Finance and Financial Management Commons^™

Forecasting Multivariate Realized Stock Market Volatility, Gregory H. Bauer, Keith Vorkink

Faculty Publications

We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of lagged volatility, lagged returns and other forecasting variables. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it results in a positive-definite estimated covariance matrix. We apply the model to the covariance matrix of size-sorted stock returns and find that two factors are sufficient to capture most of the dynamics.

Why Did U.S. Banks Invest In Highly-Rated Securitization Tranches?, Isil Erel, Taylor Nadauld, René M. Stulz

Faculty Publications

We estimate holdings of highly-rated tranches of mortgage securitizations of American deposit-taking banks ahead of the credit crisis and evaluate hypotheses that have been advanced to explain these holdings. We find that holdings of highly-rated tranches were economically trivial for the typical bank, but banks with greater holdings performed more poorly during the crisis. Though univariate comparisons show that banks with large trading books had greater holdings, the holdings of highly-rated tranches are not higher for banks with large trading books in regressions that control for bank size. The ratio of highly-rated tranches holdings to assets increases with bank assets, …

$100 Bills On The Sidewalk: Violations Of No-Arbitrage In 401(K) Accounts, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

We identify employees at seven companies whose 401(k) investment choices are dominated because they are contributing less than the employer matching contribution threshold despite being vested in their match and being able to make penalty-free 401(k) withdrawals for any reason because they are older than 59½. At the average firm, 36% of match-eligible employees over age 59½ forgo arbitrage profits that average 1.6% of their annual pay, or $507. A survey educating employees about the free lunch they are forgoing raised contribution rates by a statistically insignificant 0.67% of income among those completing the survey.

An Analysis Of The Effects Of The Probability Of Informed Trading (Pin) On Corporate Diversification Discount And Ceo Pay-Performance Sensitivity : Evidence From China, Man Jin

Lingnan Theses

This thesis includes estimating the probability of informed trading, PIN, developed by Easley, Kiefer and O’Hara (1996, 1997a, 1997b), for a large sample of listed firms in China from 2002 to 2008, and I use PIN to explore two independent research questions in corporate finance.

First, the probability of informed trading is applied to explain the discount in value for firms with diversified business operations. Although aiming to increase firm value, the corporate diversification decision usually results in a firm value discount, for a variety of reasons, one of which is the transparency problem. My study directly tests the relation …

The Role Of Income And Employment On School Participation Rate In Pasay City And Eastern Samarthe Role Of Income And Employment On School Participation Rate In Pasay City And Eastern Samar¹, Tereso S. Tullao Jr, John Paolo R. Rivera

DLSU Business & Economics Review

The Philippines committed itself to the United Nations’ Millennium Development Goals (MDG), one of which is the universal access to primary education by 2015. To address the goal, supply factors and demand factors must be considered. Supply factors refer to the ability of the government to provide resources to finance elementary education. Demand factors refer to the variables affecting household’s decision to demand educational services such as income, education cost, and demographic characteristics of the households: age structure and family characteristics. This study explored the extent to which household income and household head employment status influence elementary school participation rate …

Friends Or Foes? Target Selection Decisions Of Sovereign Wealth Funds And Their Consequences, Jason Kotter, Ugur Lel

Faculty Publications

This paper examines investment strategies of sovereign wealth funds (SWFs), their effect on target firm valuation, and how both of these are related to SWF transparency. We find that SWFs prefer large and poorly performing firms facing financial difficulties. Their investments have a positive effect on target firms’ stock prices around the announcement date but no substantial effect on firm performance and governance in the long run. We also find that transparent SWFs are more likely to invest in financially constrained firms and have a greater impact on target firm value than opaque SWFs. Overall, SWFs are similar to passive …

Style-Related Comovement: Fundamentals Or Labels?, Brian H. Boyer

Faculty Publications

I find that economically meaningless index labels cause stock returns to covary in excess of fundamentals. S&P/Barra follow a simple mechanical procedure to define their Value and Growth indices. In doing so, they reclassify some stocks from Value to Growth even after their book-to-market ratios have risen, and vice versa. Such stocks begin to covary more with the index they join and less with the index they leave. Backdated constituent data from Barra reveal no such label-related shifts in comovement during the 10 years prior to the actual introduction of the indices in 1992.

Earnings Management And The Effect On Long-Run Performance For Firms With Seasoned Equity Offerings, Danielle Enderson

Honors Program Theses

Managers of publicly traded firms use various methods to signal to the market their beliefs about their company's current performance and future prospects. These methods include, among others, the declaration of dividends to common stockholders, a firm's repurchase of its shares in the market, or the issuance of seasoned equity. Each of these actions can be used to send a specific signal to the market based on management's beliefs regarding the firm's financial outlook.

This study focuses on a firm's issuance of seasoned equity. Seasoned equity offerings, or SEOs, are the issuance of additional shares of stock by a firm …

The Implied Volatility Of Etf And Index Options., Stoyu Ivanov, Jeff Whitworth, Yi Zhang

Faculty Publications

We examine the option-implied volatility of the three most liquid ETFs (Diamonds, Spiders, and Cubes) and their respective tracking indices (Dow 30, S&P 500, and NASDAQ 100). We find that volatility smiles for ETF options are more pronounced than for index options, primarily because deep-in-the money ETF options have considerably higher implied volatility than deep-in-the-money index options. The observed difference in implied volatility is not due to a difference between the realized return distributions of the underlying ETFs and indices. Differences in implied volatility for ETF and index options also do not appear to be explained by discrepancies in net …

Cross-Sectional Analysis Of Index And Commodity Markets Price Discovery., Stoyu Ivanov

Faculty Publications

This study examines the determinants of relative price discovery between the futures and cash prices in 30 index and commodity markets based on the Gonzalo and Granger (1995) permanent-transitory decomposition methodology. Twenty-eight indexes and commodities have proportional futures market information shares greater than 60%. Two commodities are the only exception: Feeders Cattle and Wheat-Minneapolis have price discovery occurring predominantly in the cash markets with information shares of their futures contracts of 33% and 40%, respectively. The research documents a significant cross-sectional variability of the information shares across the 30 indexes and commodities and finds that the information shares of the …

Credit Default Swaps Regulation And The Use Of Collateralized Mortgage Obligations In U.S. Financial Institutions, Jon Patraic Neill

Walden Dissertations and Doctoral Studies

The fast and easy global movement of capital throughout the financial system, from lenders to borrowers and through intermediaries and financial market participants, has been recognized as a source of instability associated with illiquidity and financial crises. The purpose of this research was to better understand how regulation either enables or constrains capital movement. The theoretical framework comprised 2 contrasting public policymaking models, Arrow's rational-comprehensive model and Kingdon's garbage can model, which were used to derive opposing hypotheses. The research question addressed the nature of the relationship between Credit Default Swaps (CDSs) regulations and the flow of capital into Collateralized …

Relative Pricing Of Publicly Traded U.S. Electric Utility Companies, Nicholas Stephen Jewczyn

Walden Dissertations and Doctoral Studies

In the financial turmoil of 2008, U.S. firms reported debt-ratios that differed from the debt-ratios calculated from balance sheets. The problem is that investors bought common stock expecting initial investment return and lost money when companies delisted. The purpose of this quantitative study was to determine sample securities pricing with the application of synthetic assets and debt accrued. Addressed in the research questions was whether those securities were (a) underpriced compared with return-on-assets (ROA), (b) overpriced compared with ROA, (c) a debt-ratio higher than 60% and also overpriced, (d) underpriced with a synthetic asset added, or (e) related by relative …

Institutional Investors And Corporate Financial Policies, Ricky William Scott

USF Tampa Graduate Theses and Dissertations

Institutional investors influence corporate payout and research and development (R&D) investment policies. Higher payouts are encouraged by institutional investors, especially in firms with high free cash flow and poor investment opportunities. They also positively influence stock repurchases, particularly in firms with high information asymmetry. The substitution of stock repurchases for dividends as a percentage of total payout is encouraged by institutional investors. Institutional owners persuade firm management to increase research and development (R&D) investment overall and specifically in firms with higher stock liquidity, higher information asymmetry, lower free cash flow, and better investment opportunities. Institutional investors decrease agency costs in …

Delayed-Bang Approach Towards More Sustainable Critical Infrastructure Risk Management, C. Ariel Pinto, Michael K. Mcshane, Abhishek S. Pathak

Finance Faculty Publications

This article describes the Delayed Bang Approach for determining the value of risk management alternatives in critical infrastructure security. The discussion includes (1) the need for sustainable risk management (2) the importance of time valuation in evaluating competing loss prevention and loss reduction alternatives, (3) the convergence of deterministic engineering economics, survivability analysis, and probabilistic analysis, and (4) hypothetical examples of the Delayed-Bang Approach and significance towards more sustainable risk management.

Using Implementation Intentions Prompts To Enhance Influenza Vaccination Rates, Katherine L. Milkman, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian

Faculty Publications

We evaluate the results of a field experiment designed to measure the effect of prompts to form implementation intentions on realized behavioral outcomes. The outcome of interest is influenza vaccination receipt at free on-site clinics offered by a large firm to its employees. All employees eligible for study participation received reminder mailings that listed the times and locations of the relevant vaccination clinics. Mailings to employees randomly assigned to the treatment conditions additionally included a prompt to write down either (1) the date the employee planned to be vaccinated or (2) the date and time the employee planned to be …

Etf Volatility Around The New York Stock Exchange Close., Stoyu Ivanov

Faculty Publications

In this study we extend the work of Chang, Jain and Locke (1995) who study the Standard and Poor’s 500 (S&P 500) Index futures contract volatility around NYSE close by examining three ETFs, the Spider, the Diamonds and the Cubes price volatilities after market close. Similar to the S&P 500 Index futures contract ETFs continue trading until 16:15, which is 15 minutes after their underlying indexes are reported. This is the first study to the best of our knowledge to examine the volatility of ETFs around the NYSE close. We document that similar to the findings of Chang, Jain and …

Lessons From The Financial Crisis: Report Of The Asian Financial Regulatory Committee, Jeremy Choo Yong Goh, Sri Adiningsih, Maria S. Gochoco-Bautista

Research Collection Lee Kong Chian School Of Business

No abstract provided.

Understanding Investor Sentiment: The Case Of Soccer, Gennaro Bernile, Evgeny Lyandres

Research Collection Lee Kong Chian School Of Business

We examine the extent to which the stock market's inefficient responses to resolutions of uncertainty depend on investors’ biased ex ante beliefs regarding the probability distribution of future event outcomes or their ex post irrational reactions to these outcomes. We use a sample of publicly traded European soccer clubs and analyze their returns around important matches. Using a novel proxy for investors’ expectations based on contracts traded on betting exchanges (prediction markets), we find that within our sample, investor sentiment is attributable, in part, to a systematic bias in investors’ ex ante expectations. Investors are overly optimistic about their teams’ …

Markowitz Meets Talmud: A Combination Of Sophisticated And Naive Diversification Strategies, Jun Tu, Guofu Zhou

Research Collection Lee Kong Chian School Of Business

The modern portfolio theory pioneered by Markowitz (1952) is widely used in practice and extensively taught to MBAs. However, the estimated Markowitz portfolio rule and most of its extensions not only underperform the naive 1/N rule (that invests equally across N assets) in simulations, but also lose money on a risk-adjusted basis in many real data sets. In this paper, we propose an optimal combination of the naive 1/N rule with one of the four sophisticated strategies—the Markowitz rule, the Jorion (1986) rule, the MacKinlay and Pástor (2000) rule, and the Kan and Zhou (2007) rule—as a way to improve …

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 …