risk Induced?, Chenxi Liu

Research Collection Lee Kong Chian School Of Business

Corporate cash holding is found to be able to predict stock return. Some scholars attribute this to the association of cash with systematic risk with respect to growth options. Others find that the relation is a mispricing effect. In this paper, I try to test whether the relation between cash and return is driven by systematic risk that captured by cash. The empirical results do not support the risk explanation of cash-return relation. First, the risk loading on CASH factor cannot predict returns, which is not consistent with rational frictionless asset pricing models. Second, CASH factor cannot reflect future GDP …

Cost Of Debt And Federal Home Loan Bank Funding At U.S. Bank And Thrift Holding Companies, Scott Deacle, Elyas Elyasiani

Business and Economics Faculty Publications

We investigate the relationship between the cost of debt issued by bank holding companies (BHCs) and thrift holding companies (THCs) and their use of Federal Home Loan Bank (FHLB) advances. Cost of debt is used as a measure of bank riskiness for the first time in a FHLB study. A two-equation model of FHLB advances and cost of debt is estimated. Three main results are obtained. First, greater reliance on advances by BHCs and THCs is associated with lower cost of debt in the pre-crisis period, and more strongly so during the crisis, because granting of advances sends a positive …

The Expectation Differences Among Stakeholders In The Financial Valuation Fitness Of Auditors, James Digabriele

Department of Accounting and Finance Faculty Scholarship and Creative Works

Purpose-The purpose of this paper is to investigate if there is an expectation gap among accounting academics, accounting practitioners, and users of financial statements in the financial valuation fitness of auditors. Complex reporting standards and current market expectations have the potential to create differences between what third-party users consider to be the responsibilities of the auditor and what auditors believe to be their responsibilities in auditing fair value estimates. Design/methodology/approach-This study surveys the perceptions of accounting academics, accounting practitioners, and users of financial statements and the degree to which an expectation gap exists in the financial valuation fitness of auditors. …

Self-Exciting Jumps, Learning, And Asset Pricing Implications, Andras Fulop, Junye Li, Jun Yu

Research Collection School Of Economics

The paper proposes a self-exciting asset pricing model that takes into account co-jumps between prices and volatility and self-exciting jump clustering. We employ a Bayesian learning approach to implement real-time sequential analysis. We find evidence of self-exciting jump clustering since the 1987 market crash, and its importance becomes more obvious at the onset of the 2008 global financial crisis. We also find that learning affects the tail behaviors of the return distributions and has important implications for risk management, volatility forecasting, and option pricing.

Real Estate Investment By Bank Holding Companies And Their Risk And Return: Nonparametric And Garch Procedures, Scott Deacle, Elyas Elyasiani

Business and Economics Faculty Publications

We investigate the association between real estate investment by US Bank Holding Companies (BHCs) and their return, risk and risk-adjusted returns. Three portfolios are formed of BHCs according to whether they do or do not invest in real estate, strictness of the regulation on real estate investment and the ratio of real estate investment to assets. Wilcoxon tests of differences in portfolio returns, risk, risk-adjusted returns and value at risk between each pair of portfolios are conducted to determine how engagement in real estate, stricter regulation and increased real estate investment affect BHC performance. These effects are also investigated within …

Financial Institutions And The Taxi-Cab Industry: An Exploratory Study In Canada, John D. Obradovich, Amarjit Gill, Nahum Biger, Leo-Paul Dana, Canadian Western Bank

Faculty Publications and Presentations

A current challenge taxicab owner/operators face in Canada is the lack of financing for taxicabs. This article examines business opportunities and lending risk; it also provides risk management strategies for financial institutions to manage the risk of lending to the taxi-cab industry. Members of the boards of directors and shareholders from the Canadian taxicab industry, and lenders from financial institutions that do not provide financing to taxicab owner/operators, were interviewed. Board members and shareholders were asked about their perceptions regarding business opportunity, risk, and their willingness to provide collateral for taxicab loans. Lenders of financial institutions were asked about their …

Behaviorism In Finance And Securities Law, David A. Skeel Jr.

All Faculty Scholarship

In this Essay, I take stock (as something of an outsider) of the behavioral economics movement, focusing in particular on its interaction with traditional cost-benefit analysis and its implications for agency structure. The usual strategy for such a project—a strategy that has been used by others with behavioral economics—is to marshal the existing evidence and critically assess its significance. My approach in this Essay is somewhat different. Although I describe behavioral economics and summarize the strongest criticisms of its use, the heart of the Essay is inductive, and focuses on a particular context: financial and securities regulation, as recently revamped …

The Performance Of Listed Hedge Fund Firms, Lin Sun, Melvyn Teo

Research Collection BNP Paribas Hedge Fund Centre

We examine the impact of fund management company listing on hedge fund performance. We find that hedge funds managed by listed firms underperform those managed by unlisted firms by 1.89 per annum after adjusting for risk. Using an event study framework, we show that hedge fund performance deteriorates from 10.32 percent per year in the 36-month pre-listing window to 2.16 percent per year in the 36-month post-listing window. Over the same period, firm assets under management effectively double from US$1.54bn to US$3.04bn. There is no evidence to suggest that funds managed by listed firms are better able to manage operational …

Income Inequality And Stock Pricing In The U.S. Market, Minh T. Nguyen

Lawrence University Honors Projects

In this research, the effect of income inequality as measured by the share of national income going to the wealthiest 10% of the nation in the U.S. is assessed for its significance at explaining stock returns in the U.S from 1927 to 2012. Income inequality has always been an important economic indicator and it has the potential to become one of the fundamental sources of risk that affect stock prices. By utilizing the Fama-French three-factor model, this research obtains the inequality beta coefficient, and the inequality risk premium. In turn, the findings of this research suggest the existence of a …

Hedging Effectiveness Under Conditions Of Asymmetry, Jim Hanly, John Cotter

Articles

We examine whether hedging effectiveness is affected by asymmetry in the return distribution by applying tail specific metrics, for example, Value at Risk, to compare the hedging effectiveness of short and long hedgers. Comparisons are applied to a number of hedging strategies including OLS, and both symmetric and asymmetric GARCH models. We apply our analysis to a dataset consisting of S&P500 index cash and futures containing symmetric and asymmetric return distributions chosen ex-post. Our findings show that asymmetry reduces out-of-sample hedging performance and that significant differences occur in hedging performance between short and long hedgers.

Risk Management Trends: Currency Trading Using The Fractal Market Hypothesis, Jonathan Blackledge, Kieran Murphy

Articles

We report on a research and development programme in financial modelling and economic security undertaken in the Information and Communications Security Research Group (ICSRG, 2011) which has led to the launch of a new company - Currency Traders Ireland Limited - funded by Enterprise Ireland. Currency Traders Ireland Limited (CTI, 2011) has a fifty year exclusive license to develop a new set of indicators for analysing currency exchange rates (Forex trading). We consider the background to the approach taken and present examples of the results obtained to date. In this ‘Introduction’, we provide a background to and brief overview of …

Inside-Out Corporate Governance, David A. Skeel Jr., Vijit Chahar, Alexander Clark, Mia Howard, Bijun Huang, Federico Lasconi, A.G. Leventhal, Matthew Makover, Randi Milgrim, David Payne, Romy Rahme, Nikki Sachdeva, Zachary Scott

All Faculty Scholarship

Until late in the twentieth century, internal corporate governance—that is, decision making by the principal constituencies of the firm—was clearly distinct from outside oversight by regulators, auditors and credit rating agencies, and markets. With the 1980s takeover wave and hedge funds’ and equity funds’ more recent involvement in corporate governance, the distinction between inside and outside governance has eroded. The tools of inside governance are now routinely employed by governance outsiders, intertwining the two traditional modes of governance. We argue in this Article that the shift has created a new governance paradigm, which we call inside-out corporate governance.

Using the …

Excess Return Estimate And Risk Factors In Hospitality Firms, Genti Lagji

Masters Theses 1911 - February 2014

Calculating the expected return has been a longstanding issue in the finance. There is a positive correlation between the undertaken risk and excess return (or loss) but numerous variables need to be considered. This study builds on the Fama and French formula and adds factors unique to the hospitality industry such as labor cost and diversification in order to get results that are a tailored to the hospitality industry. Active hotel and restaurants companies (SIC 7011 and 5812 respectively) in the 2000-2009 period were analyzed in separate samples. The labor cost improves the explanatory on both samples and the diversification …

Risk And System-Of-Systems: Toward A Unified Concept, C. Ariel Pinto, Michael K. Mcshane, Rani Kady

Engineering Management & Systems Engineering Faculty Publications

The scope of this paper is the survey of both fundamental and most recent publications in system-of-systems, business and insurance, as well as risk analysis, modeling, and management for the purpose of better describing the concept of risk in recognition of emergence and complexity which characterizes many systems within the concern of engineering and business managers. The ultimate goal is to provide engineering and business managers the necessary perspective on the concept of risk and in its management for the next generation of sustainable systems - including various descriptions of risk and discussion of the relevance of properties of system-of-systems …

Longevity The Ultimate Risk For Ageing Populations, Says John Piggott, Knowledge@Smu

Knowledge@SMU

The proportion of elderly people in the population is increasing with Japan leading the field globally. The long-run effect is to put an increased burden on the young to support them. John Piggott, research dean at the Australian School of Business, University of New South Wales, spoke on longevity as the ultimate risk in the 21st Century at a seminar organised by the Sim Kee Boon Institute for Financial Economics at the Singapore Management University at the end of last year.

Trust And Investments Across Cultures, Thomas Berry, Omur Suer

Publications – Dreihaus College of Business

This study uses survey data to examine notions of trust relative to investments and perceived risk. Rather than using nation cross-sectional household survey data we target a specific group across four distinct cultures. We survey graduate business students in four countries (Turkey, Bahrain, Czech Republic, and the USA). We attempt to gauge investor perceptions about trust and the potential impact of trust on equity investing. The groups are fairly homogeneous in terms of education and relative social and economic status leaving cultural differences as the main source of observed response differences.

The Missing Monitor In Corporate Governance: The Directors' And Officers' Liability Insurer, Tom Baker, Sean J. Griffith

All Faculty Scholarship

This article reports the results of empirical research on the monitoring role of directors’ and officers’ liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the “bonding” provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance …

Investing In Hedge Funds: Risks, Returns And Performance Measurement, Francis Koh, Winston T. H. Koh, David K. C. Lee, Kok Fai Phoon

Research Collection Lee Kong Chian School Of Business

Hedge funds are collective investment vehicles that are often established with a special legal status that allows their investment managers a free hand to use derivatives, short sell, and exploit leverage to raise returns and cushion risk. We review various issues relating to the investment in hedge funds, which have become popular with high net-worth individuals and institutional investors, as well as discuss their empirical risk and return profiles. The concerns regarding the empirical measurements are highlighted, and meaningful analytical methods are proposed to provide greater risk transparency in performance reporting. We also discuss the development of the hedge fund …

Rapid Calculation Of The Price Of Guaranteed Minimum Death Benefit Ratchet Options Embedded In Annuities, Eric R. Ulm

Journal of Actuarial Practice (1993-2006)

This paper presents a new method of obtaining quick and accurate values and deltas for discrete look back options using Taylor series expansions. This method is applied to the case of ratchet guaranteed minimum death benefits attached to annuity contracts, and the method is extended to include annuities where a fixed fund is attached to the variable account. Finally, both the speed and the accuracy of the method are compared to Monte Carlo simulation and the exact analytic solution. The Taylor expansion method is shown to be faster and, in most cases, more accurate than the alternative methods.

Extension Risk In Commercial Mortgages, Charles C. Tu, Mark Eppli

Finance Faculty Research and Publications

Historical data and Monte Carlo simulation is used to examine the likelihood of loan extension and potential losses associated with extension. It is found that extension probability is highly sensitive to property NOI growth, to NOI volatility, to the amortization schedule, and to the loan term. It is found that extension risk is largely unaffected by changing credit spreads, changing yield curve assumptions, and changing term default assumptions. It is found that changing the underwriting standards affects the probability of loan extension in a somewhat muted way. It is estimated that the loss during extension is approximately 2%-3% of the …

Is The Term Premium A Risk Premium?, Louis H. Ederington, Jeremy C. Goh

Research Collection Lee Kong Chian School Of Business

This paper explores whether excess holding period returns on long vis-a-vis short-term securities behave in a manner that is consistent with (1) market efficiency, (2) the time-varying-term-premium variant of the expectations hypothesis, and (3) theories of the term premium that view it as a reward for risk bearing. Both traditional and modern theories of the term premium imply that it should evolve fairly slowly over time as attitudes toward risk and/or perceived covariances with wealth or consumption change. This implies that this period's term premium should have some predictive ability for next period's. However, we find that this quarter's ex-post …