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Research Collection Lee Kong Chian School Of Business

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A Review On Derivative Hedging Using Reinforcement Learning, Peng Liu Mar 2023

A Review On Derivative Hedging Using Reinforcement Learning, Peng Liu

Research Collection Lee Kong Chian School Of Business

Hedging is a common trading activity to manage the risk of engaging in transactions that involve derivatives such as options. Perfect and timely hedging, however, is an impossible task in the real market that characterizes discrete-time transactions with costs. Recent years have witnessed reinforcement learning (RL) in formulating optimal hedging strategies. Specifically, different RL algorithms have been applied to learn the optimal offsetting position based on market conditions, offering an automatic risk management solution that proposes optimal hedging strategies while catering to both market dynamics and restrictions. In this article, the author provides a comprehensive review of the use of …

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Peer Effects In Equity Research, Kenny Phua, Mandy Tham, Chi Shen Wei Mar 2023

Peer Effects In Equity Research, Kenny Phua, Mandy Tham, Chi Shen Wei

Research Collection Lee Kong Chian School Of Business

We study the importance of peer effects among sell-side analysts who work at the same brokerage house, but cover different firms. By mapping the information network within each brokerage, we identify analysts who occupy central positions in their network. Central analysts incorporate more information from their coworkers and produce better research. Using shocks to network structures around brokerage mergers, we identify the influence of peer effects and the importance of industry expertise on analysts’ performance. A portfolio strategy that exploits the forecast revisions of central analysts earns up to 24% per annum.

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Simultaneous Multilateral Search, Sergei Glebkin, Bart Zhou Yueshen, Ji Shen Feb 2023

Simultaneous Multilateral Search, Sergei Glebkin, Bart Zhou Yueshen, Ji Shen

Research Collection Lee Kong Chian School Of Business

This paper studies simultaneous multilateral search (SMS) in over-the-counter markets: When searching, a customer simultaneously contacts several dealers and trades with the one offering the best quote. Higher search intensity (how often one can search) improves welfare, but higher search capacity (how many dealers one can contact) might be harmful. When the market is in distress, customers might inefficiently favor bilateral bargaining (BB) over SMS. Such a preference for BB speaks to the sluggish adoption of SMS trading, like request-for-quote protocols, in over-the-counter markets. Furthermore, a market-wide shift to SMS may not be socially optimal.

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The Financialization Of Cryptocurrencies, Lei Huang, Tse-Chun Lin, Fangzhou Lu, Jian Sun Feb 2023

The Financialization Of Cryptocurrencies, Lei Huang, Tse-Chun Lin, Fangzhou Lu, Jian Sun

Research Collection Lee Kong Chian School Of Business

We show that change in Grayscale Bitcoin Trust premium is the single most significant predictor of Bitcoin daily return. This sentiment measure is similar to the closed-end fund discount measure as in Baker and Wurgler (2006), but more likely to reflect the excess demand from traditional investors than from blockchain specialists. Although there is a substantial variation in Bitcoin price quotes worldwide, this Grayscale premium and discount predict Bitcoin daily return for the most liquid Bitcoin exchanges. Using K-means clustering and LDA analysis, we find that this predictability is especially significant when there is a large variation in bullish and …

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Impact Of Geographical Diversification And Limited Attention On Private Equity Fund Returns, Victor Ong Feb 2023

Impact Of Geographical Diversification And Limited Attention On Private Equity Fund Returns, Victor Ong

Research Collection Lee Kong Chian School Of Business

This article analyzes the effect of geographical diversification on global private equity (PE) fund returns. We find that there is a negative correlation between geographical diversification and PE fund returns. To establish the causality between geographical diversification and PE fund returns, we employ an instrumental variable analysis where the instrument used is the stock market capitalization of the host country where the PE fund is based. Our results apply to Net IRR, TVPI and DPI as dependent variables used to proxy for PE fund returns in the main regression model. A one standard deviation increase in geographical diversification results in …

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From Market Making To Matchmaking: Does Bank Regulation Harm Market Liquidity?, Gideon Saar, Jian Sun, Ron Yang, Haoxiang Zhu Jan 2023

From Market Making To Matchmaking: Does Bank Regulation Harm Market Liquidity?, Gideon Saar, Jian Sun, Ron Yang, Haoxiang Zhu

Research Collection Lee Kong Chian School Of Business

Post-crisis bank regulations raised market-making costs for bank-affiliated dealers. We show that this can, somewhat surprisingly, improve overall investor welfare and reduce average transaction costs despite the increased cost of immediacy. Bank dealers in OTC markets optimize between two parallel trading mechanisms: market making and matchmaking. Bank regulations that increase market-making costs change the market structure by intensifying competitive pressure from non-bank dealers and incentivizing bank dealers to shift their business toward matchmaking. Thus, post-crisis bank regulations have the (unintended) benefit of replacing costly bank balance sheets with a more efficient form of financial intermediation.

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Presidential Economic Approval Rating And The Cross-Section Of Stock Returns, Zilin Chen, Zhi Da, Dashan Huang, Liyao Wang Jan 2023

Presidential Economic Approval Rating And The Cross-Section Of Stock Returns, Zilin Chen, Zhi Da, Dashan Huang, Liyao Wang

Research Collection Lee Kong Chian School Of Business

We construct a monthly presidential economic approval rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly under-perform those with low betas by 1.00% per month in the future, on a risk-adjusted basis. The low PEAR beta premium persists up to one year, and is present in various sub-samples and even in other G7 countries. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such …

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An Integrated Framework On Human-In-The-Loop Risk Analytics, Peng Liu Jan 2023

An Integrated Framework On Human-In-The-Loop Risk Analytics, Peng Liu

Research Collection Lee Kong Chian School Of Business

Risk analytics is an integral component in the overall assessment of the risk profile for potential and existing obligors. For example, credit worthiness is often assessed via the use of scorecards, which are regulatory credit risk models developed based on historical data and domain expertise in banks and financial institutions. A pure statistical model, however, often fails to entertain regulatory requirements on both predictiveness and interpretability at the same time. Instead, practical risk models are developed by incorporating expert opinions within the development process, such as forcing the direction of travel for certain financial factors. In this article, the author …

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Learning From Manipulable Signals, Mehmet Ekmekci, Leandrro Gorno, Lucas Maestri, Jian Sun, Dong Wei Dec 2022

Learning From Manipulable Signals, Mehmet Ekmekci, Leandrro Gorno, Lucas Maestri, Jian Sun, Dong Wei

Research Collection Lee Kong Chian School Of Business

We study a dynamic stopping game between a principal and an agent. The agent is privately informed about his type. The principal learns about the agent’s type from a noisy performance measure, which can be manipulated by the agent via a costly and hidden action. We fully characterize the unique Markov equilibrium of this game. We find that terminations/ market crashes are often preceded by a spike in (expected) performance. Our model also predicts that, due to endogenous signal manipulation, too much transparency can inhibit learning. As the players get arbitrarily patient, the principal elicits no useful information from the …

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Responsible Hedge Funds, Hao Liang, Lin Sun, Song Wee Melvyn Teo Nov 2022

Responsible Hedge Funds, Hao Liang, Lin Sun, Song Wee Melvyn Teo

Research Collection Lee Kong Chian School Of Business

Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low environmental, social, and governance (ESG) exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander …

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The Sun Is Rising In The East: Dual-Class Shares And The Competitive Landscape Of Technological Industries In Asia, Hao Liang, Tran Bao Phuong Nguyen, Wei Zhang Oct 2022

The Sun Is Rising In The East: Dual-Class Shares And The Competitive Landscape Of Technological Industries In Asia, Hao Liang, Tran Bao Phuong Nguyen, Wei Zhang

Research Collection Lee Kong Chian School Of Business

There has recently been a relaxation of listing regulations to accommodate and attract firms going public with dual-class shares (DCS), notably in Asia. We examine the value implications of DCS adoption by employing an event study around a regulatory change allowing DCS listings in Hong Kong. We find negative market reactions around these regulatory discussions for firms already listed in Hong Kong, especially for firms in technology (tech) sectors. However, the market reaction turned positive for tech firms during Hong Kong’s first DCS listing. We identify two distinct channels that influenced shareholders’ perspectives on DCS: the competition channel, which dominated …

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Bringing Excitement To Empirical Business Ethics Research: Thoughts On The Future Of Business Ethics, Mayowa T. Babalola, Matthijs Bal, Charles H. Cho, Lucia Garcia-Lorenzo, Omrane Guedhami, Hao Liang, Greg Shailer, Suzanne Van Gils Oct 2022

Bringing Excitement To Empirical Business Ethics Research: Thoughts On The Future Of Business Ethics, Mayowa T. Babalola, Matthijs Bal, Charles H. Cho, Lucia Garcia-Lorenzo, Omrane Guedhami, Hao Liang, Greg Shailer, Suzanne Van Gils

Research Collection Lee Kong Chian School Of Business

To commemorate 40 years since the founding of the Journal of Business Ethics, the editors-in-chief of the journal have invited the editors to provide commentaries on the future of business ethics. This essay comprises a selection of commentaries aimed at creating dialog around the theme Bringing Excitement to Empirical Business Ethics Research (inspired by the title of the commentary by Babalola and van Gils). These editors, considering the diversity of empirical approaches in business ethics, envisage a future in which quantitative business ethics research is more bold and innovative, as well as reflexive about its techniques, and dialog between quantitative …

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Commonality In Credit Spread Changes: Dealer Inventory And Intermediary Distress, Zhiguo He, Paymon Khorrami, Zhaogang Song Oct 2022

Commonality In Credit Spread Changes: Dealer Inventory And Intermediary Distress, Zhiguo He, Paymon Khorrami, Zhaogang Song

Research Collection Lee Kong Chian School Of Business

Two intermediary-based factors—a corporate bond dealer inventory measure and a broad intermediary distress measure—explain more than 40% of the puzzling common variation in credit spread changes beyond canonical structural factors. A simple intermediary-based model with partial market segmentation accounts for intermediary factors’ explanatory power and delivers three further implications with empirical support. First, whereas bond sorts on risk-related variables produce monotonic loading patterns on intermediary factors, non-risk-related sorts produce no pattern. Second, dealer inventory comoves with corporate-credit assets only, whereas intermediary distress comoves with both corporate-credit and non-corporate-credit assets. Third, dealers’ inventory responds to (instrumented) bond sales by institutional investors.

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Riding Off Into The Sunset: Dual-Class Structure In The Age Of Unicorns Going Public, Hao Liang, Junho Park, Wei Zhang Oct 2022

Riding Off Into The Sunset: Dual-Class Structure In The Age Of Unicorns Going Public, Hao Liang, Junho Park, Wei Zhang

Research Collection Lee Kong Chian School Of Business

The increasing adoption of dual-class shares (DCS)—an ownership structure that gives corporate insiders greater voting power than other shareholders—among newly listed companies has raisedsignificant governance concerns. We investigate the decision to adopt the DCS structure and itsvalue implications in the recent U.S. IPOs. Using founder cultural traits and Silicon Valley lawfirms as instrumental variables, we find significant post-IPO outperformance by firms adopting DCSwith a sunset clause, especially incapacity-based sunset which stipulates that the DCS will ceaseafter founders’ death, incapacitation or departure, compared to non-DCS firms and DCS firms without sunsets. This outperformance is more pronounced for high-tech firms, after Google’s …

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The Alphabet Soup In Reporting And Measuring Esg, Hao Liang, Kam Chee Chan Oct 2022

The Alphabet Soup In Reporting And Measuring Esg, Hao Liang, Kam Chee Chan

Research Collection Lee Kong Chian School Of Business

Harmonising frameworks with the Impact-Weighted Accounts Framework.

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Corporate Actions And The Manipulation Of Retail Investors In China: An Analysis Of Stock Splits, Sheridan Titman, Chi Shen Wei, Bin Zhao Sep 2022

Corporate Actions And The Manipulation Of Retail Investors In China: An Analysis Of Stock Splits, Sheridan Titman, Chi Shen Wei, Bin Zhao

Research Collection Lee Kong Chian School Of Business

We identify a group of “suspicious” firms that use stock splits, perhaps along with other activities, to artificially inflate their share prices. Following the initiation of suspicious splits, share prices temporarily increase, and subsequently decline below their presplit levels. Using account level data from the Shanghai Stock Exchange, we find that small retail investors acquire shares in firms initiating suspicious splits, while more sophisticated investors accumulate positions before suspicious split announcements and sell in the postsplit period. We also find that insiders sell large blocks of shares and obtain loans using company stock as collateral around the initiation of suspicious …

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Fractile Graphical Analysis In Finance: A New Perspective With Applications, Anil K. Bera, Aurobindo Ghosh Sep 2022

Fractile Graphical Analysis In Finance: A New Perspective With Applications, Anil K. Bera, Aurobindo Ghosh

Research Collection Lee Kong Chian School Of Business

Fractile Graphical Analysis (FGA) was proposed by Prasanta Chandra Mahalanobis in 1961 as a method for comparing two distributions at two different points (of time or space) controlling for the rank of a covariate through fractile groups. We use bootstrap techniques to formalize the heuristic method used by Mahalanobis for approximating the standard error of the dependent variable using fractile graphs from two independently selected “interpenetrating network of subsamples.” We highlight the potential and revisit this underutilized technique of FGA with a historical perspective. We explore a new non-parametric regression method called Fractile Regression where we condition on the ranks …

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Overnight Returns, Daytime Reversals, And Future Stock Returns, Ferhat Akbas, Ekkehart Boehmer, Chao Jiang, Paul D. Koch Sep 2022

Overnight Returns, Daytime Reversals, And Future Stock Returns, Ferhat Akbas, Ekkehart Boehmer, Chao Jiang, Paul D. Koch

Research Collection Lee Kong Chian School Of Business

A higher frequency of positive overnight returns followed by negative trading day reversals during a month suggests a more intense daily tug of war between opposing investor clienteles, who are likely composed of noise traders overnight and arbitrageurs during the day. We show that a more intense daily tug of war predicts higher future returns in the cross section. Additional tests support the conclusion that, in a more intense tug of war, daytime arbitrageurs are more likely to discount the possibility that positive news arrives overnight and thus overcorrect the persistent upward overnight price pressure.

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Inflation Expectations Can Be A Self-Fulfilling Prophecy, Aurobindo Ghosh, Khyati Chauhan, Muskan Bagrodia Aug 2022

Inflation Expectations Can Be A Self-Fulfilling Prophecy, Aurobindo Ghosh, Khyati Chauhan, Muskan Bagrodia

Research Collection Lee Kong Chian School Of Business

In a commentary, SMU Assistant Professor of Finance (Education) Aurobindo Ghosh, SMU postgraduate student and Research Assistant for the SInDEx Project Muskan Bagrodia and International Monetary Fund Economic Research Assistant Khyati Chauhan weighed in on why inflation expectations matter as much as economic data. They discussed how inflation expectations can be a self-fulfilling prophecy, and shared the key takeaways of the quarterly DBS-Sim Kee Boon Institute’s Singapore Index of Inflation Expectations (DBS-SKBI SInDEx) survey. They concluded that effective communication on inflation control measures, in addition to credible policy decisions, will help consumers feel assured and refrain from basing purchasing decisions …

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Do Alpha Males Deliver Alpha? Facial Width-To-Height Ratio And Hedge Funds, Yan Lu, Melvyn Teo Aug 2022

Do Alpha Males Deliver Alpha? Facial Width-To-Height Ratio And Hedge Funds, Yan Lu, Melvyn Teo

Research Collection Lee Kong Chian School Of Business

An abundance of evidence relates facial width-to-height ratio (fWHR) to masculine behaviors in males. We show that hedge funds operated by high-fWHR managers underperform those operated by low-fWHR managers, bear greater downside risk, are more susceptible to fire sales, and fail more often. High-fWHR managers compensate for their underperformance by marketing their funds more aggressively, thereby garnering higher flows and fee revenues. By exploiting major personal events that shape testosterone, namely marriage and fatherhood, we trace the biological mechanism underlying the relation between fWHR and investment performance to circulating testosterone. Our findings are robust and extend to equity mutual funds.

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Information Acquisition And Expected Returns: Evidence From Edgar Search Traffic, Frank Weikai Li, Chengzhu Sun Aug 2022

Information Acquisition And Expected Returns: Evidence From Edgar Search Traffic, Frank Weikai Li, Chengzhu Sun

Research Collection Lee Kong Chian School Of Business

This paper examines expected return information embedded in investors' information acquisition activity. Using a novel dataset containing investors' access of company filings through SEC's EDGAR system, we reverse engineer their expectations over future payoffs and show that the abnormal number of IPs searching for firms' financial statements strongly predict future returns. The return predictability stems from investors allocating more effort to firms with improving fundamentals and following exogeneous shock to underpricing. A long-short portfolio based on our measure of information acquisition activity generate monthly abnormal return of 80 basis points and does not reverse over the long-run.. In addition, the …

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The Cryptocurrency Participation Puzzle, Ran Duchin, David H. Solomon, Jun Tu, Xi Wang Aug 2022

The Cryptocurrency Participation Puzzle, Ran Duchin, David H. Solomon, Jun Tu, Xi Wang

Research Collection Lee Kong Chian School Of Business

We show that ongoing zero portfolio weights in cryptocurrency are surprisingly difficult to generate in a standard Bayesian portfolio theory framework. With ten years of prior data, equity market investors would need very pessimistic priors on mean returns to justify never having bought cryptocurrency: -10.6% per month for Bitcoin, and -19.6% per month for a diversified portfolio of cryptocurrencies. Moreover, most priors that involve never purchasing cryptocurrency imply that investors should short cryptocurrency. Optimal absolute weights are generally small but non-trivial (1-5%), frequently positive, and fairly smooth despite returns being volatile. Under a wide range of priors, the certainty equivalent …

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International Asset Pricing With Strategic Business Groups, Massimo Massa, Hong Zhang, Hong Zhang Aug 2022

International Asset Pricing With Strategic Business Groups, Massimo Massa, Hong Zhang, Hong Zhang

Research Collection Lee Kong Chian School Of Business

Firms in global markets often belong to business groups. We argue that this feature can have a profound influence on international asset pricing. In bad times, business groups may strategically reallocate risk across affiliated firms to protect core “central firms.” This strategic behavior induces co-movement among central firms, creating a new intertemporal risk factor. Based on a novel data set of worldwide ownership for 2002–2012, we find that central firms are better protected in bad times and that they earn relatively lower expected returns. Moreover, a centrality factor augments traditional models in explaining the cross section of international stock returns.

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Customer Concentration And Corporate Carbon Emissions, Saiying Deng, Tinghua Duan, Frank Weikai Li, Xiaoling Pu Aug 2022

Customer Concentration And Corporate Carbon Emissions, Saiying Deng, Tinghua Duan, Frank Weikai Li, Xiaoling Pu

Research Collection Lee Kong Chian School Of Business

This paper examines whether economic links with major corporate customers curb corporate carbon emissions. We show that supplier firms with a concentrated customer base have significantly lower carbon emissions. The baseline results are robust to alternative measures of carbon emissions and customer concentration, and various approaches that mitigate endogeneity concerns due to omitted variables and reverse causality. Moreover, the curbing effect of customer concentration on supplier carbon emissions is more pronounced in firms facing lower customer switching costs, with less (more) supplier (customer) bargaining power, fewer redeployable assets, operating in more carbon-intensive industries, and after the Paris Agreement of 2015. …

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Countercyclical Marketing During Recessions, Nirmalya Kumar Jul 2022

Countercyclical Marketing During Recessions, Nirmalya Kumar

Research Collection Lee Kong Chian School Of Business

Nirmalya Kumar argues that during recessions, firms should fight against their instinct to reduce marketing outlays. Instead, a large body of academic research demonstrates that firms investing in countercyclical marketing perform better both during, and immediately after, the economic downturn.

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Oil Price Shocks And Stock Market Anomalies, Zhaobo Zhu, Licheng Sun, Jun Tu, Qiang Ji Jul 2022

Oil Price Shocks And Stock Market Anomalies, Zhaobo Zhu, Licheng Sun, Jun Tu, Qiang Ji

Research Collection Lee Kong Chian School Of Business

This paper provides a novel perspective to the nexus of oil prices and stock markets by examining the impact of oil price shocks on stock market anomalies. After decomposing oil price shocks into three types , we find that aggregate demand shocks have the strongest influence on stock market anomalies. In contrast, oil supply shocks and oil-specific demand shocks have little impact. Similar results are also found in the industry analysis. Interestingly, the link between aggregate demand shocks and anomalies is the strongest among firms with either small size or high idiosyncratic risks. The documented effects are robust after controlling …

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Performance Of Smart Beta Etfs In The U.S. Market: 2009–2019, Chiyachantana N. Chiraphol, Chiraphol N. Chiyachantana, Kuan Yong David Ding, Tanakorn Likitapiwat Jul 2022

Performance Of Smart Beta Etfs In The U.S. Market: 2009–2019, Chiyachantana N. Chiraphol, Chiraphol N. Chiyachantana, Kuan Yong David Ding, Tanakorn Likitapiwat

Research Collection Lee Kong Chian School Of Business

Purpose: This paper empirically analyses the performance of smart beta exchange traded funds (ETFs) through the absolute return, relative return, and risk-adjusted return over the decade from 2009 to 2019.Methodology: Using a sample of smart beta ETFs in the U.S. stock market, we examine the components of the risk factors in a smart beta strategy. Results: Our results show that a smart beta strategy is not able to maintain a persistent performance over the period examined. Moreover, there is not a single year that smart beta ETFs could generate an abnormal return that is statistically significant. The evidence illustrates that …

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Why Do U.S. Firms Invest Less Over Time?, Fangjian Fu, Sheng Huang, Rong Wang Jul 2022

Why Do U.S. Firms Invest Less Over Time?, Fangjian Fu, Sheng Huang, Rong Wang

Research Collection Lee Kong Chian School Of Business

Capital expenditures of U.S. public firms, relative to total assets, decrease by more than half from 1980 to 2020. The decline is pervasive across industries and firms of different characteristics and cannot be explained by the usual determinants of investment and many other seemingly plausible reasons. The decline is consistent with the transformation in production technology — firms rely more on intangible capital and less on fixed assets in production. Industry-level analyses yield supporting evidence. We observe similar declining trend in capital expenditure in other developed countries but not in most emerging markets.

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Eradicating Malaria: Innovation Diffusion In The Face Of Grand Challenges, Han Jiang, Hao Liang, Dongning Yang Jul 2022

Eradicating Malaria: Innovation Diffusion In The Face Of Grand Challenges, Han Jiang, Hao Liang, Dongning Yang

Research Collection Lee Kong Chian School Of Business

What is the role of organizational innovation—beyond technological innovation—in an era of grand challenges concerning health, poverty, and economic development around the world? How is organizational innovation developed and diffused to influence resource allocation in the field? We conduct a qualitative case study by analyzing a Chinese pharmaceutical firm’s efforts to combat malaria in Africa over 10 years. Through documentation and extensive interviews, we study the role of innovation diffusion and resource allocation to address grand challenges in emerging markets with significant institutional voids. Our conceptual model delineates the different stages of innovation diffusion to show how organizations can draw …

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Endogeneity Of Commodity Price In Freight Cost Models, Kian Guan Lim Jun 2022

Endogeneity Of Commodity Price In Freight Cost Models, Kian Guan Lim

Research Collection Lee Kong Chian School Of Business

In this paper, we answer a novel question on how the value of goods carried can affect the freight cost. We focus on the issue based on a more specialized freight market involving transport of seaborne iron ore from mining ports to Qingdao in China during the period 2014 to 2019. We construct simultaneous systems of demand–supply equations on both the iron ore market and the freight market. In the models, we explain how endogeneity of iron ore as a regressor can arise due to the nexus between the two markets, and that the freight demand is largely a derived …

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