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Research Collection Lee Kong Chian School Of Business

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Full-Text Articles in Finance and Financial Management

Investing In Hedge Funds When Returns Are Predictable, Doron Avramov, Robert Kosowski, Narayan Y. Naik, Melvyn Teo Aug 2007

Investing In Hedge Funds When Returns Are Predictable, Doron Avramov, Robert Kosowski, Narayan Y. Naik, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

This paper evaluates hedge fund performance through portfolio strategies that incorporate predictability in managerial skills, fund risk loadings, and benchmark returns. Incorporating predictability substantially improves performance for the entire universe of hedge funds as well as various subsets based on investment styles. Such out-performance is strongest during market downturns when the marginal utility of consumption is relatively high. Moreover, the major source of investment profitability is predictability in managerial skills. In particular, long-only strategies that incorporate predictable skills outperform their Fung and Hsieh (2004) benchmarks by over 12 percent per year. The economic value of predictability obtains for various rebalancing …

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A New Approach To The Measurement Of Polarization For Grouped Data, Eckart Bomsdorf, Clemens A. Otto Aug 2007

A New Approach To The Measurement Of Polarization For Grouped Data, Eckart Bomsdorf, Clemens A. Otto

Research Collection Lee Kong Chian School Of Business

In this paper we develop a measure of polarization for discrete distributions of non-negative grouped data. The measure takes into account the relative sizes and homogeneities of individual groups as well as the heterogeneities between all pairs of groups. It is based on the assumption that the total polarization within the distribution can be understood as a function of the polarizations between all pairs of groups. The measure allows information on existing groups within a population to be used directly to determine the degree of polarization. Thus the impact of various classifi- cations on the degree of polarization can be …

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Optimal Liquidation Strategies And Their Implications, Christopher Ting, Mitch Warachka, Yonggan Zhao Apr 2007

Optimal Liquidation Strategies And Their Implications, Christopher Ting, Mitch Warachka, Yonggan Zhao

Research Collection Lee Kong Chian School Of Business

This paper studies optimal liquidation when the selling price depends on the rate of liquidation, transaction time, volume, and the asset's intrinsic value. A generic closed-form solution for maximizing the discounted liquidation proceeds is derived. To obtain financial insights, three parametric specifications that proxy for increasingly realistic market conditions are examined. In our framework, maximizing liquidation proceeds and minimizing liquidity costs are equivalent. The optimal strategies imply more rapid liquidations in less liquid markets. We also show that volatility is stochastic when market liquidity is unpredictable.

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The Effect Of Financial Hedging On The Incentives For Corporate Diversification: The Role Of Stakeholder Firm-Specific Investments, Sonya Seongyeon Lim, Heli Wang Apr 2007

The Effect Of Financial Hedging On The Incentives For Corporate Diversification: The Role Of Stakeholder Firm-Specific Investments, Sonya Seongyeon Lim, Heli Wang

Research Collection Lee Kong Chian School Of Business

Financial hedging and corporate diversification are often considered substitutive means of risk management, implying that rapid development of financial hedging markets will yield less need for firms to manage risk through costly diversification. Building on a stakeholder-based view of risk management, we show that financial hedging and corporate diversification are more often complementary than substitutive. Financial hedging reduces a firm’s systematic risk, encouraging firm-specific investment by stakeholders. Larger firmspecific investment loads excessive idiosyncratic risk on the stakeholders, increasing the benefits of reducing idiosyncratic risk through diversification. Therefore, financial hedging can increase a firm’s incentives to manage risk through diversification.

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Do Hedge Funds Deliver Alpha? A Bayesian And Bootstrap Analysis, Robert Kosowski, Narayan Y. Naik, Melvyn Teo Apr 2007

Do Hedge Funds Deliver Alpha? A Bayesian And Bootstrap Analysis, Robert Kosowski, Narayan Y. Naik, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Using a robust bootstrap procedure, we find that top hedge fund performance cannot be explained by luck, and that hedge fund performance persists at annual horizons. Moreover, we show that Bayesian measures, which help overcome the short-sample problem inherent in hedge fund returns, lead to superior performance predictability. Relative to sorting on OLS alphas, sorting on Bayesian alphas yields a 5.5 percent per year increase in the alpha of the spread between the top and bottom hedge fund deciles. Our results are robust, and relevant to investors, as they are neither confined to small funds, nor driven by incubation bias, …

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Realized Daily Variance Of S&P500 Cash Index: A Revaluation Of Stylized Facts, Shirley J. Huang, Qianqiu Liu, Jun Yu Mar 2007

Realized Daily Variance Of S&P500 Cash Index: A Revaluation Of Stylized Facts, Shirley J. Huang, Qianqiu Liu, Jun Yu

Research Collection Lee Kong Chian School Of Business

In this paper, the realized daily variance is obtained from intraday transaction prices of the S&P 500 cash index over the period from January 1993 to December 2004. When constructing realized daily variance, market microstructure noise is taken into account using a technique proposed by Zhang, Mykland, and Ait-Sahalia (2005). The time series properties of realized daily variance are compared with those of variance estimates obtained from parametric GARCH and stochastic volatility models. Unconditional and dynamic properties concerning the realized daily variance are examined, the relationship between realized variance and returns is investigated, and the stylized facts concerning realized daily …

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Public Disclosure And Private Decisions: The Case Of Equity Market Execution Quality, Ekkehart Boehmer, Robert Jennings, Li Wei Mar 2007

Public Disclosure And Private Decisions: The Case Of Equity Market Execution Quality, Ekkehart Boehmer, Robert Jennings, Li Wei

Research Collection Lee Kong Chian School Of Business

In 2001, the Securities and Exchange Commission (SEC) required market centers to publish monthly execution-quality reports in an effort to spur competition for order flow between markets. Using samples of stocks trading on several markets, we investigate whether past execution quality affects order-routing decisions and whether the new disclosure requirements influence this relationship. We find that routing decisions are associated with execution quality; markets reporting low execution costs and fast fills subsequently receive more orders. Moreover, the reports themselves appear to provide information that was unavailable previously. Our results are consistent with active competition for order flow that can be …

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On Stiffness In Affine Asset Pricing Models, Shirley Junying Huang, Jun Yu Feb 2007

On Stiffness In Affine Asset Pricing Models, Shirley Junying Huang, Jun Yu

Research Collection Lee Kong Chian School Of Business

Economic and econometric analysis of continuous-time affine asset pricing models often necessitates solving systems of ordinary differential equations (ODEs) numerically. Explicit RungeûKutta (ERK) methods have been suggested to solve these ODEs both in the theoretical finance literature and in the financial econometrics literature. In this paper we show that under many empirically relevant circumstances the ODEs involve stiffness, a phenomenon which leads to some practical difficulties for numerical methods with a finite region of absolute stability, including the whole class of ERK methods. The difficulties are highlighted in the present paper in the context of pricing zero-coupon bonds as well …

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A Cardan’S Discriminant Approach To Predicting Currency Crashes, Benedict Seng Kee Koh, Wai Mun Fong, Fabrice Chan Feb 2007

A Cardan’S Discriminant Approach To Predicting Currency Crashes, Benedict Seng Kee Koh, Wai Mun Fong, Fabrice Chan

Research Collection Lee Kong Chian School Of Business

This paper models large swings in exchange rates by introducing nonlinearity via the generalized normal (GEN) distribution [Lye, J.N., Martin, V.L., 1993. Robust estimation, nonnormalities and generalized exponential distributions. Journal of the American Statistical Association 88, 261-267]. As the distribution allows for bimodality, a switch between modes may give rise to currency crashes. A statistic known as Cardan's discriminant, based on the shape parameters of the GEN, is used to detect bimodality. The Cardan's discriminant is found to reliably predict currency crashes for eight emerging countries and generate relatively low false signals for stable currencies.

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Risky Debt-Maturity Choice Under Information Asymmetry, Chunchi Wu, Sheen Liu Jan 2007

Risky Debt-Maturity Choice Under Information Asymmetry, Chunchi Wu, Sheen Liu

Research Collection Lee Kong Chian School Of Business

The traditional equilibrium models of signaling with debt-maturity require transaction costs by firms when raising new capital. In this paper, we propose a new model that has no such requirement. We demonstrate that a separating equilibrium of debt-maturity choice exists under a much more general condition, once accounting for the interactions between borrowers and lenders. The model is able to explain the observed complex financial structure. It is found that callable debt functions much like short-term debt, and serial debt similar to long-term debt. In equilibrium, high-quality firms issue short-term debt, and low-quality firms issue long-term debt.

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The Effect Of The Options Backdating Scandal On The Stock-Price Performance Of 110 Accused Companies, Gennaro Bernile, Gregg A. Jarrell, Howard Mulcahey Dec 2006

The Effect Of The Options Backdating Scandal On The Stock-Price Performance Of 110 Accused Companies, Gennaro Bernile, Gregg A. Jarrell, Howard Mulcahey

Research Collection Lee Kong Chian School Of Business

Since academic scholars and the Wall Street Journal reported widespread evidence indicating that option grants to executives were backdated, an avalanche of news stories followed documenting this ever-widening corporate scandal. In this study we ask: "How do disclosures of backdating affect shareholder value?" We closely examine 110 companies listed in the Wall Street Journal's Perfect Payday webpage, collecting all news stories related to options backdating. We find that shareholders of these 110 companies suffer on average significant stock-price declines, ranging between 20% and 50%. Moreover, these losses do not seem to be due to temporary overreactions (at least so far). …

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Choice Of Currency By East Asia Bond Issuers, David Fernandez, Simon Klassen Nov 2006

Choice Of Currency By East Asia Bond Issuers, David Fernandez, Simon Klassen

Research Collection Lee Kong Chian School Of Business

In discussing bond markets in Asia, academics and policymakers typically begin by noting that the Asian crisis of 1997-98 in part resulted from the underdevelopment of the region’s domestic bond markets and the resultant currency and duration mismatches. When assessing the progress made in developing these markets in the post-crisis years, academics and policymakers usually observe that, while several domestic currency government bond markets have moved ahead, corporate bond markets have lagged (Asian Development Bank (2002), Reserve Bank of Australia (2003)). The policy conclusion is therefore often drawn: to prevent another Asian crisis, Asian bond markets must be further developed.

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Which Daily Price Is Less Noisy?, Christopher Ting Sep 2006

Which Daily Price Is Less Noisy?, Christopher Ting

Research Collection Lee Kong Chian School Of Business

The daily efficient price is the price that would prevail if the market were frictionless. I show that volume-weighted average price (VWAP) provides a less noisy estimate for the unobservable efficient price as compared to the closing price. The variance of daily returns computed with VWAPs is smaller than that computed with closing prices. The difference between these two realized variances is economically significant. The volatility of log closing price change tends to understate the beta risk and Sharpe ratio. A higher noise level in the closing price leads to derivative prices that favor option and volatility-related swap writers.

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Is Stock Price Rounded For Economic Reasons In The Chinese Market, Yan He, Chunchi Wu Sep 2006

Is Stock Price Rounded For Economic Reasons In The Chinese Market, Yan He, Chunchi Wu

Research Collection Lee Kong Chian School Of Business

This paper investigates whether trading and quoting prices are rounded for both economic and cultural reasons on the Shanghai and Shenzhen Stock Exchanges in China. We find that the close, bid, and ask prices of domestic shares are rounded to the nearest 10s and 5s for economic reasons, and the last decimal point of prices clusters on 8 for cultural reasons. The cross-sectional variation in 10-cent and 5-cent rounding can be well explained by price and inverse of square root of trading volume, whereas the clustering on 8 can hardly be ascribed to economic variables. The cross-sectional variation in execution …

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Financial Value Of Brands In Mergers And Acquisitions: Is Value In The Eye Of The Beholder?, Cem Badahir, Sundar G.Bharadwaj, Rajendra Kumar Srivastava Jun 2006

Financial Value Of Brands In Mergers And Acquisitions: Is Value In The Eye Of The Beholder?, Cem Badahir, Sundar G.Bharadwaj, Rajendra Kumar Srivastava

Research Collection Lee Kong Chian School Of Business

Firms frequently engage in merger and acquisition deals. In these transactions, brands account for significant but differential proportions of overall transaction value. Extant marketing literature on financial value of brands focuses on drivers of financial value only within a firm. However, in a merger and acquisition context, value of brands also depends on how their new owners might leverage them in the marketplace. This study identifies and empirically tests both the target and acquirer characteristics that affect the value of target firm’s brands in mergers and acquisitions. Furthermore, the authors examine the moderating role of deal type and target firm …

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Asian Market Microstructure, David K. Ding, Charlie Charoenwong Jun 2006

Asian Market Microstructure, David K. Ding, Charlie Charoenwong

Research Collection Lee Kong Chian School Of Business

Along with the rapidly burgeoning Asian economy, the financial markets in the region have seen spectacular development during the past few decades. Several recent statistics will best illustrate their success. Net capital flows to Asia and Pacific over 1999 to 2003 constituted 40% of total flows to emerging markets and about 13.9% of the world's FDI flows. Over 90% of net capital flows to the Asia Pacific region has been in the form of equity and portfolio investment. By the end of 2004, Asia's share (including Japan) in world equity market capitalization has grown to 21%, with a total market …

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Do Accurate Earnings Forecasts Facilitate Superior Investment Recommendations?, Roger Loh, G. Mujtaba Mian May 2006

Do Accurate Earnings Forecasts Facilitate Superior Investment Recommendations?, Roger Loh, G. Mujtaba Mian

Research Collection Lee Kong Chian School Of Business

We find that analysts who issue more accurate earnings forecasts also issue more profitable stock recommendations. The average factor-adjusted return associated with the recommendations of analysts in the highest accuracy quintile exceeds the corresponding return for analysts in the lowest accuracy quintile by 1.27% per month. Our findings provide indirect empirical support for valuation models in the accounting and finance literatures (e.g., Ohlson, 1995) that emphasize the role of future earnings in predicting stock price movements. Our results also suggest that imperfectly efficient markets reward information gatherers, such as security analysts, for their costly activities in generating superior earnings forecasts.

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Employee Incentives To Make Firm Specific Investment: Implications For Resource-Based Theories Of Corporate Diversification, Heli Wang, Jay B. Barney Apr 2006

Employee Incentives To Make Firm Specific Investment: Implications For Resource-Based Theories Of Corporate Diversification, Heli Wang, Jay B. Barney

Research Collection Lee Kong Chian School Of Business

We argue that the risk associated with the value of a firm's core resources has an impact on employee decisions to make firm-specific investments, independent of the threat of opportunism that might exist in a particular exchange. We further explore mechanisms firms may adopt to mitigate the employee incentive problem stemming from the risk associated with core resource value. These arguments shed new light on resource-based theories of corporate diversification.

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Government Ownership And The Performance Of Government-Linked Companies: The Case Of Singapore, James Ang, David K. Ding Feb 2006

Government Ownership And The Performance Of Government-Linked Companies: The Case Of Singapore, James Ang, David K. Ding

Research Collection Lee Kong Chian School Of Business

In an emerging economy, the alternative to government control is often no governance. We investigate the governance structure of government-linked companies (GLCs) in Singapore under the ownership/control structure of Temasek Holdings, the government holding entity, which typically owns substantial cash flow rights but disproportional control rights and exercises no operational control. We compare the financial and market performance of GLCs with non-GLCs, where each has a different set of governance structure, the key difference being government ownership. We show that Singaporean GLCs have higher valuations and better corporate governance than a control group of non-GLCs. The results hold even when …

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Conceptualization Of Trust, Commitment, And Understanding The Relationships Between Trust, Commitment, And Willingness To Try Internet Banking Services, Siew Tong Fock, Hian Chye Koh Jan 2006

Conceptualization Of Trust, Commitment, And Understanding The Relationships Between Trust, Commitment, And Willingness To Try Internet Banking Services, Siew Tong Fock, Hian Chye Koh

Research Collection Lee Kong Chian School Of Business

This paper examines trust and commitment and their antecedents and consequences within the context of Internet banking, based on data collected from a survey of 500 Singapore undergraduates. After the establishment of a conceptual model that links trust and commitment to the willingness to try Internet banking, the empirical findings show that higher levels of trust and commitment are significantly associated with a greater willingness to try Internet banking. The paper also investigates security, ethics, privacy, openness, the speed of response, quality of information, regulatory control, technology advancement, and reputation as determinants of trust. Of these, security, regulatory control, technology …

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Conflicts Of Interest And Stock Recommendations: The Effects Of The Global Settlement And Related Regulations, Rong Wang, Ohad Kadan, Leonardo Madureira, Tzachi Zach Jan 2006

Conflicts Of Interest And Stock Recommendations: The Effects Of The Global Settlement And Related Regulations, Rong Wang, Ohad Kadan, Leonardo Madureira, Tzachi Zach

Research Collection Lee Kong Chian School Of Business

Prior research has shown that sell-side analysts in general, and especially those facing conflicts of interest driven by investment bank relationships, issue overly optimistic recommendations. This paper studies the effect of regulations on sell-side analysts’ research. These regulations — Rule NASD 2711, Rule NYSE 472, and the “Global Analyst Research Settlement” — attempted to mitigate the interdependence between the research and the investment bank departments of US brokerage houses. The results suggest that the regulations have partially achieved their goal of curbing the conflicts of interest’s influence over analysts’ stock recommendations. After the adoption of the new regulations, the likelihood …

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Capital Structure Dynamics And Stock Returns, Jie Cai, Zhe Zhang Jan 2006

Capital Structure Dynamics And Stock Returns, Jie Cai, Zhe Zhang

Research Collection Lee Kong Chian School Of Business

Many finance theories predict that the capital structure affects firm value, which implies that the changes in leverage have an impact on stock returns. Most of the existing literature however has been focusing on the determinants of the capital structure. Using a sample of U.S. public firms during 1975-2002, we document a significantly negative effect of leverage changes on next-quarter stock returns. This effect remains significant after controlling for other firm characteristics such as ROE, book-to-market, firm size, and past returns. We propose and test several hypotheses to explain the observed effect. We find that the negative effect is stronger …

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Indirect Inference For Dynamic Panel Models, Christian Gourieroux, Peter C. B. Phillips, Jun Yu Jan 2006

Indirect Inference For Dynamic Panel Models, Christian Gourieroux, Peter C. B. Phillips, Jun Yu

Research Collection Lee Kong Chian School Of Business

It is well-known that maximum likelihood (ML) estimation of the autoregressive parameter of a dynamic panel data model with fixed effects is inconsistent under fixed time series sample size (T) and large cross section sample size (N) asymptotics. The estimation bias is particularly relevant in practical applications when T is small and the autoregressive parameter is close to unity. The present paper proposes a general, computationally inexpensive method of bias reduction that is based on indirect inference (Gouriéroux et al., 1993), shows unbiasedness and analyzes efficiency. The method is implemented in a simple linear dynamic panel model, but has wider …

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Determinants Of Intra-Day Stock Price Change And Asymmetric Information, Christopher Hian Ann Ting Dec 2005

Determinants Of Intra-Day Stock Price Change And Asymmetric Information, Christopher Hian Ann Ting

Research Collection Lee Kong Chian School Of Business

This paper presents a synthesized model of asymmetric information. An empirical analysis of more than 1,400 NYSE common stocks shows that trade direction is more important than volume in revealing the asymmetry. There is also evidence to suggest that signed duration reflects informed trading activity. We use the proposed measure of information asymmetry to study daily changes in the level of informed trading and find that earnings announcements narrow the information gap between the informed and the uninformed. On average, information asymmetry is largest at the beginning of the trading day and it decreases monotonically toward the closing bell. More …

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The Implied Jump Risk Of Libor Rates, Kian Guan Lim, Christopher Ting, Mitch Warachka Oct 2005

The Implied Jump Risk Of Libor Rates, Kian Guan Lim, Christopher Ting, Mitch Warachka

Research Collection Lee Kong Chian School Of Business

This paper examines implied parameters from options on LIBOR futures. Jump-diffusion models are found to offer superior in-sample and out-of-sample performance when compared to their pure diffusion counterpart. The need to incorporate stochastic jump magnitudes into LIBOR dynamics is also documented. In addition, empirical evidence reveals that the jump component in LIBOR rates is important for pricing their derivatives. Furthermore, variation in jump risk often coincides with Federal Open Market Committee (FOMC) decisions and a small subset of macroeconomic announcements.

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The Choice Of Trading Venue And Relative Price Impact Of Institutional Trading: Adrs Versus The Underlying Securities In Their Local Markets, Chakravarty Sugato, Christine X. Jiang, Chiraphol New Chiyachantana Oct 2005

The Choice Of Trading Venue And Relative Price Impact Of Institutional Trading: Adrs Versus The Underlying Securities In Their Local Markets, Chakravarty Sugato, Christine X. Jiang, Chiraphol New Chiyachantana

Research Collection Lee Kong Chian School Of Business

No abstract provided.

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Calibration Of The Structural Model Of Corporate Bond Spreads, Lerner Peter, Chunchi Wu Oct 2005

Calibration Of The Structural Model Of Corporate Bond Spreads, Lerner Peter, Chunchi Wu

Research Collection Lee Kong Chian School Of Business

No abstract provided.

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Profiting From Mean-Reverting Yield Curve Trading Strategies, Choong Tze Chua, Winston T. H. Koh, Krishna Ramaswamy Aug 2005

Profiting From Mean-Reverting Yield Curve Trading Strategies, Choong Tze Chua, Winston T. H. Koh, Krishna Ramaswamy

Research Collection Lee Kong Chian School Of Business

A large class of fixed income trading strategies focuses on opportunities offered by the interest rate term structure. This paper studies a set of yield curve trading strategies that are based on the view that the yield curve mean-reverts to an unconditional curve. These mean-reverting trading strategies exploit deviations in the level, slope and curvature of the yield curve from historical norms. We consider cash-neutral trades with one-month holding periods. Some mean-reverting strategies were found to be highly profitable, and outperform, on a risk-adjusted basis before transaction costs, alternative strategies of an investment in the Lehman Brothers Bond index (by …

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Implied Measures Of Relative Fund Performance, Steve Hogan, Mitchell Craig Warachka Aug 2005

Implied Measures Of Relative Fund Performance, Steve Hogan, Mitchell Craig Warachka

Research Collection Lee Kong Chian School Of Business

We evaluate the relative performance of funds by conditioning their returns on the cross-section of portfolio characteristics across fund managers. Our implied procedure circumvents the need to specify benchmark returns or peer funds. Instead, fund-specific benchmarks for measuring selection and market timing ability are constructed. This technique is robust to herding as well as window dressing and mitigates survivorship bias. Empirically, the conditional information contained in portfolio weights defined by industry sectors, assets and geographical regions is critically important to the assessment of fund management. For each set of portfolio characteristics, we identify funds with success at either selecting securities …

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A Dynamic Model For The Forward Curve, Choong Tze Chua, Foster Dean, Krishna Ramaswamy, Robert Stine Aug 2005

A Dynamic Model For The Forward Curve, Choong Tze Chua, Foster Dean, Krishna Ramaswamy, Robert Stine

Research Collection Lee Kong Chian School Of Business

This paper develops and estimates a dynamic arbitrage-free model for the current forward curve as the sum of (i) an unconditional component, (ii) a maturity-specific component and (iii) a date-specific component. The model combines features of the Preferred Habitat model,the Expectation Hypothesis and affine yield curve models. We show how to construct alternative parametric examples of the three components from a sum of exponential functions, verify that the resulting forward curves satisfy the Heath-Jarrow-Morton conditions, and derive the risk-neutral dynamics for the purpose of pricing interest rate derivatives. We select a model from alternative affine examples that are fitted to …

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