Template-Type: ReDIF-Article 1.0 Author-Name: Simon Keane Author-X-Name-First: Simon Author-X-Name-Last: Keane Title: A reappraisal of share price maximization as a corporate financial objective Abstract: This paper challenges the conventional share price maximizing objective and the assumption that a successful company can expect to achieve share price growth above the normal drift caused by inflation and earnings retention. The share price is an expectations-based measure, and more efficient companies have no greater prospect of outperforming market expectations than less efficient companies. The paper concludes that, given the potentially dysfunctional effects of pursuing a share price maximizing goal, it may be significant that share-price centred economies such as the UK and the US tend to be associated with a more short-termist perspective than bank-centred economies such as Germany and Japan. Journal: The European Journal of Finance Pages: 1-17 Issue: 1 Volume: 1 Year: 1995 Keywords: share price maximization, zero NPVs, short-termism, X-DOI: 10.1080/13518479500000001 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000001 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:1-17 Template-Type: ReDIF-Article 1.0 Author-Name: J. Ignacio Pena Author-X-Name-First: J. Ignacio Author-X-Name-Last: Pena Title: Comment Abstract: Journal: The European Journal of Finance Pages: 18-20 Issue: 1 Volume: 1 Year: 1995 X-DOI: 10.1080/13518479500000002 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000002 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:18-20 Template-Type: ReDIF-Article 1.0 Author-Name: Christopher Smallwood Author-X-Name-First: Christopher Author-X-Name-Last: Smallwood Title: Comment Abstract: From the point of view of a practitioner, I found Professor Keane's paper interesting and stimulating. I do not agree with the arguments, mainly because the model I have in mind of the way in which the world really works is not consistent with the theoretical model which Keane is addressing. His puzzles and paradoxes do not seem to me to be particularly puzzling or paradoxical when certain unrealistic theoretica assumptions are relaxed. This paper provides a brief summary of some of Professor Keane's arguments; presents an alternative view of the way equity markets actually behave in the real world; and finally contrasts the implications of this alternative view with Professor Keane' own conclusions on such issues as managements' approach to investment decisions and executive renumeration packages. Journal: The European Journal of Finance Pages: 21-25 Issue: 1 Volume: 1 Year: 1995 X-DOI: 10.1080/13518479500000003 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000003 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:21-25 Template-Type: ReDIF-Article 1.0 Author-Name: Graham Quick Author-X-Name-First: Graham Author-X-Name-Last: Quick Title: Comment Abstract: Journal: The European Journal of Finance Pages: 26-30 Issue: 1 Volume: 1 Year: 1995 X-DOI: 10.1080/13518479500000004 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000004 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:26-30 Template-Type: ReDIF-Article 1.0 Author-Name: George Frankfurter Author-X-Name-First: George Author-X-Name-Last: Frankfurter Title: Comment Abstract: Journal: The European Journal of Finance Pages: 31-36 Issue: 1 Volume: 1 Year: 1995 X-DOI: 10.1080/13518479500000005 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000005 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:31-36 Template-Type: ReDIF-Article 1.0 Author-Name: S. M. Keane Author-X-Name-First: S. M. Author-X-Name-Last: Keane Title: Rejoinder Abstract: Journal: The European Journal of Finance Pages: 37-40 Issue: 1 Volume: 1 Year: 1995 X-DOI: 10.1080/13518479500000006 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000006 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:37-40 Template-Type: ReDIF-Article 1.0 Author-Name: Istemi Demirag Author-X-Name-First: Istemi Author-X-Name-Last: Demirag Title: Short-term performance pressures: is there a consensus view? Abstract: The manufacturing sector in the UK has been performing rather badly in comparison with its major international competitors. This deterioration in performance can be seen in R&D spending patenting rates and in market shares and appears to centre on deficiencies in product innovation. There is general agreement that short-termismis one of the main factors responsible for such poor performance in Britain. Does short-termism arise from pressure in captial markets or is it generated within the firm? The stock market is often blamed for putting inappropriate short-term pressures on management by institutional investor intervention and hostile take-over activity leading to changes in management policy and ultimately to dismissal. On the other hand it is also argued that the problem of short-termism originates within management itself. The purpose of this paper is therefore to review the relevant literature surrounding the debate on short-termism to draw conclusions on its likely causes and to provide some suggestions as to how to manage these pressures. Journal: The European Journal of Finance Pages: 41-56 Issue: 1 Volume: 1 Year: 1995 Keywords: short-termism, financial institutions, market efficiency, investment decisions, performance evalution, management control styles, X-DOI: 10.1080/13518479500000007 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000007 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:41-56 Template-Type: ReDIF-Article 1.0 Author-Name: Chritian De Boissieu Author-X-Name-First: Chritian Author-X-Name-Last: De Boissieu Title: Derivatives Markets and Systematic Risks: Some Reflections Abstract: Derivatives are an essential part of risk management by all economic agents (financial or non financial). They contribute, with other financial innovations, to the allocative efficiency. Under certain circumstances they could also generate systemic risks. The purpose of this article is to underline the dramatic growth of derivatives instruments and the articulation between OTC and exchange-traded markets. The current debate about the regulatory framework applied to derivatives instruments and the implementation of internal control procedures (leading to more appropriate disclosure and reporting standards) is also discussed. Journal: The European Journal of Finance Pages: 57-68 Issue: 1 Volume: 1 Year: 1995 Keywords: derivatives markets, over-the-counter contracts, systemic risks, regulation, internal control, X-DOI: 10.1080/13518479500000008 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000008 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:57-68 Template-Type: ReDIF-Article 1.0 Author-Name: Walter Allegretto Author-X-Name-First: Walter Author-X-Name-Last: Allegretto Author-Name: Giovanni Barone-Adesi Author-X-Name-First: Giovanni Author-X-Name-Last: Barone-Adesi Author-Name: Robert Elliott Author-X-Name-First: Robert Author-X-Name-Last: Elliott Title: Numerical evaluation of the critical price and American options Abstract: An approximate solution to the American put value is proposed and implemented numerically. Relaxation techniques enable the critical price to be determined with high accuracy. The method uses a modification of the quadratic approximation of MacMillan and Barone-Adesi and Whaley which gives an expression for the critical price. Numerical experimentation and iterative methods quickly provide highly accurate solutions. Journal: The European Journal of Finance Pages: 69-78 Issue: 1 Volume: 1 Year: 1995 Keywords: American options, critical price, numerical appoximations, X-DOI: 10.1080/13518479500000009 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000009 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:69-78 Template-Type: ReDIF-Article 1.0 Author-Name: Terence Mills Author-X-Name-First: Terence Author-X-Name-Last: Mills Author-Name: J. Andrew Coutts Author-X-Name-First: J. Andrew Author-X-Name-Last: Coutts Title: Calendar effects in the London Stock Exchange FT-SE indices Abstract: This paper investigates the presence of various anomalies, or 'calendar effects', in the FT-SE 100, Mid 250 and 350 indices, and the accompanying industry baskets, for the period January 1986 to October 1992. Our results broadly support similar evidence found for many countries concerning stock market anomalies, for the 'January', 'weekend', 'half of the month' and 'holiday' effects all appear to be present in at least some of the indices. Journal: The European Journal of Finance Pages: 79-93 Issue: 1 Volume: 1 Year: 1995 Keywords: anomalies, calendar effects, FT-SE indices, X-DOI: 10.1080/13518479500000010 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000010 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:79-93 Template-Type: ReDIF-Article 1.0 Author-Name: Theodore Bos Author-X-Name-First: Theodore Author-X-Name-Last: Bos Author-Name: Thomas Fetherston Author-X-Name-First: Thomas Author-X-Name-Last: Fetherston Author-Name: Teppo Martikainen Author-X-Name-First: Teppo Author-X-Name-Last: Martikainen Author-Name: Jukka Perttunen Author-X-Name-First: Jukka Author-X-Name-Last: Perttunen Title: The international co-movements of Finish stocks Abstract: This paper provides new empirical evidence on the international co-movements of Finnish stocks. The vector autoregression (VAR) approach indicates that US and especially Swedish stock markets lead Finnish stock market returns by approximately one or two months. The results based on international market models indicate that the returns of individual Finnish stocks are significantly positively related to those of Sweden, while the relation between Finnish and US returns is significantly lower. The relation seems to vary clearly between industries, some industries being related to US markets as well. Significant time-series instability is reported in the results, however. Journal: The European Journal of Finance Pages: 95-111 Issue: 1 Volume: 1 Year: 1995 Keywords: finance, asset pricing, stock markets, international, stability, X-DOI: 10.1080/13518479500000011 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000011 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:1:p:95-111 Template-Type: ReDIF-Article 1.0 Author-Name: A. Buckley Author-X-Name-First: A. Author-X-Name-Last: Buckley Title: The classical tax system, imputation tax and capital budgeting Abstract: Differences in the taxation systems in Britain, France, and some other European countries (which use the imputation system) compared with the USA and the Netherlands, among others (which use the classical tax system), mean that the cost of equity capital should be specified, using a capital asset pricing model methodology, in different ways. Under the imputation system its value should be net of personal taxes; under the classical tax system, it should be gross of personal taxes. Similarly the value of the tax shield on debt for input into adjusted present value calculations differs, being significantly greater under the classical tax system. Formulae are set out to enable the calculation of the magnitude of the tax shield readily to be undertaken. Journal: The European Journal of Finance Pages: 113-128 Issue: 2 Volume: 1 Year: 1995 Keywords: investment, taxation, value, project, appraisal, X-DOI: 10.1080/13518479500000012 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000012 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:2:p:113-128 Template-Type: ReDIF-Article 1.0 Author-Name: K. Giannopoulos Author-X-Name-First: K. Author-X-Name-Last: Giannopoulos Title: Estimating the time Varying Components of international stock markets' risk Abstract: In this study an alternative approach for assessing securities' risk is applied. Various authors have argued that security returns are not homoskedastic but exhibit variation over time. They have observed that large changes tend be followed by more large changes in either direction, and so volatility must be predictably high after large changes. This phenomenon of securities' volatility, referred to as clustering, has important implications for security pricing and risk management. Among the most popular techniques currently used to capture the clustering effect and to forecast future volatilityare those belonging to the family of Autoregressive Conditional Heteroskedastic (ARCH) models. The main aim of this paper is to investigate whether such volatility modelling can be used to capture the time variation not only in the total risk of a security return but also its systematic and unsystematic components. Using weekly local stock market data, the time varying beta with the World Index has been estimated via a bivariate GARCH-M model. The GARCH-M parameterization used here is a dynamic specification of the SIM. The hypothesis that this dynamic specification holds cannot be rejected for 11 out of 13 local portfolios. The results provide evidence that both the systematic and the non-systematic counterparts are also changing over time. However, in some markets those risk changes may take place with some delay. This suggests that some of the low correlation coefficients computed for certain stock market returns may not be due to differences in business cycles among those countries, but may be caused by the non-synchronous response to world market developments. This finding should have important implications in many investment decisions such as portfolio selection, market timing and risk hedging. Journal: The European Journal of Finance Pages: 129-164 Issue: 2 Volume: 1 Year: 1995 Keywords: ARCH, SIM, time varying betas, X-DOI: 10.1080/13518479500000013 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000013 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:2:p:129-164 Template-Type: ReDIF-Article 1.0 Author-Name: Ø. Gjerde Author-X-Name-First: Ø. Author-X-Name-Last: Gjerde Author-Name: F. Sættem Author-X-Name-First: F. Author-X-Name-Last: Sættem Title: Linkages among European and world stock markets Abstract: Causal relations and dynamic interactions among equity returns in ten countries for the period 1983-1994 are analysed. An innovation accounting approach based on a multivariate vector autoregressive (VAR) model is used to estimate the proportion of each market return's forecast error attributable to innovations in foreign market returns. Three major results appear. The variance decompositions indicate a strong degree of economic interaction among stock markets. The US stock market has a considerable influence on stock market performance in almost every country, while there is no substantial inter-continental influence from the European stock markets on the world's two largest equity markets in New York and Tokyo. Finally, the pattern of the impulse-response functions illustrates a rapid international transmission of stock market events, supporting the hypothesis of international stock market efficiency. Journal: The European Journal of Finance Pages: 165-179 Issue: 2 Volume: 1 Year: 1995 Keywords: VAR model, economic integration, stock markets, X-DOI: 10.1080/13518479500000014 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000014 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:2:p:165-179 Template-Type: ReDIF-Article 1.0 Author-Name: Istemi Demirag Author-X-Name-First: Istemi Author-X-Name-Last: Demirag Title: An empirical study of research and development top managers' perceptions of short-term pressures from capital markets in the United Kingdom Abstract: It is often argued that capital market pressures are increasingly directed towards short-term performance evaluation of managers and their operations. Whether these external capital market pressures actually exist or not, short-term pressures on firms are influenced by managers' own perceptions of these external pressures. If managers perceive the existence of these external pressures it is likely that this will lead to short-term behaviour on their part. The purpose of this paper is therefore to examine (a) research and development (R&D) managers' perceptions of short-term behaviour in capital markets in the UK, and (b) patterns of behaviour relating to R&D which may be influenced by these perceptions. The findings of this study indicate that approximately half of the UK research and development managers perceive capital markets as responsible for putting inappropriate short-term pressures on their companies' management. However, an even larger proportion report short-termist behaviour relating to R&D and its evaluation, suggesting that some at least of the problem of 'short-termism' is internally generated. Journal: The European Journal of Finance Pages: 180-202 Issue: 2 Volume: 1 Year: 1995 Keywords: short-termism, research and development, market efficiency, investment decisions, performance evaluation, management control, X-DOI: 10.1080/13518479500000015 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000015 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:2:p:180-202 Template-Type: ReDIF-Article 1.0 Author-Name: P. Doran Author-X-Name-First: P. Author-X-Name-Last: Doran Author-Name: C. Clubb Author-X-Name-First: C. Author-X-Name-Last: Clubb Title: The leasing equation in a general tax environment: a note Abstract: This note demostrates that the traditional method of evaluating a lease is consistent with shareholder wealth maximization and that it is not necessary for the company to take into account details of its shareholders' personal taxation when making the lease or purchase decision. Journal: The European Journal of Finance Pages: 203-206 Issue: 2 Volume: 1 Year: 1995 Keywords: leasing, personal taxes, X-DOI: 10.1080/13518479500000016 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000016 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:2:p:203-206 Template-Type: ReDIF-Article 1.0 Author-Name: G. Y. N. Tang Author-X-Name-First: G. Y. N. Author-X-Name-Last: Tang Title: Stability of international stock market relationships across month of the year and different holding intervals Abstract: Potential benefits from international diversification depend upon the stability in stock market relationships. Using monthly data of 11 international stock markets, this paper examines the stability in stock market relationships across month of the year and across different holding intervals. Empirical results show that the correlation structure is more stable than the covariance structure. While empirical evidence supports the hypothesis that the correlation structure is very stable across different holding intervals, the empirical support for the stability in correlation structure across month of the year is much weaker. Journal: The European Journal of Finance Pages: 207-218 Issue: 3 Volume: 1 Year: 1995 Keywords: stability, month of the year, holding intervals, International, X-DOI: 10.1080/13518479500000017 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000017 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:3:p:207-218 Template-Type: ReDIF-Article 1.0 Author-Name: George Mckenzie Author-X-Name-First: George Author-X-Name-Last: Mckenzie Author-Name: Simon Wolfe Author-X-Name-First: Simon Author-X-Name-Last: Wolfe Title: Limited liability and bank safety net procedures Abstract: A model is presented of bank behaviour which identifies the factors determining a bank's optimal capital/asset ratio, its optimal liquidity ratio, the expected value of non-performing loans and the probability of bank failure. We propose that this last variable can act as an index of bank credit-worthiness. The main factors determining this index are (i) the risk associated with bank asset returns, (ii) the variability of bank deposits, (iii) the costs associated with bank failure and (iv) the implicit or explicit government subsidy involved in depositor protection schemes. The principal general conclusion of the paper is that regulations governing capital requirements, liquidity requirements and depositor protection should be (a) risk related and (b) integrated. Depositor protection can be improved through relatively high capital requirements. However, the optimal strategy is for all bank safety net procedures and incentive mechanisms to be related to the riskiness of individual bank portfolios. Journal: The European Journal of Finance Pages: 219-235 Issue: 3 Volume: 1 Year: 1995 Keywords: capital adequacy requirements, deposit guarantees, limited liability. JEL classification codes G13, G21, G28, X-DOI: 10.1080/13518479500000018 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000018 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:3:p:219-235 Template-Type: ReDIF-Article 1.0 Author-Name: Patricia Chelley-Steeley Author-X-Name-First: Patricia Author-X-Name-Last: Chelley-Steeley Title: Calendar effects and the pricing of risk: the UK evidence Abstract: For some time there has been a puzzle surrounding the seasonal behaviour of stock returns. This paper demonstrates that there is an asymmetric relationship between risk and return across the different months of the year. The paper finds that systematic risk is only priced during the months of January, April and July. Variance risk and firm size are priced during several months of the year including January. An analysis of the relative behaviour of size based securities reveals that firm capitalization makes a valuable contribution to the magnitude of risk premiums. Journal: The European Journal of Finance Pages: 237-255 Issue: 3 Volume: 1 Year: 1995 Keywords: risk pricing, stock returns, calendar effect, X-DOI: 10.1080/13518479500000019 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000019 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:3:p:237-255 Template-Type: ReDIF-Article 1.0 Author-Name: A. Baglioni Author-X-Name-First: A. Author-X-Name-Last: Baglioni Title: Incomplete contracts, renegotiation, and the choice between bank loans and public debt issues Abstract: In a two-period model where an investment project is funded with standard debt, the probability distribution of final cash flow is determined, at the interim date, by an unverifiable state of nature together with a choice by the controlling party (entrepreneur or creditor). With a control allocation contingent on a noisy default signal, renegotiation may improve efficiency in two ways: (i) reduce excessive risk-taking - due to the entrepreneur's moral hazard - through debt forgiveness; (ii) avoid the costs of financial distress associated with excessive liquidation or underinvestment by debt-holders, by letting them receive an equity stake in the firm. Such efficiency gain is an advantage of bank loans over publicly traded debt, given that the former are more easily renegotiated than the latter. The difference between the two types of debt is increasing in the degree of contractual incompleteness (noise present in the default signal) and in the portion of project value accounted for by future discretionary investment options. Journal: The European Journal of Finance Pages: 257-278 Issue: 3 Volume: 1 Year: 1995 Keywords: incomplete contracts, debt renegotiation, financial distress, intermediation, X-DOI: 10.1080/13518479500000020 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000020 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:3:p:257-278 Template-Type: ReDIF-Article 1.0 Author-Name: Jo Danbolt Author-X-Name-First: Jo Author-X-Name-Last: Danbolt Title: An analysis of gains and losses to shareholders of foreign bidding companies engaged in cross-border acquisitions into the United Kingdom, 1986-1991 Abstract: In this paper the gains and losses to shareholders of 71 foreign companies which made takeover bids for companies listed in the United Kingdom during the 1986-1991 period are analysed. The average abnormal return during the month of the bid announcement was positive, although not statistically significant. However, both prior to and sub-sequent to the bid announcement month, the overseas bidders earned highly significant negative abnormal returns. The cumulative abnormal returns over the five month period following the bid announcement were-4.77% with the index model and -9.79% with the market model. Further analysis established that Continental European companies performed significantly worse than American bidders. In addition, large companies and companies bidding for large targets, performed significantly better than the other bidders. Journal: The European Journal of Finance Pages: 279-309 Issue: 3 Volume: 1 Year: 1995 Keywords: cross-border, acquisitions, takeovers, bidders, X-DOI: 10.1080/13518479500000021 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000021 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:3:p:279-309 Template-Type: ReDIF-Article 1.0 Author-Name: Ian Nabney Author-X-Name-First: Ian Author-X-Name-Last: Nabney Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Richard Dallaway Author-X-Name-First: Richard Author-X-Name-Last: Dallaway Author-Name: Swee Leong Author-X-Name-First: Swee Author-X-Name-Last: Leong Author-Name: Wendy Redshaw Author-X-Name-First: Wendy Author-X-Name-Last: Redshaw Title: Leading edge forecasting techniques for exchange rate prediction Abstract: This paper describes how modern machine learning techniques can be used in conjuction with statistical methods to forecast short term movements in exchange rates, producing models suitable for use in trading. It compares the results achieved by two different techniques, and shows how they can be used in a complementary fashion. The paper draws on experience of both inter-and intra-day forecasting taken from earlier studies conducted by Logica and Chemical Bank Quantitative Research & Trading (QRT) group's experience in developing trading models. In evaluating different models both trading performance and forecasting accuracy are used as measures of performance. Rule induction is a method for deriving classification rules from data. Logica's data exploration toolkit DataMariner™, which combines rule induction with statistical techniques, has been used successfully to model several exchange rate time series. An attractive feature of this approach is that the trading rules produced are in a form that is familiar to analysts. We also show how DataMariner™, can be used to determine the importance of different technical indicators and to understand relationships between different markets. This understanding can then be used to assist in building models using other analytical tools. Neural networks are a general technique for detecting and modelling patterns in data. We describe the principles of neural networks, the data pre-processing that they require and our experience in training them to forecast the direction and magnitude of movements in time series. Journal: The European Journal of Finance Pages: 311-323 Issue: 4 Volume: 1 Year: 1995 Keywords: machine learning techniques, leading-edge forecasting, rule induction, neural networks, X-DOI: 10.1080/13518479500000022 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000022 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:4:p:311-323 Template-Type: ReDIF-Article 1.0 Author-Name: Dirk Emma Baestaens Author-X-Name-First: Dirk Emma Author-X-Name-Last: Baestaens Author-Name: Willem Max Van Den Bergh Author-X-Name-First: Willem Max Van Den Author-X-Name-Last: Bergh Author-Name: Herve Vaudrey Author-X-Name-First: Herve Author-X-Name-Last: Vaudrey Title: Options as a predictor of common stock price changes Abstract: Since rather novel techniques such as neural nets allow investigation of nonlinear model specification previously untested, it may be that traditional models of price formation underperform through misspecification rather than market efficiency. This paper explores whether a multilayer backpropagation model offers exploitable profit opportunities for some limited period. Using an intradaytransaction dataset obtained from the European Options Exchange (Amsterdam), We attempted to predict the return on Philips. Two neural nets are contrasted to ordinary linear regression analysis on the basis of three benchmarks (MSE, and net realized returns). An adaptively trained 33-14-1 architecture scored best on all criteria and yielded an annualized 11% return following a simple one-period trading strategy. Journal: The European Journal of Finance Pages: 325-343 Issue: 4 Volume: 1 Year: 1995 Keywords: option pricing, intraday transaction data, stock return prediction, multilayer backpropagation algorithm, X-DOI: 10.1080/13518479500000023 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000023 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:4:p:325-343 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Andre Keller Author-X-Name-First: Andre Author-X-Name-Last: Keller Title: Efficiency tests with overlapping data: an application to the currency options market Abstract: This paper presents the results of an empirical study into the efficiency of the currency options market. The methodology derives from a simple model often applied to the spot and forward markets for foreign exchange. It relates the historic volatility of the underlying asset to the implied volatility of an option on the underlying at a specified prior time and then proceeds to test obvious hypotheses about the values of the coefficients. The study uses panel regression to address the problem of overlapping data which leads to dependence between observations. It also uses volatility data directly quoted on the market in order to avoid the biases which may occur when 'backing out' volatility from specific option pricing models. In general, the evidence rejects the hypothesis that the currency option market is efficient. This suggests that implied volatility is not the best predictor of future exchange rate volatility and should not be used without modification: the models presented in this paper could be a way of producing revised forecasts. Journal: The European Journal of Finance Pages: 345-366 Issue: 4 Volume: 1 Year: 1995 X-DOI: 10.1080/13518479500000024 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000024 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:4:p:345-366 Template-Type: ReDIF-Article 1.0 Author-Name: J. I. Pena Author-X-Name-First: J. I. Author-X-Name-Last: Pena Author-Name: E. Ruiz Author-X-Name-First: E. Author-X-Name-Last: Ruiz Title: Stock market regulations and international financial integration: the case of Spain Abstract: International financial integration effects on the Spanish stock market are studied, both for the conditional mean and conditional variance. New institutional regulations in Spain are taken into account and their efficiency consequences are addressed. Results suggest an increasing international integration but nontrivial opportunities for financial diversification may still be relevant. Journal: The European Journal of Finance Pages: 367-382 Issue: 4 Volume: 1 Year: 1995 Keywords: financial integration, market reforms, stochastic volatility, X-DOI: 10.1080/13518479500000025 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000025 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:4:p:367-382 Template-Type: ReDIF-Article 1.0 Author-Name: M. M. Dacorogna Author-X-Name-First: M. M. Author-X-Name-Last: Dacorogna Author-Name: U. A. Muller Author-X-Name-First: U. A. Author-X-Name-Last: Muller Author-Name: C. Jost Author-X-Name-First: C. Author-X-Name-Last: Jost Author-Name: O. V. Pictet Author-X-Name-First: O. V. Author-X-Name-Last: Pictet Author-Name: J. R. Ward Author-X-Name-First: J. R. Author-X-Name-Last: Ward Title: Heterogeneous real-time trading strategies in the foreign exchange market Abstract: The foreign exchange (FX) market is worldwide, but the dealers differ in their geographical locations (time zones), working hours, time horizons, home currencies, access to information,transaction costs, and other institutional constraints. The variety of time horizones is large: from intra-day dealers, who close their positions every evening, to long-term investors and central banks. Depending on the constraints, the different market participats need different strategies to reach their goal, which is usually maximizing the profit, or rather a utility function including risk. Different intra-day trading strategies can be studied only if high-density data are available. Oslen & Associates (O & A) has collected and analysed large amounts of FX quotes by market makers around the clock (up to 5000 non-equally spaced prices per day for the German mark against US$). Based on these data, a set of real-time intra-day trading models has been developed. These models give explicit trading recommendations under realistic constraints. They are allowed to trade only during the opening hours of a market, depending on the time zone and local holidays. The models have been running real-time for more than three years, thus leading to an ex ante test. The test results, obtained with a risk-sensitive performance measure, are presented. All these trading models are profitable, but they differ in their risk behaviour and dealing frequency. If a certain profitable intra-day algorithm is tested with different working hours, its success can considerably change. A systematic study shows that the best choice of working hours is usually when the most important markets for the particular FX rate are active. All the results demonstrate that the assumption of a homogeneous 24-hour FX market with identical dealers, following an identical 'rational expectation', is far from reality. To explain the market dynamics, a heterogeneous model of the market with different types of dealers is more appropriate. Journal: The European Journal of Finance Pages: 383-403 Issue: 4 Volume: 1 Year: 1995 Keywords: foreign exchange market, trading model, heterogeneous expectations, X-DOI: 10.1080/13518479500000026 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479500000026 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:1:y:1995:i:4:p:383-403 Template-Type: ReDIF-Article 1.0 Author-Name: Magnus Dahlquist Author-X-Name-First: Magnus Author-X-Name-Last: Dahlquist Author-Name: Peter Sellin Author-X-Name-First: Peter Author-X-Name-Last: Sellin Title: Stochastic dominance, tax-loss selling and seasonalities in Sweden Abstract: This paper examines two potential explanations of the January effect in the Swedish stock market for the period from January 1919 to December 1994; The tax-loss selling hypothesis and the omitted risk factor hypothesis. We document significantly higher returns in both January and July over the sample period. In addition, there is a seasonal pattern in the variances of the monthly returns. There also seems to be an interaction between the variance and the mean effects. We identify six different tax regimes where capital gains and losses are treated differently, and test whether tax regime changes have an influence on the January effect. Price pressures and rebounds implied by the tax-loss selling hypothesis are also analysed. Finally, we use the concept of stochastic dominance to study if the higher returns are due to compensation to investors for bearing higher risk. However, we find no support for either of the proposed hypotheses. Journal: The European Journal of Finance Pages: 1-19 Issue: 1 Volume: 2 Year: 1996 Keywords: January, Effect, Omitted, Risk, Factors, Tax, Effects, Turn, Of, The, Year, X-DOI: 10.1080/135184796337571 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184796337571 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:1:p:1-19 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Author-Name: Ephraim Clark Author-X-Name-First: Ephraim Author-X-Name-Last: Clark Author-Name: Eve Hicks Author-X-Name-First: Eve Author-X-Name-Last: Hicks Title: Editorial Abstract: Journal: The European Journal of Finance Pages: 3-4 Issue: 1 Volume: 2 Year: 1996 X-DOI: 10.1080/135184796337562 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184796337562 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:1:p:3-4 Template-Type: ReDIF-Article 1.0 Author-Name: Marc Chesney Author-X-Name-First: Marc Author-X-Name-Last: Chesney Author-Name: Jean Lefoll Author-X-Name-First: Jean Author-X-Name-Last: Lefoll Title: Predicting premature exercise of an American put on stocks: theory and empirical evidence Abstract: Journal: The European Journal of Finance Pages: 21-39 Issue: 1 Volume: 2 Year: 1996 X-DOI: 10.1080/135184796337580 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184796337580 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:1:p:21-39 Template-Type: ReDIF-Article 1.0 Author-Name: R. Puntillo Author-X-Name-First: R. Author-X-Name-Last: Puntillo Author-Name: D. Ipsen Author-X-Name-First: D. Author-X-Name-Last: Ipsen Title: Poland's mass privatization program Abstract: This paper analyses three corporate finance aspects of Poland's proposed mass privatization program (MPP): design feasibility, incentive systems employed and initial valuation method of the selected state-owned enterprises (SOEs). Also discussed are critical corporate governance issues that will in part determine the ultimate success of Poland's unique approach to mass privatization. Poland's MPP is designed to privatize en masse over 400 mid-to-large size Polish SOEs. In the mid-1995, Poland's MPP installed 15 specially designed national investment funds (NIFs) as core investors in each of the 400+ privatized firms. NIFs, which are like high-powered Western mutual funds, have hired consortia of Polish-foreign fund managers or advisors to help restructure the target operating companies over the next ten years. The stated goal of the MPP Law — and the key basis of fund managers' incentive compensation — is to increase shareholder value in the former SOEs through restructuring. Journal: The European Journal of Finance Pages: 41-55 Issue: 1 Volume: 2 Year: 1996 Keywords: Poland's, Transformation, Mass, Privatization, Poland, National, Investment, Funds, Voucher, Privatization, X-DOI: 10.1080/135184796337599 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184796337599 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:1:p:41-55 Template-Type: ReDIF-Article 1.0 Author-Name: John Pointon Author-X-Name-First: John Author-X-Name-Last: Pointon Author-Name: Suzanne Farrar Author-X-Name-First: Suzanne Author-X-Name-Last: Farrar Author-Name: Jon Tucker Author-X-Name-First: Jon Author-X-Name-Last: Tucker Title: European taxation and capital investment Abstract: A simulated study is conducted of the relative tax incentives to capital investment in Europe. For 1994 required pre-tax rates of return vary from 8.5% for plant and machinery investments in Spain to l3.8% for commercial property in Ireland. Within investment categories, however, the spreads between countries are much narrower. After personal tax, the smallest tax disincentives are found in Italy (to invest in plant and machinery and commercial buildings) and the UK (industrial buildings). The largest disincentives occur in the Netherlands (to invest in plant and machinery and industrial buildings) and Ireland (with respect to commercial property). Journal: The European Journal of Finance Pages: 57-76 Issue: 1 Volume: 2 Year: 1996 Keywords: Investment, Tax, Europe, Incentives, Capital, X-DOI: 10.1080/135184796337607 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184796337607 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:1:p:57-76 Template-Type: ReDIF-Article 1.0 Author-Name: John Holland Author-X-Name-First: John Author-X-Name-Last: Holland Title: Corporate and institutional control over the dissemination of price sensitive information Abstract: This article explores how companies and financial institutions used their private relationship channels and contacts to encourage compliance with the 1994 UK Stock Exchange guidance on the dissemination of price sensitive information to the stock market. Extensive case data is used to identify and illustrate this private self regulation process. The companies and institutions developed 'mirror image' themes in their approaches to self regulating the corporate release and institutional receipt of price sensitive information. Both parties conducted this self regulation within their regular contacts and links and as part of their strategic decision processes. These matching self regulatory themes provide a simple typology which reveals the spectrum of possible responses across the corporate and institutional cases. The self regulatory process is interpreted within finance theory and within institutional organizational theory. Finally, the paper examines how the self regulatory mechanism contrasts with and interacts with the more explicit and well known market and legal mechanisms. Journal: The European Journal of Finance Pages: 77-102 Issue: 1 Volume: 2 Year: 1996 Keywords: Price, Sensitive, Information, Self, Regulation, Relationships, X-DOI: 10.1080/135184796337616 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184796337616 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:1:p:77-102 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Strickland Author-X-Name-First: Chris Author-X-Name-Last: Strickland Title: A comparison of diffusion models of the term structure Abstract: A number of different continuous time approaches that have been developed to model the term structure of interest rates are examined. These techniques span the interest rate literature over the last 20 years or so, and are the most commonly used among both academics and practitioners. We view this paper as a reference for the different term structure models, aiming to bring together the three most commonly used approaches, emphasizing their differences, analysing their respective advantages and disadvantages, and with explicit representations where they exist for prices of discount bonds. Journal: The European Journal of Finance Pages: 103-123 Issue: 1 Volume: 2 Year: 1996 X-DOI: 10.1080/135184796337625 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184796337625 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:1:p:103-123 Template-Type: ReDIF-Article 1.0 Author-Name: Dimitris Kirikos Author-X-Name-First: Dimitris Author-X-Name-Last: Kirikos Title: The role of the forecast-generating process in assessing asset market models of the exchange rate: a non-linear case Abstract: This paper contains an assessment of three variants of the monetary approach to exchange rate determination when the dynamics of the information variables are described by a Markov switching regimes process which generates non-linear forecasts. A large information set is used and the empirical results are based on monthly data on six major US dollar exchange rates over the period 1978-90. The relevant cross-equation restrictions are tested statistically and the economic significance of the models is evaluated on the basis of appropriate volatility tests. The Markov model is compared with other popular stochastic processes. Journal: The European Journal of Finance Pages: 125-144 Issue: 2 Volume: 2 Year: 1996 Keywords: exchange rates, asset markets, Markov process, non-linear forecasts, X-DOI: 10.1080/13518479600000001 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000001 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:2:p:125-144 Template-Type: ReDIF-Article 1.0 Author-Name: Patricia Chelley-Steeley Author-X-Name-First: Patricia Author-X-Name-Last: Chelley-Steeley Author-Name: James Steeley Author-X-Name-First: James Author-X-Name-Last: Steeley Title: Volatility transmission in the UK equity market Abstract: We provide evidence of the nature of the transmission of volatility within the UK stock market. We find a distinct asymmetry in that shocks to the return volatility of a portfolio of relatively large firms influence the future volatility of a portfolio of relatively small firms, but find that the reverse is not the case. The characteristics of the volatility process suggest that this result is not caused by thin trading. Journal: The European Journal of Finance Pages: 145-160 Issue: 2 Volume: 2 Year: 1996 X-DOI: 10.1080/13518479600000002 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000002 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:2:p:145-160 Template-Type: ReDIF-Article 1.0 Author-Name: P. L. Dheeriya Author-X-Name-First: P. L. Author-X-Name-Last: Dheeriya Title: Accessing international business resources on the Internet Abstract: In this paper we provide a brief description of the various ways in which the international business faculty can gain access to databases, reports and other resources on the internet. The objective of this paper is to provide a low cost, efficient way of retrieving data which can be used for international business research. This paper will be important to international business researchers (both academicians and practitioners) and students. By helping build the infrastructure for accessing information for research, this paper indirectly contributes to existing research. Journal: The European Journal of Finance Pages: 161-179 Issue: 2 Volume: 2 Year: 1996 Keywords: internet, international business, finance, e-mail, resources, X-DOI: 10.1080/13518479600000003 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000003 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:2:p:161-179 Template-Type: ReDIF-Article 1.0 Author-Name: Adrian Buckley Author-X-Name-First: Adrian Author-X-Name-Last: Buckley Author-Name: Peter Buckley Author-X-Name-First: Peter Author-X-Name-Last: Buckley Author-Name: Pascal Langevin Author-X-Name-First: Pascal Author-X-Name-Last: Langevin Author-Name: Ka Lun Tse Author-X-Name-First: Ka Lun Author-X-Name-Last: Tse Title: The financial analysis of foreign investment decisions by large UK-based companies Abstract: Various studies of international investment appraisal practices of US-based multinationals suggest that they largely fall to conform to theoretical ideas on project screening and fall short of those used for domestic projects. The findings of these American investigations are summarized. The survey that is the focus of this paper relates to international investment project appraisal practices of large UK companies. It is a unique study in the sense that it is the first British investigation of international capital appraisal procedures which applies statistical analysis to its results. Broadly, the findings are not dissimilar to those relating to US multinationals' practices. Particularly interesting is the finding that 22% of respondents use payback and/or accounting rate of return as their sole primary decision criterion. This reinforces the continuing need for a better conceptual framework for international investment appraisal. Journal: The European Journal of Finance Pages: 181-206 Issue: 2 Volume: 2 Year: 1996 Keywords: investment, value, international, appraisal, X-DOI: 10.1080/13518479600000004 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000004 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:2:p:181-206 Template-Type: ReDIF-Article 1.0 Author-Name: Teppo Martikainen Author-X-Name-First: Teppo Author-X-Name-Last: Martikainen Author-Name: Vesa Puttonen Author-X-Name-First: Vesa Author-X-Name-Last: Puttonen Title: Sequential information arrival in the Finnish stock index derivatives markets Abstract: This paper investigates the hypothesis of sequential information arrival in the Finnish stock index futures and options markets. With no short selling restrictions in the derivatives markets, no causality relationships between returns and trading volume are observed. However, by using the so-called call-put signal, based on call and put volumes, causality between returns and volume is found supporting the hypothesis of sequential information arrival. In addition, it is discovered that the increased volume in stock index options relative to index futures has significantly increased their importance in the intermarket price discovery process. Journal: The European Journal of Finance Pages: 207-217 Issue: 2 Volume: 2 Year: 1996 Keywords: futures, options, volume, X-DOI: 10.1080/13518479600000005 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000005 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:2:p:207-217 Template-Type: ReDIF-Article 1.0 Author-Name: Jean-Paul Decamps Author-X-Name-First: Jean-Paul Author-X-Name-Last: Decamps Title: Integrating the risk and term structures of interest rates Abstract: Merton (1974) analysed the risk structure of corporate bonds under the assumption of a flat term structure of interest rates. We clarify his results and extend them to the case of stochastic interest rates. As a consequence we deal simultaneously with interest rate risk and with default risk. We investigate the price of a corporate bond and the various measures of the riskness of a corporate bond proposed by Merton ((i) the Yield difference between the corporate bond and a default free bond with the same characteristics, (ii) the standard deviation of the rate of return of a corporate bond). We demonstrate and we explain why several of Merton's conclusions are no longer valid in a stochastic term structure framework. Journal: The European Journal of Finance Pages: 219-238 Issue: 3 Volume: 2 Year: 1996 Keywords: option pricing, term structure of interest rates, default risk, interest rate risk, X-DOI: 10.1080/13518479600000006 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000006 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:3:p:219-238 Template-Type: ReDIF-Article 1.0 Author-Name: C. Henin Author-X-Name-First: C. Author-X-Name-Last: Henin Author-Name: N. Pistre Author-X-Name-First: N. Author-X-Name-Last: Pistre Title: Bounding the generalized convex call price Abstract: The present article introduces the concept of generalized calls (options whose value at expiry can be any function of the difference between the price of the underlying security and the striking price) and presents some of the properties of such options through the use of absence of stochastic dominance arguments. It deals with bounding relations of call premium applied to generalized options of the convex type, i.e. nonlinear convex options. These relations are obtained from the hypothesis of absence of second-order stochastic dominance between comparable strategies and without any hypothesis on the underlying security's distribution. The article presents economic justification of this method, some classical lemmas about stochastic dominance, and some bounds for convex calls. Journal: The European Journal of Finance Pages: 239-259 Issue: 3 Volume: 2 Year: 1996 Keywords: convex options, stochastic dominance, upper bounds, lower bounds, intersection points, X-DOI: 10.1080/13518479600000007 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000007 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:3:p:239-259 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Strickland Author-X-Name-First: Chris Author-X-Name-Last: Strickland Title: A comparison of models for pricing interest rate derivative securities Abstract: This paper looks at the different approaches and different models that have been developed to value interest rate-dependent securities, providing a survey of pricing procedures which are based on mathematical models of the term structure. It can be viewed as a reference for the different interest rate models with explicit representations, where they exist, for prices of derivative instruments and an an analysis of their respective advantages and disadvantages. Journal: The European Journal of Finance Pages: 261-287 Issue: 3 Volume: 2 Year: 1996 X-DOI: 10.1080/13518479600000008 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000008 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:3:p:261-287 Template-Type: ReDIF-Article 1.0 Author-Name: Chen Guo Author-X-Name-First: Chen Author-X-Name-Last: Guo Title: A sufficient and necessary condition for arbitrage-free pricing Abstract: This paper derives a sufficient and necessary condition for arbitrage-free pricing, by the mathematical definition of linear dependency. It states that any pricing function that can be expressed as a linear combination of some of its partial derivatives inherently possesses the arbitrage-free property. This condition can serve as a quick 'reality check' to help search for arbitrage-free asset pricing. Journal: The European Journal of Finance Pages: 289-295 Issue: 3 Volume: 2 Year: 1996 Keywords: arbitrage pricing, partial differential equation, linear dependency, Taylor series, X-DOI: 10.1080/13518479600000009 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000009 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:3:p:289-295 Template-Type: ReDIF-Article 1.0 Author-Name: Les Clewlow Author-X-Name-First: Les Author-X-Name-Last: Clewlow Author-Name: Andrew Carverhill Author-X-Name-First: Andrew Author-X-Name-Last: Carverhill Title: A note on the efficiency of the binomial option pricing model Abstract: We discuss the efficiency of the binomial option pricing model for single and multivariate American style options. We demonstrate how the efficiency of lattice techniques such as the binomial model can be analysed in terms of their computational cost. For the case of a single underlying asset the most efficient implementation is the extrapolated jump-back method: that is, to value a series of options with nested discrete sets of early exercise opportunities by jumping across the lattice between the early exercise times and then extrapolating from these values to the limit of a continuous exercise opportunity set. For the multivariate case, the most efficient method depends on the computational cost of the early exercise test. However, for typical problems, the most efficient method is the standard step-back method: that is, performing the early exercise test at each time step. Journal: The European Journal of Finance Pages: 297-304 Issue: 3 Volume: 2 Year: 1996 X-DOI: 10.1080/13518479600000010 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000010 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:3:p:297-304 Template-Type: ReDIF-Article 1.0 Author-Name: A. Yuce Author-X-Name-First: A. Author-X-Name-Last: Yuce Author-Name: C. Simga-Mugan Author-X-Name-First: C. Author-X-Name-Last: Simga-Mugan Title: An investigation of the short- and long-term relationships between Turkish financial markets Abstract: In recent years the importance of emerging stock exchanges has been demonstrated by the number of market studies. Although some of these stock exchanges such as those of Korea and Taiwan have been investigated extensively, there is only limited research on others including the Turkish stock exchange. This study aims to fill this gap by investigating the short- and long-term relationship between Turkish stock prices, and the Turkish lira price of the US dollar. Turkish investors view both of these instruments as investments. The exchange offices in Turkey serve investors who continuously buy and sell foreign currencies. We expect that at least one market would cause the other one, and there could be a feedback relation or in the extreme case, there could even be long-run equilibrium between these two markets. Data for this study are obtained from a foreign exchange office and the Istanbul Stock Exchange for the period January 1988 to December 1994. The data consist of daily closing prices of the Istanbul Stock Exchange index, and the closing ask price of the US dollar. Unit root tests indicate that both series are nonstationary as 1(1). The results show that a long-run equilibrium does not exist, however, the foreign exchange market causes the stock market in the Granger sense. Journal: The European Journal of Finance Pages: 305-317 Issue: 4 Volume: 2 Year: 1996 Keywords: Cointegration, Turkish Stock Exchange, causality, emerging market, developing, X-DOI: 10.1080/13518479600000011 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000011 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:4:p:305-317 Template-Type: ReDIF-Article 1.0 Author-Name: Terence Mills Author-X-Name-First: Terence Author-X-Name-Last: Mills Author-Name: J. Andrew Coutts Author-X-Name-First: J. Andrew Author-X-Name-Last: Coutts Title: Misspecification testing and robust estimation of the market model: estimating betas for the FT-SE industry baskets Abstract: Using daily data on the London Stock Exchange's FT-SE industry baskets, this paper subjects the market model to a set of rigorous specification tests designed to assess its statistical adequacy in the face of possible model non-linearity and autocorrelation, heteroscedasticity and, in particular, non-normality of residuals. It then utilizes robust methods of estimation to provide valid estimates of the model's parameters in the face of such misspecification. It is found that robust estimation usually provides betas that are lower than those estimated by conventional ordinary least squares. Journal: The European Journal of Finance Pages: 319-331 Issue: 4 Volume: 2 Year: 1996 Keywords: industry baskets, market model, misspecification, robust estimation, X-DOI: 10.1080/13518479600000012 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000012 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:4:p:319-331 Template-Type: ReDIF-Article 1.0 Author-Name: Gordon Tang Author-X-Name-First: Gordon Author-X-Name-Last: Tang Title: Day-of-the-week effect on skewness and kurtosis: a direct test and portfolio effect Abstract: This paper examines the day-of-the-week effect on skewness and kurtosis of stock returns of six international stock markets using a new approach. Empirical results show that a day-of-the-week effect exists on the skewness and kurtosis of all stock markets except the US market. The portfolio effect on skewness and kurtosis of stock returns across different weekdays is compared. Our results show that skewness can be eliminated through diversification only on Tuesday while kurtosis can be diversified away on all weekdays except Thursday. Hence, it may not always be beneficial for rational investors to diversity internationally when the stock returns are not normally distributed. Journal: The European Journal of Finance Pages: 333-351 Issue: 4 Volume: 2 Year: 1996 Keywords: skewness, kurtosis, portfolio effect, day-of-the-week effect, X-DOI: 10.1080/13518479600000013 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000013 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:4:p:333-351 Template-Type: ReDIF-Article 1.0 Author-Name: William Rees Author-X-Name-First: William Author-X-Name-Last: Rees Title: The impact of open market equity repurchases on UK equity prices Abstract: This paper presents the first empirical evidence regarding the share price impact of open market stock repurchases in the UK. The analysis reveals a positive reaction on the day of the announcement of the repurchase, consistent with the reaction found under very different circumstances in the US, and consistent with the expected reaction on the retirement of equity. The transactions are typically instigated by firms that are underperforming the market and tends to follow a short-term fall in the firm's share price. The reaction on the day of the repurchase is positively related to the percentage of equity transacted. There is no evidence that the return on the day of the announcement is affected by the characteristics of the repurchase. Journal: The European Journal of Finance Pages: 353-370 Issue: 4 Volume: 2 Year: 1996 Keywords: G14 information and market efficiency, event studies, G32 financing policy: capital and ownership structure, X-DOI: 10.1080/13518479600000014 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000014 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:4:p:353-370 Template-Type: ReDIF-Article 1.0 Author-Name: Colin Drury Author-X-Name-First: Colin Author-X-Name-Last: Drury Author-Name: Mike Tayles Author-X-Name-First: Mike Author-X-Name-Last: Tayles Title: UK capital budgeting practices: some additional survey evidence Abstract: Probably more surveys have been undertaken on the use of capital budgeting techniques than on any other accounting and finance topic. Despite the many surveys a number of issues remain unresolved. The surveys have consisted of a sample of either very large or very small companies and observations relating to the impact of company size have been derived from comparing the responses from different surveys undertaken at different points in time. The aim of this paper is to provide additional empirical evidence relating to some of the unresolved issues and to examine the impact of company size on the use of financial appraisal techniques. In particular, the paper concentrates on the treatment of inflation, the appraisal of advanced manufacturing technologies and examines whether the empirical evidence supports the claim that many companies use excessive discount rates. Journal: The European Journal of Finance Pages: 371-388 Issue: 4 Volume: 2 Year: 1996 Keywords: capital budgeting practices, investment appraisal, inflation, discount rates, advanced manufacturing technologies, X-DOI: 10.1080/13518479600000015 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000015 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:4:p:371-388 Template-Type: ReDIF-Article 1.0 Author-Name: C. I. Lee Author-X-Name-First: C. I. Author-X-Name-Last: Lee Author-Name: I. Mathur Author-X-Name-First: I. Author-X-Name-Last: Mathur Title: A comprehensive look at the efficacy of technical trading rules applied to cross-rates Abstract: Moving average (MA) and channel rules (CH) are applied to ten spot cross-rates - AUD/JPY,GBP/JPY,CAD/JPY,DEM/GBP,DEM/ITL,DEM/JPY,DEM/CHF,CHF/GBP, and CHF/JPY - to examine whether opportunities for profitable trading exist. The results suggest that neither trasding rule is profitable. Overall, the results are consistent with those reported in Lee and Mathur**and in sharp contrast with the evidence from studies on dollar-denominated exchange rates. The costs of direct currency exchange through cross-rates and through indirect dollar-related transactions are also estimated. The savings related to direct cross-rate currency exchanges are estimated to range from 0.004% to 0.22%. Journal: The European Journal of Finance Pages: 389-411 Issue: 4 Volume: 2 Year: 1996 Keywords: trading rules, currency cross-rates, X-DOI: 10.1080/13518479600000016 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479600000016 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:2:y:1996:i:4:p:389-411 Template-Type: ReDIF-Article 1.0 Author-Name: F. Barran Author-X-Name-First: F. Author-X-Name-Last: Barran Author-Name: V. Coudert Author-X-Name-First: V. Author-X-Name-Last: Coudert Author-Name: B. Mojon Author-X-Name-First: B. Author-X-Name-Last: Mojon Title: Interest rates, banking spreads and credit supply: the real effects Abstract: We analyse the information content of the relative structure of interest rates on economic activity. Over and above currently defined spreads, we have defined spreads based on bank interest rates. In order to analyse the information content of financial variables on economic activity, measured through a set of proxy variables like output, investment, industrial production, employment, private consumption, durable goods consumption and inflation, Granger-causality tests are performed. The predictive power of spreads is then compared with other inancial variables such as interest rates and monetary and credit aggregates. The tests are performed on five major OECD countries. A major conclusion is that 'bank' spreads are informative about economic activity even though the relationship between inancial aggregates and real activity has weakened. Journal: The European Journal of Finance Pages: 107-136 Issue: 2 Volume: 3 Year: 1997 Keywords: Interest Rate Spreads Credit Channel, X-DOI: 10.1080/135184797337480 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337480 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:2:p:107-136 Template-Type: ReDIF-Article 1.0 Author-Name: F. Gonzalez Miranda Author-X-Name-First: F. Gonzalez Author-X-Name-Last: Miranda Author-Name: N. Burgess Author-X-Name-First: N. Author-X-Name-Last: Burgess Title: Modelling market volatilities: the neural network perspective Abstract: This paper investigates the use of Artificial Neural Networks (NN) to forecast volatility. In particular, we assess the dynamic behaviour of market volatility by forecasting the volatility implied in the transaction prices of the Ibex35 index options. The use of the NN technique is done within the framework of a model building strategy that tries to capitalize on the well known feature of persistence in volatility series. We demonstrate that forecasting with non-linear NNs generally produces forecasts which, on the basis of out-of-sample forecast encompassing tests and mean squared error comparisons, ordinarily dominate forecasts from traditional linear methods. Better forecasting results for the NN are due to its flexibility to account for potentially complex non-linear relationships, which are not well captured by traditional linear methods. We test and reject the hypothesis that volatility changes are unpredictable on an hourly basis. Journal: The European Journal of Finance Pages: 137-157 Issue: 2 Volume: 3 Year: 1997 Keywords: Implied Volatility Neural Networks Linear Least Squares Encompassing Tests, X-DOI: 10.1080/135184797337499 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337499 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:2:p:137-157 Template-Type: ReDIF-Article 1.0 Author-Name: David Chappell Author-X-Name-First: David Author-X-Name-Last: Chappell Author-Name: Robert Eldridge Author-X-Name-First: Robert Author-X-Name-Last: Eldridge Title: Non-linear characteristics of the sterling/European Currency Unit exchange rate: 1984-1992 Abstract: The behaviour of the Sterling/European Currency Unit (ECU) exchange rate is examined both during the time before Britain joined the European exchange rate mechanism (ERM) and during the time of Britain's membership. During the latter period, a GARCH (1, 1) model fits the data well but during the pre-ERM period there is evidence of significant non-linear - possibly chaotic - structure in the GARCH residuals. Analysis of the dominant Lyapunov exponents and correlation dimension for the pre-ERM period suggests that the data generation process may be chaotic and this is reinforced by the highly significant BDS statistics obtained for this sample period. Journal: The European Journal of Finance Pages: 159-182 Issue: 2 Volume: 3 Year: 1997 Keywords: Sterlingecu Exchange Rate Non-LINEARITY, X-DOI: 10.1080/135184797337507 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337507 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:2:p:159-182 Template-Type: ReDIF-Article 1.0 Author-Name: Carlos Serrano-Cinca Author-X-Name-First: Carlos Author-X-Name-Last: Serrano-Cinca Title: Feedforward neural networks in the classification of financial information Abstract: Financial research has given rise to numerous studies in which, on the basis of the information provided by financial statements, companies are classified into different groups. An example is that of the classification of companies into those that are solvent and those that are insolvent. Linear discriminant analysis (LDA) and logistic regression have been the most commonly used statistical models in this type of work. One feedforward neural network, known as the multilayer perceptron (MLP), performs the same task as LDA and logistic regression which, a priori, makes it appropriate for the treatment of financial information. In this paper, a practical case based on data from Spanish companies, shows, in an empirical form, the strengths and weaknesses of feedforward neural networks. The desirability of carrying out an exploratory data analysis of the financial ratios in order to study their statistical properties, with the aim of achieving an appropriate model selection, is made clear. Journal: The European Journal of Finance Pages: 183-202 Issue: 3 Volume: 3 Year: 1997 Keywords: Neural Networks Multilayer Perceptron Bankruptcy Prediction Spanish Banking System, X-DOI: 10.1080/135184797337426 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337426 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:3:p:183-202 Template-Type: ReDIF-Article 1.0 Author-Name: D. J. E. Baestaens Author-X-Name-First: D. J. E. Author-X-Name-Last: Baestaens Title: Comment Abstract: Journal: The European Journal of Finance Pages: 203-224 Issue: 3 Volume: 3 Year: 1997 X-DOI: 10.1080/135184797337435 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337435 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:3:p:203-224 Template-Type: ReDIF-Article 1.0 Author-Name: C. Serrano-Cinca Author-X-Name-First: C. Author-X-Name-Last: Serrano-Cinca Title: Rejoinder Abstract: Journal: The European Journal of Finance Pages: 225-230 Issue: 3 Volume: 3 Year: 1997 X-DOI: 10.1080/135184797337444 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337444 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:3:p:225-230 Template-Type: ReDIF-Article 1.0 Author-Name: Dominique Guegan Author-X-Name-First: Dominique Author-X-Name-Last: Guegan Author-Name: Guillaume Leorat Author-X-Name-First: Guillaume Author-X-Name-Last: Leorat Title: Consistent estimation to determine the embedding dimension in financial data; with an application to the dollar/deutschmark exchange rate Abstract: To detect chaos on observational data, we first need to know the embedding dimension. We propose a consistent approach to estimate this dimension using the theoretical work of Bosq and Guegan (1994) and we apply the results to real financial data. Journal: The European Journal of Finance Pages: 231-242 Issue: 3 Volume: 3 Year: 1997 Keywords: Dimension Of Correlation Dynamical Systems Embedding Dimension Kernel Estimates Lyapunov Exponents Non-PARAMETRIC Estimation, X-DOI: 10.1080/135184797337453 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337453 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:3:p:231-242 Template-Type: ReDIF-Article 1.0 Author-Name: J. Andrew Coutts Author-X-Name-First: J. Andrew Author-X-Name-Last: Coutts Author-Name: Terence Mills Author-X-Name-First: Terence Author-X-Name-Last: Mills Author-Name: Jennifer Roberts Author-X-Name-First: Jennifer Author-X-Name-Last: Roberts Title: Time series and cross-section parameter stability in the market model: the implications for event studies Abstract: This paper investigates the time series and cross-section stability of parameter estimates from the single-index market model, using a UK data set relating to the security prices of parent companies, divesting in the form of a management buyout. A battery of tests of structural stability are undertaken, and we find that instability exists in the vast majority of the fitted models, both in relation to changes in the estimation period, and also to changes in the cross-section sample of firms included in this analysis. The implications of instability for the event study method are clearly illustrated by the construction of recursive cumulative abnormal return series. Our results suggest that when the market model is used within the event study framework, the quantitative results are extremely sensitive to the chosen estimation period and cross-section sample of firms. We suggest that if event studies continue to be pursued in the applied finance literature, it is essential that tests of parameter stability are incorporated into this framework. In addition, 'sensitivity analysis', that is, changes to the estimation period and cross-section sample employed, should also be investigated, and conclusions should be limited to interpreting the patterns of the cumulative abnormal returns. Journal: The European Journal of Finance Pages: 243-259 Issue: 3 Volume: 3 Year: 1997 Keywords: Single-INDEX Market Model Parameter Estimates Time Series Cross-SECTION Stability, X-DOI: 10.1080/135184797337462 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337462 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:3:p:243-259 Template-Type: ReDIF-Article 1.0 Author-Name: Peijie Wang Author-X-Name-First: Peijie Author-X-Name-Last: Wang Author-Name: Colin Lizieri Author-X-Name-First: Colin Author-X-Name-Last: Lizieri Author-Name: George Matysiak Author-X-Name-First: George Author-X-Name-Last: Matysiak Title: Information asymmetry, long-run relationship and price discovery in property investment markets Abstract: The relationships between 'direct' and 'indirect' property investment, emphasizing information asymmetry and price discovery, have been investigated in the framework of cointegration and using the concept of Granger causality. The implications of information asymmetry in the market have been discussed and explanations offered. Journal: The European Journal of Finance Pages: 261-275 Issue: 3 Volume: 3 Year: 1997 Keywords: Direct Indirect Property Investment Information Asymmetry Price Discovery, X-DOI: 10.1080/135184797337471 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337471 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:3:p:261-275 Template-Type: ReDIF-Article 1.0 Author-Name: Greg Filbeck Author-X-Name-First: Greg Author-X-Name-Last: Filbeck Author-Name: Sue Visscher Author-X-Name-First: Sue Author-X-Name-Last: Visscher Title: Dividend yield strategies in the British stock market Abstract: One particular investment strategy, a dividend yield strategy, has been in existence for several years. This strategy consists of investing an equal dollar amount in each of the ten stocks of a market index with the highest dividend yields. With yearly rebalancing, the portfolio return in the United States over time has exceeded that of the Dow. In this paper, we find that a similar dividend yield investment strategy in Britain was not effective between March 1984 and February 1994. The portfolio returns exceeded the market returns on both unadjusted and risk adjusted bases, in only four years. The superior multiple year Top Ten portfolio performances were primarily due to the outstanding second year returns. Journal: The European Journal of Finance Pages: 277-289 Issue: 4 Volume: 3 Year: 1997 Keywords: Dividend British Investment Strategy, X-DOI: 10.1080/135184797337372 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337372 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:4:p:277-289 Template-Type: ReDIF-Article 1.0 Author-Name: I. Bajeux-Besnainou Author-X-Name-First: I. Author-X-Name-Last: Bajeux-Besnainou Author-Name: R. Portait Author-X-Name-First: R. Author-X-Name-Last: Portait Title: The numeraire portfolio: a new perspective on financial theory Abstract: The numeraire portfolio, also called the optimal growth portfolio, allows simple derivations of the main results of financial theory. The prices of self financing portfolios, when the optimal growth portfolio is the numeraire, are martingales in the 'true' (historical) probability. Given the dynamics of the traded securities, the composition of the numeraire portfolio as well as its value are easily computable. Among its numerous properties, the numeraire portfolio is instantaneously mean variance efficient. This key feature allows a simple derivation of standard continuous time CAPM, CCAPM, APT and contingent claim pricing. Moreover, since the Radon-Nikodym derivatives of the usual martingale measures are very simple functions of the numeraire portfolio, the latter provides a convenient link between the standard Capital Market Theory a la Merton and the probabilistic approach a la Harrison-Kreps-Pliska. Journal: The European Journal of Finance Pages: 291-309 Issue: 4 Volume: 3 Year: 1997 Keywords: Martingale Pricing Equilibrium Pricing Numeraire Portfolio Theory, X-DOI: 10.1080/135184797337381 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337381 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:4:p:291-309 Template-Type: ReDIF-Article 1.0 Author-Name: Georges Darbellay Author-X-Name-First: Georges Author-X-Name-Last: Darbellay Author-Name: Marco Finardi Author-X-Name-First: Marco Author-X-Name-Last: Finardi Title: Could nonlinear dynamics contribute to intra-day risk management? Abstract: We use techniques drawn from the field of nonlinear dynamics, often popularly referred to as chaos theory, to study high frequency (tick by tick) time series of foreign exchange and interest rates. The existence of strange attractors is extensively investigated by applying the nearest-neighbours algorithm for the computation of fractal dimensions to the signals reconstructed with the time-delay embedding technique. Furthermore, the state space reconstruction allows us to test whether, in the course of a business day, forecasts based on this technique could improve the timing of hedge trades, in the foreign exchange and interest rate markets. We find that this approach does not reduce hedging costs. This casts strong doubts on the ability of nonlinear dynamics to be of any practical use in financial risk management. Journal: The European Journal of Finance Pages: 311-324 Issue: 4 Volume: 3 Year: 1997 Keywords: Nonlinear Dynamics Chaos Theory High Frequency Time Series Foreign Exchange Interest Rates Risk Management Forecasting Techniques, X-DOI: 10.1080/135184797337390 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337390 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:4:p:311-324 Template-Type: ReDIF-Article 1.0 Author-Name: E. Jouini Author-X-Name-First: E. Author-X-Name-Last: Jouini Author-Name: P. -F. Koehl Author-X-Name-First: P. -F. Author-X-Name-Last: Koehl Author-Name: N. Touzi Author-X-Name-First: N. Author-X-Name-Last: Touzi Title: Incomplete markets, transaction costs and liquidity effects Abstract: An agent's optimization problem of the expected terminal wealth utility in a trinomial tree economy is solved. At each transaction date, the agent can trade in a riskless asset, a primitive asset subject to constant proportional transaction costs, and a contingent claim characterized by some parameter kappa whose bid and ask price is defined by allowing for different equivalent martingale measures. In addition to the classical portfolio choice problem, the characteristic of the contingent claim κ is determined endogenously in the optimization problem. Under suitable conditions, it is proved that the optimal demand of the agent in the primitive risky asset is zero independently of the choice of the terminal wealth utility function: the agent prefers not to trade in the asset subject to transaction costs, which prevents the market from being complete, rather than trading in both assets. Next, the optimal choice of the contingent claim is characterized and the results are applied to European call and put options with fixed maturity and varying exercise price κ. Journal: The European Journal of Finance Pages: 325-347 Issue: 4 Volume: 3 Year: 1997 Keywords: Contingent Claim Incomplete Markets Transaction Costs, X-DOI: 10.1080/135184797337408 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337408 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:4:p:325-347 Template-Type: ReDIF-Article 1.0 Author-Name: D. K. Ghosh Author-X-Name-First: D. K. Author-X-Name-Last: Ghosh Title: Arbitrage with hedging by forward contracts: exploited and exploitable profits Abstract: The theoretical conditions for covered interest arbitrage and exploitable profit opportunities out of simple and triangular arbitrage in the absence and presence of market imperfection are enunciated. A distinction is made between pure arbitrage profits and arbitrage-induced total profits attainable under the risk-free environment. Operational feasibility of iterative arbitrage is also examined. Journal: The European Journal of Finance Pages: 349-361 Issue: 4 Volume: 3 Year: 1997 Keywords: Arbitrage Hedging Forward Contracts Program Trading Orders Ulation, X-DOI: 10.1080/135184797337417 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184797337417 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:4:p:349-361 Template-Type: ReDIF-Article 1.0 Author-Name: Gonzalo Rubio Author-X-Name-First: Gonzalo Author-X-Name-Last: Rubio Author-Name: Mikel Tapia Author-X-Name-First: Mikel Author-X-Name-Last: Tapia Title: The liquidity premium in equity pricing under a continuous auction system Abstract: The paper shows that the cost of illiquidity is not (positively) priced over all months in the Spanish continuous auction system, where liquidity is provided in the absence of market makers. Two distinct approaches are employed. Both the two-step traditional cross-sectional method and the pooled cross-section time series analysis tend to indicate that the liquidity premium is negative during months other than January. Moreover, the liquidity premium in January is positive (although not significant) and at the 10% level it seems to be significantly higher than the liquidity premium over the rest of the year. Therefore, given the previous results for the US market, we conclude that, independently of the market trading mechanism with the exception of NASDAQ, the behaviour of the relationship between the bid-ask spread and stock returns is rather similar. Journal: The European Journal of Finance Pages: 1-28 Issue: 1 Volume: 4 Year: 1998 Keywords: asset pricing, market microstructure, liquidity premium, X-DOI: 10.1080/13518479800000001 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479800000001 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:1:p:1-28 Template-Type: ReDIF-Article 1.0 Author-Name: Seth Armitage Author-X-Name-First: Seth Author-X-Name-Last: Armitage Title: Seasoned equity offers and rights issues: a review of the evidence Abstract: The paper reviews evidence from the USA and UK on seasoned equity offers (SEOs) and rights issues. There are two main avenues of research: first, the market reaction to announcements of SEOs, and the related questions of the price elasticity of demand for new shares and the timing of issues; second, the costs of issuing and choice of issuing method. The negative reaction to announcements is well documented and the evidence suggests it is more due to an issue being a signal of overvaluation than to inelastic demand. Other findings are less well understood. The shares of issuers underperform appreciably in the long term, and there is evidence that market receptiveness to new issues varies. Companies tend to choose the most expensive method of issue both in terms of direct costs and negative market reaction. US companies use underwritten non-rights, through underwriting increases the direct costs. A possible explanation is that certification of issue value by the sponsor is more credible with non-rights issues in the USA and underwritten rights in the UK than with the apparently cheaper alternatives. Journal: The European Journal of Finance Pages: 29-59 Issue: 1 Volume: 4 Year: 1998 Keywords: seasoned equity offers, rights issues, investment banking, X-DOI: 10.1080/13518479800000002 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479800000002 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:1:p:29-59 Template-Type: ReDIF-Article 1.0 Author-Name: G. Geoffrey Booth Author-X-Name-First: G. Geoffrey Author-X-Name-Last: Booth Author-Name: Gregory Koutmos Author-X-Name-First: Gregory Author-X-Name-Last: Koutmos Title: Volatility and autocorrelation in major European stock markets Abstract: This paper models index stock returns for four major European stock markets as conditionally heteroskedastic processes with time dependent serial correlation. The evidence suggests that current returns in these markets are nonlinearly dependent on their past history. The dependence is strong during calm periods and weak during volatile periods and manifests itself as an inverse relationship between first order autocorrelations and volatility. While this relationship is statistically significant in daily returns, it is absent from weekly returns. Additional tests reveal that the nonlinear specification used by LeBaron (1992) is not necessarily the most adequate representation of the short-term dynamics of stock index returns. Journal: The European Journal of Finance Pages: 61-74 Issue: 1 Volume: 4 Year: 1998 Keywords: EAR-EGARCH model, volatility, autocorrelation, European stock markets, X-DOI: 10.1080/13518479800000003 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479800000003 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:1:p:61-74 Template-Type: ReDIF-Article 1.0 Author-Name: John Pointon Author-X-Name-First: John Author-X-Name-Last: Pointon Author-Name: Derek Spratley Author-X-Name-First: Derek Author-X-Name-Last: Spratley Title: Financial effects of an uncertain change in VAT rates in the EU Abstract: The aims of this paper are first, to review the background to the harmonization of VAT rates within the European Union and second, to model the financial impact of the risks surrounding structural changes in VAT rates. The underlying sales upon which VAT is based is modelled by a geometric Brownian motion. By contrast the timing of a VAT rate change, consitent with a negative exponential distribution, implies a Poisson jump if and when the VAT rate changes. By combining the geometric Brownian motion with a Poisson jump, a model is developed which requires the solution to a second-order ordinary differential equation. This provides a frmework to quantify the effects of VAT risk upon firm values. By using market interest rates and an estimate of an overall market premium the impact of VAT harmonization risk on companies within several EU countries is analysed. Journal: The European Journal of Finance Pages: 75-83 Issue: 1 Volume: 4 Year: 1998 Keywords: VAT, Europe, Poisson, Brownian, X-DOI: 10.1080/13518479800000004 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479800000004 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:1:p:75-83 Template-Type: ReDIF-Article 1.0 Author-Name: Gulnur Muradoglu Author-X-Name-First: Gulnur Author-X-Name-Last: Muradoglu Author-Name: Nese Akkaya Author-X-Name-First: Nese Author-X-Name-Last: Akkaya Author-Name: Jamel Chafra Author-X-Name-First: Jamel Author-X-Name-Last: Chafra Title: The effect of the establishment of an organized exchange on weak form efficiency: the case of Istanbul Gold Exchange Abstract: Evidence is presented from IGE (the Istanbul Gold Exchange) that an institutional regulation such as the establishment of an organized exchange is an important component of informational efficiency that should not be disregarded in the process of financial liberlization. Journal: The European Journal of Finance Pages: 85-92 Issue: 1 Volume: 4 Year: 1998 Keywords: weak form efficiency, gold market, institutional regulation, X-DOI: 10.1080/13518479800000005 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518479800000005 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:1:p:85-92 Template-Type: ReDIF-Article 1.0 Author-Name: F. De Roon Author-X-Name-First: F. Author-X-Name-Last: De Roon Author-Name: C. Veld Author-X-Name-First: C. Author-X-Name-Last: Veld Author-Name: J. Wei Author-X-Name-First: J. Author-X-Name-Last: Wei Title: A study on the efficiency of the market for Dutch long-term call options Abstract: The efficiency of the market for 5-year call options which are traded on the European Options Exchange in Amsterdam is investigated. Both delta, delta-vega and delta-gamma neutral arbitrage portfolios are studied. No serious inefficiencies in the market for longterm call options are detected. This result is in line with previous studies on different kinds of call options and warrants. The results for the delta-vega and delta-gamma neutral arbitrage strategies differ from the results of the simple delta-neutral strategies in two ways: they lead to positive results more often, but the variance of these results is also larger. Journal: The European Journal of Finance Pages: 93-111 Issue: 2 Volume: 4 Year: 1998 Keywords: Market Efficiency Long-TERM Call Options Arbitrage Hedging, X-DOI: 10.1080/135184798337335 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337335 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:2:p:93-111 Template-Type: ReDIF-Article 1.0 Author-Name: E. Dinenis Author-X-Name-First: E. Author-X-Name-Last: Dinenis Author-Name: S. K. Staikouras Author-X-Name-First: S. K. Author-X-Name-Last: Staikouras Title: Interest rate changes and common stock returns of financial institutions: evidence from the UK Abstract: The objective of this paper is to examine the impact of interest rate changes on the common stock returns of portfolios of financial institutions in the UK. The five groups of financial institutions examined are banks, insurance companies, investment trusts, property investment companies and finance firms. In addition, a wide sample of nonfinancial firms is considered for comparison purposes. A two-index model is employed to test the effect of both current and unanticipated interest rate changes. An element of volatility in market yields is also introduced in a three-index model to measure the effect of variability in interest rates on the returns of these financial intermediaries. Two main implications emerge from the present paper for both financial and nonfinancial firms. First, a significant negative relationship seems to exist between the common stock returns and the changes in interest rates. Second, common stock returns and variability of interest rates are related with a significant positive coefficient. Journal: The European Journal of Finance Pages: 113-127 Issue: 2 Volume: 4 Year: 1998 Keywords: Financial Institutions Stock Returns Unexpected Interest Rate Changes Interest Rate Volatility, X-DOI: 10.1080/135184798337344 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337344 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:2:p:113-127 Template-Type: ReDIF-Article 1.0 Author-Name: J. B. Holland Author-X-Name-First: J. B. Author-X-Name-Last: Holland Author-Name: P. Doran Author-X-Name-First: P. Author-X-Name-Last: Doran Title: Financial institutions, private acquisition of corporate information, and fund management Abstract: The article describes how 27 large UK financial institutions (FIs) sought to acquire an information and influence advantage from the relationships they enjoyed with investee companies in their portfolio. The financial institutions invested much time and effort cultivating these links and contacts. The primary aim of this relationship investment decision was to produce added value in stock selection and asset allocation decisions. The resulting fund performance was the means for inancial institutions to satisfy a fiduciary duty to supply their clients with their preferred mix of return, diversification and liquidity. This problem area is investigated by using financial institutional case data to describe FI behaviour when interacting with their relationship investee companies. The article ends by analysing the case data and case structures through the perspective of inance theory. Journal: The European Journal of Finance Pages: 129-155 Issue: 2 Volume: 4 Year: 1998 Keywords: Financial Institutions Private Information Fund Management, X-DOI: 10.1080/135184798337353 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337353 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:2:p:129-155 Template-Type: ReDIF-Article 1.0 Author-Name: C. N. Bagley Author-X-Name-First: C. N. Author-X-Name-Last: Bagley Author-Name: D. K. Ghosh Author-X-Name-First: D. K. Author-X-Name-Last: Ghosh Author-Name: U. Yaari Author-X-Name-First: U. Author-X-Name-Last: Yaari Title: Pecking order as a dynamic leverage theory Abstract: Static tradeoff theories, which do not explicitly treat the impact of transaction costs, do not explain the policy of asymmetry between frequent small debt transactions and infrequent large equity transactions. Nor do these theories explain why the debt ratio is allowed to wander a considerable distance from its alleged static optimum, or how much of a distance should be tolerated. We offer a class of diffusion models that mimic this behaviour in a stochastic-dynamic framework and are designed to optimize a financing strategy using any static tradeoff theory as input. The models developed reveal the determinants of the size and frequency of equity transactions and the range of values over which leverage variations are tolerated in four generic scenarios. They also yield a new formulation of the cost of capital that recognizes stochastic transaction costs and a penalty for deviation from any static-optimal leverage. Our class of models augments the pecking order theory, provides a flexible quantitative framework for its implementation as a decision tool, and facilitates the formulation of additional hypotheses for its empirical validation. Symmetrically, our results show the importance of dynamic factors in designing and interpreting empirical tests of static tradeoff theories. The results presented have important implications for the role played by static tradeoff theories in a stochastic-dynamic framework. One such implication is that the static-optimal leverage has no direct effect on the firm's leverage policy in this setting. The target leverage for refinancing transactions is different from the static-optimal leverage, and the mean leverage is generally different from both. As a consequence, the latter cannot be used to estimate the former. Another implication is that even when the mean leverage equals the static optimum, mean reversion is not an optimal behaviour and therefore not a legitimate test for the existence of a static tradeoff in a dynamic context. Still another implication is that wide variations in leverage ratios cannot be interpreted as evidence of leverage indifference. It follows that the pecking order theory is consistent with static tradeoff theories and does not require the assumption of leverage indifference. Journal: The European Journal of Finance Pages: 157-183 Issue: 2 Volume: 4 Year: 1998 Keywords: Financial Leverage Dynamic Debt Policy Capital Structure, X-DOI: 10.1080/135184798337362 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337362 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:2:p:157-183 Template-Type: ReDIF-Article 1.0 Author-Name: Istemi Demirag Author-X-Name-First: Istemi Author-X-Name-Last: Demirag Title: Boards of Directors' short-term perceptions and evidence of managerial short-termism in the UK Abstract: Some researchers argue that capital market pressures are increasingly directed towards short-term performance evaluation of managers and their operations; others deny this. However, the crucial issue, it is argued in this paper, is managers' perceptions of this: for if they perceive capital markets as short-termist, they will behave in a short-term manner. This paper begins by offering a theoretical model for studying the effects of management perceptions on short-term behaviour of firms. Five hypotheses were developed and tested. The hypotheses related to the degree of short-term performance pressures as perceived by the boards of directors and the degree of emphasis their companies put on short-term financial control measures in determining R&D budgets. All the five hypotheses were supported, and the results were explained through the 'model'. These results support the view that perceived short-term pressures influence firms' decisions to retain or adopt 'Financial Control' management styles in their R&D budget determination. They also show that perceptions are a valuable theoretical construct in exploring short-term behaviour in firms' Research and Development and related innovation activities. Journal: The European Journal of Finance Pages: 195-211 Issue: 3 Volume: 4 Year: 1998 Keywords: Corporate Governance Short-TERMISM Management Perceptions Management Control Research Development Budgets, X-DOI: 10.1080/135184798337263 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337263 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:3:p:195-211 Template-Type: ReDIF-Article 1.0 Author-Name: Tom Groot Author-X-Name-First: Tom Author-X-Name-Last: Groot Title: Determinants of shareholders' short-term pressures: empirical evidence from Dutch companies Abstract: It is often argued that Anglo-Saxon corporate governance systems place more emphasis on short-term results than do corporate governance systems in continental European countries, such as Germany and the Netherlands. Empirical evidence on this is scarce and often contradictory. This paper examines differences in the perception of shareholders' short-term orientation by the financial managers of UK and Dutch listed firms. These differences turn out not to be as large as expected. Moreover, differences in short-term pressures to perform also appear to exist between the firms in the Dutch sample. This study attempts to identify factors that may cause differences in short-term orientation among Dutch financial managers. Two of the factors identiied are the existence of a trust office and the risk profile of the firm. Journal: The European Journal of Finance Pages: 212-232 Issue: 3 Volume: 4 Year: 1998 Keywords: Corporate Governance Short-TERMISM Corporate Control Shareholder Management, X-DOI: 10.1080/135184798337272 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337272 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:3:p:212-232 Template-Type: ReDIF-Article 1.0 Author-Name: C. L. Marston Author-X-Name-First: C. L. Author-X-Name-Last: Marston Author-Name: B. M. Craven Author-X-Name-First: B. M. Author-X-Name-Last: Craven Title: A survey of corporate perceptions of short-termism among analysts and fund managers Abstract: There is a popularly held view that institutional investors and stockbrokers' analysts take a short-term view when making or advising on investment decisions. Short-termism is held to be a particular problem for economies such as the US and the UK which rely heavily on stock exchanges to price securities and help reallocate resources through take-over. This is deemed to be detrimental to long-term corporate development and overall economic growth. The paper seeks to show the extent to which directors of large UK companies perceive that analysts and institutional investors evaluate their companies on short-term criteria. The role of institutional investors in the context of short-termism is important because they own a large proportion of equity. The paper then seeks to explain why some company directors appear to believe in short-termism while others do not. Hence the paper is not investigating whether 'the City' is short-termist but is examining the reasons why directors of large publicly quoted companies believe 'the City' is or is not short-termist about their company. The conclusion of this paper is that there is some evidence to support the view that 'the City' is perceived as being short-termist towards some companies but that the phenomenon is more narrowly focused and of lesser importance than its supporters claim. Journal: The European Journal of Finance Pages: 233-256 Issue: 3 Volume: 4 Year: 1998 Keywords: Analysts Fund Managers Investor Relations Perception Short-TERMISM, X-DOI: 10.1080/135184798337281 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337281 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:3:p:233-256 Template-Type: ReDIF-Article 1.0 Author-Name: Mae Baker Author-X-Name-First: Mae Author-X-Name-Last: Baker Title: Fund managers' attitudes to risk and time horizons: the effect of performance benchmarking Abstract: Results are reported of an interview survey conducted with 64 fund managers. The objective of the survey is to identify the performance appraisal and reward systems under which the fund managers are operating, and to identify ways in which this impacts upon their investment heuristics. The results of the interviews indicate that fund managers are evaluated on a regular basis against performance benchmarks, although the extent of such evaluation and the choice of benchmark differs according to the types of funds under management. The papers hows th at performance evaluation affects fund managers' attitudes to risk, to motivation and to time horizons. It is shown that fund managers believe that the quarterly relative performance monitoring to which many funds and fund managers are subject, results in the adoption of a more short-termist attitude and approach to the management of the funds in question. Journal: The European Journal of Finance Pages: 257-278 Issue: 3 Volume: 4 Year: 1998 Keywords: Performance Monitoring Fund Managers Short-TERMISM, X-DOI: 10.1080/135184798337290 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337290 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:3:p:257-278 Template-Type: ReDIF-Article 1.0 Author-Name: J. B. Coates Author-X-Name-First: J. B. Author-X-Name-Last: Coates Author-Name: E. W. Davis Author-X-Name-First: E. W. Author-X-Name-Last: Davis Author-Name: P. A. Golder Author-X-Name-First: P. A. Author-X-Name-Last: Golder Title: Comparisons of dividend per share behaviour of large UK and German companies over the period 1980-1995: preliminary findings Abstract: Following comments made in a House of Commons Trade and Industry Committee Report in 1994, this paper considers the dividend behaviour of 46 large UK and 44 large German quoted companies over the period 1980-1995. The analysis is principally based on comparison of the constancy, or otherwise, of dividends per share relative to profit before non-recurring items (PBNRI). Where possible, contingency tests have been applied to test the hypothesis that there is no difference between UK and German companies in their dividends per share response to identified changes in PBNRI. While interesting, statistically significant differences are found with respect to the basic situation of dividend behaviour linked to profit of the current or immediately preceding year, and the general, provisional, conclusion does not support the view that the two countries' dividend behaviour is that strikingly different. The relationship between dividends per share (DPS) and dividend cover was also examined with similar results. Differences in the two nations corporate dividend behaviour are subsequently discussed by reference to comparisons of tax and institutional shareholding characteristics. Journal: The European Journal of Finance Pages: 279-290 Issue: 3 Volume: 4 Year: 1998 Keywords: Dividend Policies Of British German Quoted Companies, X-DOI: 10.1080/135184798337308 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337308 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:3:p:279-290 Template-Type: ReDIF-Article 1.0 Author-Name: Martin Conyon Author-X-Name-First: Martin Author-X-Name-Last: Conyon Author-Name: Simon Peck Author-X-Name-First: Simon Author-X-Name-Last: Peck Title: Board size and corporate performance: evidence from European countries Abstract: This paper examines the effects of board size on corporate performance across a number of European economies. Agency models suggest that large boards may destroy corporate value. Our fixed effects econometric evidence demonstrates that the effect of board size on corporate performance is generally negative. A negative effect is isolated for all five European countries in question when performance is measured as return on equity; this inverse relationship is more difficult to isolate using market-based measures of performance. Journal: The European Journal of Finance Pages: 291-304 Issue: 3 Volume: 4 Year: 1998 Keywords: Corporate Governance Boards Of Directors Corporate Performance, X-DOI: 10.1080/135184798337317 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337317 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:3:p:291-304 Template-Type: ReDIF-Article 1.0 Author-Name: Ian Davidson Author-X-Name-First: Ian Author-X-Name-Last: Davidson Author-Name: Chris Mallin Author-X-Name-First: Chris Author-X-Name-Last: Mallin Title: The influence of earnings per share on capital issues: some evidence from UK companies Abstract: This paper investigates the simple hypothesis that when companies issue more capital, they have a tendency to select the type of capital, all other things being equal, which results in the higher short-term earnings per share (eps). The methodology employs probit analysis to test the hypothesis that the form of issue selected was that which gave the higher eps after controlling for other factors such as leverage and industry classification. The results lead us to conclude that there is evidence in capital issues of functional fixation on eps. Journal: The European Journal of Finance Pages: 305-309 Issue: 3 Volume: 4 Year: 1998 Keywords: Earnings Per Share Functional Fixation Capital Issues, X-DOI: 10.1080/135184798337326 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337326 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:3:p:305-309 Template-Type: ReDIF-Article 1.0 Author-Name: P. Lequeux Author-X-Name-First: P. Author-X-Name-Last: Lequeux Author-Name: E. Acar Author-X-Name-First: E. Author-X-Name-Last: Acar Title: A dynamic index for managed currencies funds using CME currency contracts Abstract: The goal of this paper is to equip the investor with the tools and understanding necessary to evaluate managed currencies' investments in a meaningful way. It is shown that managed currency funds might exhibit a common factor because most of the trading managers use similar technical forecasts to trigger their positions in the financial markets. Therefore, a dynamic benchmark is built, based on technical trading rules. Using the stochastic properties of trading rules, three simple moving averages are selected and given equal weight. Then the basket of trading rules is applied to a set of currencies. The weighting between currencies is done according to volumes traded on the OTC market as observed through Reuters 2000. Such a dynamic benchmark when adjusted for the leverage and risk-free factors exhibits similar performances, namely returns and volatility, to currency traders' benchmarks. The degree of correlation is high and the tracking error is low. These results might have several implications for institutions wishing to consider managed currency funds. First, the dynamic index might be used as a test of market inefficiencies. Second, the technical index might be used as a benchmark for currency trading advisers. As a whole, it can be seen that managed currencies have been trend-followers because the correlation coefficient between the dynamic index and the currency managers is significantly positive. The dynamic index might well be used to distinguish trend-followers from contrarian and judgemental fund. Finally, the dynamic index might be used as a tool to fulfil market expectations. On the one hand, an investor anticipating trending markets might wish to buy the dynamic index. On the other hand, an investor forecasting range-trading markets might wish to sell the index. In sum, the dynamic index might constitute a new financial product, as well as an appropriate benchmark for managed currencies funds. Journal: The European Journal of Finance Pages: 311-330 Issue: 4 Volume: 4 Year: 1998 Keywords: Benchmark;Currencies;Trend;Trading ;Rules, X-DOI: 10.1080/135184798337209 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337209 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:4:p:311-330 Template-Type: ReDIF-Article 1.0 Author-Name: Amado Peiro Author-X-Name-First: Amado Author-X-Name-Last: Peiro Author-Name: Javier Quesada Author-X-Name-First: Javier Author-X-Name-Last: Quesada Author-Name: Ezequiel Uriel Author-X-Name-First: Ezequiel Author-X-Name-Last: Uriel Title: Transmission of movements in stock markets Abstract: The paper analyses the relationships between three stock markets: New York, Tokyo and Frankfurt. The non-simultaneity of the trading times in these three markets determines the results of cross-correlations and regressions with daily returns. To cope with this and other problems, an empirical model is proposed and estimated. This model allows the separation of the ability to influence and the sensitivity of the different markets, and New York is found to be the most influential market, with Tokyo the most sensitive. Journal: The European Journal of Finance Pages: 331-343 Issue: 4 Volume: 4 Year: 1998 Keywords: International, Linkages, Stock, Markets, Transmission, Of, Movements, X-DOI: 10.1080/135184798337218 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337218 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:4:p:331-343 Template-Type: ReDIF-Article 1.0 Author-Name: G. Lypny Author-X-Name-First: G. Author-X-Name-Last: Lypny Author-Name: M. Powalla Author-X-Name-First: M. Author-X-Name-Last: Powalla Title: The hedging effectiveness of DAX futures Abstract: Dynamic futures hedging strategies have been shown to be effective in a number of markets, but the gain in risk reduction over simple, constant hedges varies. This paper examines the hedging effectiveness of German stock index DAX futures and shows that the application of a dynamic hedging strategy based on a GARCH(1,1) covariance structure, combined with an error correction of the mean returns, yields economically significant in- and out-of-sample improvements in welfare over a simple constant hedge and over a dynamic hedge with the error correction but without the GARCH(1,1) covariance structure. A nonparametric test of the model's forecasts shows that it is able to predict both portfolio returns and investor utility significantly better than the simpler alternative models considered. Journal: The European Journal of Finance Pages: 345-355 Issue: 4 Volume: 4 Year: 1998 Keywords: Hedging, Stock, Index, Futures, Garch, Models, Dynamic, Hedging, X-DOI: 10.1080/135184798337227 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337227 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:4:p:345-355 Template-Type: ReDIF-Article 1.0 Author-Name: Carole Corby Author-X-Name-First: Carole Author-X-Name-Last: Corby Author-Name: Mark Hoven Stohs Author-X-Name-First: Mark Hoven Author-X-Name-Last: Stohs Title: Investment opportunities and Irish equity offerings Abstract: Numerous empirical studies confirm that the stock market reacts negatively to the announcement of an equity issue. Yet some seasoned offerings occasion a positive market response. Studies investigating the differentiation of positive from negative responses should contribute to our understanding of both market and firm behaviour. In addition, few studies to date have examined market responses in other institutional and/or geographical settings. A sample of 95 open offerings by Irish firms between 1987 and 1994 is investigated and, surprisingly, a neutral market response is discovered. The hypothesis that a positive market response is due to a firm's growth opportunities is tested. The intuition underlying this growth opportunity hypothesis is that investors perceive the potential gain in growth opportunities and willingly fund such investments. The Irish evidence supports this hypothesis. It is conjectured that the lack of a long-term debt market in Ireland may explain these results. Journal: The European Journal of Finance Pages: 357-367 Issue: 4 Volume: 4 Year: 1998 Keywords: Stock, Offerings, Event, Studies, Investment, Opportunities, International, Investments, Irish, Stock, Returns, X-DOI: 10.1080/135184798337236 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184798337236 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:4:y:1998:i:4:p:357-367 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Editorial Abstract: Journal: The European Journal of Finance Pages: 1-1 Issue: 1 Volume: 5 Year: 1999 X-DOI: 10.1080/135184799337154 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337154 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:1:p:1-1 Template-Type: ReDIF-Article 1.0 Author-Name: Istemi. Demirag Author-X-Name-First: Istemi. Author-X-Name-Last: Demirag Author-Name: Cristina De Fuentes Author-X-Name-First: Cristina Author-X-Name-Last: De Fuentes Title: Exchange rate fluctuations and management control in UK-based MNCs: an examination of the theory and practice Abstract: This paper explores how UK MNCs assess their foreign subsidiary operating managers' performance in parent company currency terms using operating budgets. It shows how managers' performance evlauation systems may become dysfunctional if the management of currency risk is centralized at the parent company headquarters and the impact of these centralized currency risk decisions on operating performance is subsequently ignored when foreign operating managers are evaluated. The results of the study indicate that the practices of UK MNCs in general have not improved since the early 1980s and there seems to remain a significant gap between theory and practice in this area. However, there is evidence to suggest that UK MNCs, as their US counterparts, are becoming more interested in identifying the impact of exchange rate changes on their foreign subsidiary operations. Journal: The European Journal of Finance Pages: 3-28 Issue: 1 Volume: 5 Year: 1999 Keywords: Foreign Currency, Operating Exposure, Operating Budgets, Performance Evaluations, Control, X-DOI: 10.1080/135184799337163 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337163 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:1:p:3-28 Template-Type: ReDIF-Article 1.0 Author-Name: J. P. Krahnen Author-X-Name-First: J. P. Author-X-Name-Last: Krahnen Author-Name: C. Rieck Author-X-Name-First: C. Author-X-Name-Last: Rieck Author-Name: E. Theissen Author-X-Name-First: E. Author-X-Name-Last: Theissen Title: Insider trading and portfolio structure in experimental asset markets with a long-lived asset Abstract: Results are reported of a series of nine market experiments with asymmetric information and a fundamental value process that is more 'realistic' than those in previous experiments. Both a call market institution and a continuous double auction mechanism are employed. Considerable pricing inefficiencies that are only partially exploited by insiders were found. The magnitude of insider gains is analysed separately for each experiment. Support is found for the hypothesis that the continuous double auction leads to more efficient outcomes. Finally, evidence of an endowment effect is presented: the initial portfolio structure influences the final asset holdings of experimental subjects. Journal: The European Journal of Finance Pages: 29-50 Issue: 1 Volume: 5 Year: 1999 Keywords: Experimental Asset Markets, Market Efficiency, Market Institutions, Endowment Effect, X-DOI: 10.1080/135184799337172 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337172 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:1:p:29-50 Template-Type: ReDIF-Article 1.0 Author-Name: G. G. Booth Author-X-Name-First: G. G. Author-X-Name-Last: Booth Author-Name: P. Iversen Author-X-Name-First: P. Author-X-Name-Last: Iversen Author-Name: S. K. Sarkar Author-X-Name-First: S. K. Author-X-Name-Last: Sarkar Author-Name: H. Schmidt Author-X-Name-First: H. Author-X-Name-Last: Schmidt Author-Name: A. Young Author-X-Name-First: A. Author-X-Name-Last: Young Title: Market structure and bid-ask spreads: IBIS vs Nasdaq Abstract: A comparison is made between the bid-ask spreads of 30 high volume German stocks traded on IBIS and 30 high volume US stocks traded on Nasdaq. IBIS and Nasdaq are best described as agency and dealer auction markets, respectively. On average, the market spread for these IBIS and Nasdaq stocks is the same, but for the 10 most active stocks in each market, IBIS spreads are considerably lower. For these latter stocks, IBIS spreads change in a predictable manner throughout the day. Nasdaq spreads do not. The critical factor appears to be the unrestricted access of suppliers of immediacy that is distinctive for agency auction markets. Journal: The European Journal of Finance Pages: 51-71 Issue: 1 Volume: 5 Year: 1999 Keywords: Bid-ask Spreads, Germany, Nasdaq, X-DOI: 10.1080/135184799337181 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337181 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:1:p:51-71 Template-Type: ReDIF-Article 1.0 Author-Name: Owain Ap Gwilym Author-X-Name-First: Owain Ap Author-X-Name-Last: Gwilym Author-Name: Mike Buckle Author-X-Name-First: Mike Author-X-Name-Last: Buckle Title: Volatility forecasting in the framework of the option expiry cycle Abstract: The paper presents new UK evidence on the relative predictive performance of several implied and historical volatilities. The Datastream combination of historical and implied volatilities is also tested empirically for the first time. Daily observations are used to increase the power of the tests, and particular attention is paid to forecasting over the life of options. A further contribution of the paper is to examine relative accuracy for several different horizons, and matching the amount of past data to the forecast horizon is found to be effective when forecasting over longer horizons. Historical volatility estimators are found to have greater forecast accuracy than implied volatilities. Although implied volatility is a biased estimator of realized volatility, regression tests show that it contains more information than historical volatility. Also, a simple trading rule using historical volatility estimators is unable to exploit the forecast improvements since it fails to earn abnormal profits after transactions costs. Journal: The European Journal of Finance Pages: 73-94 Issue: 1 Volume: 5 Year: 1999 Keywords: Volatility, Forecasting, Index Options, X-DOI: 10.1080/135184799337190 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337190 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:1:p:73-94 Template-Type: ReDIF-Article 1.0 Author-Name: M. Chesney Author-X-Name-First: M. Author-X-Name-Last: Chesney Author-Name: R. Gibson-Asner Author-X-Name-First: R. Author-X-Name-Last: Gibson-Asner Title: The investment policy and the pricing of equity in a levered firm: a re-examination of the 'contingent claims' valuation approach Abstract: In this study we re-examine the pricing of equity and the risk incentives of shareholders in levered firms. We derive a down-and-out call equity valuation model which rests on the assumption that shareholders choose the optimal investment and asset returns' volatility as a function of current leverage. Contrarily to the Black and Scholes framework where, irrespective of the firm's leverage, they would always select infinite volatility projects, here the more deep out-of-the-money the shareholders' claim, the greater their incentives to select riskier investment projects. The model is thus consistent with and quantifies the asset substitution problem previously acknowledged by the agency literature. Journal: The European Journal of Finance Pages: 95-107 Issue: 2 Volume: 5 Year: 1999 Keywords: Agency Problems, Asset Substitution, Contingent Claim, Down-and-out Call Option, Capital Structure, Leverage, Risk Incentives, X-DOI: 10.1080/135184799337118 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337118 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:2:p:95-107 Template-Type: ReDIF-Article 1.0 Author-Name: K. Nyholm Author-X-Name-First: K. Author-X-Name-Last: Nyholm Title: Estimation of the effective bid-ask spread on high frequency Danish bond data Abstract: In this paper the effective bid-ask spread is estimated using 12 high frequency Danish bond samples. A clear-cut MA(1)-model for the mean of the return series, and a GARCH(1,1)-model for the variance, are found. Basically, Roll's model is used, but three different methods of calculating the first-order autocovariance are suggested. Each of these in turn produces three possible ways of estimating the effective bid-ask spread. First, Roll's original autocovariance estimate is used. Second, the autocovariance is calculating using the parameters of an estimated MA(1) model. Third, the autocovariance is obtained from the parameters of a joint MA(1)-GARCH(1,1) model. By means of bootstrapping the standard error of the bid-ask spread estimates are found. It is shown that the gain in efficiency, measured by the relative difference in the standard error of the estimates, is 29% when going from method one to method two, but only 1% when going from method two to method three. These results indicate that the extra gain in efficiency obtained by taking account of the MA(1) structure of the data is noteworthy, but the gain when incorporating the GARCH-effects is negligible. Journal: The European Journal of Finance Pages: 109-122 Issue: 2 Volume: 5 Year: 1999 Keywords: Effective Spread Estimation, Time Series Models, X-DOI: 10.1080/135184799337127 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337127 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:2:p:109-122 Template-Type: ReDIF-Article 1.0 Author-Name: A. Abhyankar Author-X-Name-First: A. Author-X-Name-Last: Abhyankar Author-Name: L. S. Copeland Author-X-Name-First: L. S. Author-X-Name-Last: Copeland Author-Name: W. Wong Author-X-Name-First: W. Author-X-Name-Last: Wong Title: LIFFE cycles: intraday evidence from the FTSE-100 Stock Index futures market Abstract: We use a data set consisting of a complete history of all transactions and quotes to examine intraday patterns in trading volume, volatility and the quoted bid-ask spread in the market for FTSE-100 index futures. We document a number of regularities in the pattern of daily returns and volatility of the cash index. We also document intraday patterns in the basis, i.e. the contemporaneous difference between the futures price and the underlying cash index level. In general, we find returns vary over the day, reflecting in particular the influence of the US market openings in early afternoon London-time. We find that, while both volume and volatility exhibit a U-shaped pattern over the day, movements in the spread tend if anything to follow the opposite pattern. As far as consistency with microstructure models is concerned, our results are more supportive of the Brock and Kleidon model than the Admati and Pfleiderer model. Journal: The European Journal of Finance Pages: 123-139 Issue: 2 Volume: 5 Year: 1999 Keywords: Trading Volume, Bid-ask Spread, Stock Index, Futures, Volatility, Liffe, X-DOI: 10.1080/135184799337136 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337136 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:2:p:123-139 Template-Type: ReDIF-Article 1.0 Author-Name: Kenneth Mcclure Author-X-Name-First: Kenneth Author-X-Name-Last: Mcclure Author-Name: Ronnie Clayton Author-X-Name-First: Ronnie Author-X-Name-Last: Clayton Author-Name: Richard Hofler Author-X-Name-First: Richard Author-X-Name-Last: Hofler Title: International capital structure differences among the G7 nations: a current empirical view Abstract: Historical research domestically and internationally suggests that differences in capital structures exist for industry classification, firm size and nationality. However, the data for most of these previous studies are based on book values, include a limited number of countries, are not up-to-date, and specifically do not cover the period of the late 1980s when there were important developments in the globalization of financial markets. In addition, no single study specifically compares all seven of the world's major industrial nations (G7 Nations). Financial theory would suggest that in an efficient global market the capital structure of identical firms in different nations would be the same. If international market imperfections still exist through the 1980s, current capital structures and costs may be different among similar firms in different nations; and business advantages (or disadvantages) may provide profits (or costs) to firms incorporated in different countries. The intent of this research is empirically to update the literature with recent international data on both a book value and market value basis and to include for the first time in a single study all the G7 Nations. The results suggest significant financial structure differences still exist among the G7 countries. Specifically, on a market value basis France, Italy and Germany tend to use a higher proportion of total debt, US, UK, Canada and Japan tend to use less debt, and France, Italy and Canada tend to use a higher proportion of institutional debt (non-spontaneous funds) than the US, UK, Japan and Germany. Journal: The European Journal of Finance Pages: 141-164 Issue: 2 Volume: 5 Year: 1999 Keywords: International Finance, Capital Structure, Corporate Finance, X-DOI: 10.1080/135184799337145 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337145 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:2:p:141-164 Template-Type: ReDIF-Article 1.0 Author-Name: Adrian Buckley Author-X-Name-First: Adrian Author-X-Name-Last: Buckley Title: An introduction to security returns Abstract: The equity premium - the difference between the return achievable from investment in the equity market (RM) and the risk-free rate of return (RF)- plays an important part in corporate finance. The expression equity premium (sometimes referred to as the equity risk premium) is used to denote the ex ante expectation of investors. The term excess return refers to the ex post achievement of stock returns over and above the risk-free return. If we compare US and UK returns, we find that total returns, real returns and the value of (RM - RF) are all marginally higher for the UK. Summarized evidence appears in Table 1 and Table 6. Such greater returns may be due to an increased risk premium related to increasing unexpected inflation. Particularly important in estimating the equity risk premium is whether excess returns are measured using a geometric or an arithmetic mean return. To a significant extent, this question revolves around mean reversion in stock returns. Evidence of mean reversion is substantial, although it cannot be proved unequivocally. Given the weight of evidence of mean reversion, there may be a strong case for the use of a geometric mean with an equity premium of between 3% and 5% - or even less. Journal: The European Journal of Finance Pages: 165-180 Issue: 3 Volume: 5 Year: 1999 Keywords: Equity Premium, Equity Risk Premium, Excess Return, Geometric Mean, Arithmetic Mean, Mean Reversion, X-DOI: 10.1080/135184799337019 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337019 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:165-180 Template-Type: ReDIF-Article 1.0 Author-Name: G. G. Booth Author-X-Name-First: G. G. Author-X-Name-Last: Booth Author-Name: T. Martikainen Author-X-Name-First: T. Author-X-Name-Last: Martikainen Title: Excess returns and international diversification: The Scandinavian view Abstract: The paper discusses excess returns within four Scandinavian stock markets and also how Scandinavian returns are related to the returns in non-Scandinavian markets. Some underlying reasons for the observed economically weak relationships between markets are reviewed. Moreover, some reasons why the interrelationships between markets can be expected to increase in the future are provided. Journal: The European Journal of Finance Pages: 181-185 Issue: 3 Volume: 5 Year: 1999 Keywords: Diversification, Scandanavia, X-DOI: 10.1080/135184799337028 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337028 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:181-185 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Bessler Author-X-Name-First: Wolfgang Author-X-Name-Last: Bessler Title: Equity returns, bond returns, and the equity premium in the German capital market Abstract: This article reviews the empirical evidence for equity returns, bond returns, and the equity premium in the German capital market for the period from 1870 to 1995. Taken together, the studies reviewed provide convincing evidence that over longer investment periods, average equity returns have been higher than average bond returns. These excess returns, however, have been highly volatile and negative in many years, illustrating the higher risk of equity investments. Moreover, market timing had a major positive or negative impact on overall returns. Despite the historical evidence of a substantial equity premium there is still little equity investment by German households. Journal: The European Journal of Finance Pages: 186-201 Issue: 3 Volume: 5 Year: 1999 Keywords: Equity Premium, German Capital Market, Stock Returns, Bond Returns, X-DOI: 10.1080/135184799337037 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337037 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:186-201 Template-Type: ReDIF-Article 1.0 Author-Name: Dusan Isakov Author-X-Name-First: Dusan Author-X-Name-Last: Isakov Title: Is beta still alive? Conclusive evidence from the Swiss stock market Abstract: Recent evidence from Fama and French (1992, 1996) and others shows that betas and returns are not related empirically. They interpret this as evidence against the validity of the capital asset pricing model and conclude that the beta is not a good measure of risk. This paper claims that usual tests do not leave much opportunity for beta to appear as a useful variable capable of explaining returns, because tests are often performed in periods where the average realized market excess return is not significantly different from zero. In order to assess the usefulness of beta, an alternative approach that dissociates results obtained in periods where the realized market excess is positive from those where it is negative is proposed. These new tests are then applied to a representative sample of the Swiss stock market over the period 1983-1991. The different results unambiguously support the fact that beta is a good measure of risk, because beta is strongly related to the cross-section of realized returns. These results also confirm that there are no arbitrage opportunities on this market. Journal: The European Journal of Finance Pages: 202-212 Issue: 3 Volume: 5 Year: 1999 Keywords: Capital Asset Pricing Model, Risk, Stock Market, X-DOI: 10.1080/135184799337046 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337046 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:202-212 Template-Type: ReDIF-Article 1.0 Author-Name: C. J. Adcock Author-X-Name-First: C. J. Author-X-Name-Last: Adcock Author-Name: E. A. Clark Author-X-Name-First: E. A. Author-X-Name-Last: Clark Title: Beta lives - some statistical perspectives on the capital asset pricing model Abstract: This note summarizes some technical issues relevant to the use of the idea of excess return in empirical modelling. We cover the case where the aim is to construct a measure of expected return on an asset and a model of the CAPM type is used. We review some of the problems and show examples where the basic CAPM may be used to develop other results which relate the expected returns on assets both to the expected return on the market and other factors. Journal: The European Journal of Finance Pages: 213-224 Issue: 3 Volume: 5 Year: 1999 Keywords: Arbitrage Pricing Theory, Arch Models, Beta, Capital Asset Pricing Model, Conditional Distributions, Multi-factor Models, Non-central Chi-squared, X-DOI: 10.1080/135184799337055 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337055 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:213-224 Template-Type: ReDIF-Article 1.0 Author-Name: G. P. Diacogiannis Author-X-Name-First: G. P. Author-X-Name-Last: Diacogiannis Title: A three-dimensional risk-return relationship based upon the inefficiency of a portfolio: derivation and implications Abstract: This paper derives a three-dimensional risk-return relationship employing a set of risky securities and a portfolio that is located inside the minimum-variance boundary of these securities. More specifically, it is proved that the inefficiency of a portfolio that has an expected return greater than the expected return of the global minimum variance portfolio, is a necessary and sufficient condition for expressing the expected return on any security under consideration as an exact linear function of its relative risk in that portfolio and an additional risk associated with moving inside the boundary portfolio set. Then two implications of the theoretical results are discussed, one related to the cost of equity capital and another related to past tests of the capital asset pricing model. Journal: The European Journal of Finance Pages: 225-235 Issue: 3 Volume: 5 Year: 1999 Keywords: Risk-return Relationship, Inefficient Index, Cost Of Equity Capital, X-DOI: 10.1080/135184799337064 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337064 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:225-235 Template-Type: ReDIF-Article 1.0 Author-Name: M. C. Freeman Author-X-Name-First: M. C. Author-X-Name-Last: Freeman Author-Name: I. R. Davidson Author-X-Name-First: I. R. Author-X-Name-Last: Davidson Title: Estimating the equity premium Abstract: Accurate estimation of the equity premium (the expected difference between the returns to a well-diversified stock market portfolio and a riskfree asset) is of central importance in many applications of finance theory including project appraisal and portfolio selection. The standard approach is to take the average observed excess returns to the market over some recent time period (sometimes referred to as the ex post equity premium) and apply this as an unbiased estimate of the ex ante equity premium. The paper reviews the problems associated with such an approach and contrasts it with alternative theoretical techniques. Journal: The European Journal of Finance Pages: 236-246 Issue: 3 Volume: 5 Year: 1999 Keywords: Equity Premium Puzzle, Riskfree Rate Puzzle, Capm, Portfolio Theory, X-DOI: 10.1080/135184799337073 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337073 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:236-246 Template-Type: ReDIF-Article 1.0 Author-Name: Alan Clements Author-X-Name-First: Alan Author-X-Name-Last: Clements Title: The cost of capital- the practitioners view Abstract: To many practitioners, serious doubts exist about various aspects of the application of CAPM to the investment decision. This is especially so with respect to the cost of equity, where varying possible specifications of beta due to different observation periods leave many unconvinced. Is the beta a satisfactory measure of risk? And is it correct that only market risk matters? The practitioner is sceptical on these points and equally so of the plethora of advice received on the magnitude of the equity premium. With respect to financing, the thoughtful practitioner finds it disappointing that estimates of the cost of capital are little used in developing the company's funding strategy - including dividend policy. The pecking order hypothesis leaves us with no optimal capital structure. It merely tells us the way firms typically behave. Thinking practitioners continue to await the fully comprehensive theory of corporate finance that is wholly applicable in solving their problems. Maybe practitioners have to work harder at understanding, selling and applying the more intricate teachings of modern corporate finance but their patience is often tried by unworldly and conflicting prescriptions. Journal: The European Journal of Finance Pages: 247-255 Issue: 3 Volume: 5 Year: 1999 Keywords: Investment, Financing, Theory, Practitioner, X-DOI: 10.1080/135184799337082 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337082 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:247-255 Template-Type: ReDIF-Article 1.0 Author-Name: Herbert Rijken Author-X-Name-First: Herbert Author-X-Name-Last: Rijken Author-Name: Menno Booij Author-X-Name-First: Menno Author-X-Name-Last: Booij Author-Name: Adrian Buckley Author-X-Name-First: Adrian Author-X-Name-Last: Buckley Title: Valuation differences between quoted and unquoted companies- empirical evidence from the UK Abstract: This paper focuses upon differences in the valuation of UK quoted and unquoted companies. It draws on empirical evidence over the period from 1991 to 1997. It commences with an overview of the published literature. This suggests a broad spectrum of valuation statistics ranging from very minor discounts for non-listed companies relative to their quoted brethren, up to a discount as high as 40%. The empirical analysis uses PE ratios, derived from the publication Acquisitions Monthly, in respect of non-listed, private companies selling out in takeover deals. These are compared with average PE ratios for quoted companies in Britain. A raw statistic of approximately 40% was found as the discount for non-listed firms relative to quoted companies. However, this is dramatically different when corrected for size. For size varying from less than GBP 0.5 million to about GBP 55 million, the discount ranges, respectively, from 16% to 6% with an average of around 10%. Regression equations relating size and PE ratio are presented. Journal: The European Journal of Finance Pages: 256-275 Issue: 3 Volume: 5 Year: 1999 Keywords: Valuation, Quoted Companies, Non-quoted Companies, Discount, Pe Ratios, X-DOI: 10.1080/135184799337091 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337091 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:256-275 Template-Type: ReDIF-Article 1.0 Author-Name: Hans Eijgenhuijsen Author-X-Name-First: Hans Author-X-Name-Last: Eijgenhuijsen Author-Name: Adrian Buckley Author-X-Name-First: Adrian Author-X-Name-Last: Buckley Title: An overview of returns in Europe Abstract: This paper is an attempt to present a digest of European security returns. In this respect, Table 7 summarizes key data over recent years. The table presents information for the period 1967 to 1990. By and large, within Europe, equity returns appear to be very similar. To the extent that if differences exist, they can probably be attributed to too short a period for utterly unambiguous data on returns to be achieved. But there may be another explanation which relates to an international capital asset pricing model and the sinews of this topic are explored towards the end of the paper. Data are presented which compare and contrast the part played by equity markets in the structure of corporate financing in Europe. These show the contrasting cult of the equity share, with its high emphasis in Britain and much lower role in Germany and France, for example. Other statistics reveal differing share ownership structures and pension fund portfolio distributions in European countries. That the topic of realized European security returns requires further research is obviously the case. It is hoped that this paper — and others in this issue — will stimulate a desire to undertake the necessary investigations. Journal: The European Journal of Finance Pages: 276-297 Issue: 3 Volume: 5 Year: 1999 Keywords: European Security Returns, Equity Markets, Share Ownership, International, Capital Asset Pricing Model, X-DOI: 10.1080/135184799337109 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337109 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:3:p:276-297 Template-Type: ReDIF-Article 1.0 Author-Name: Atreya Chakraborty Author-X-Name-First: Atreya Author-X-Name-Last: Chakraborty Author-Name: John Barkoulas Author-X-Name-First: John Author-X-Name-Last: Barkoulas Title: Dynamic futures hedging in currency markets Abstract: The hedging effectiveness of dynamic strategies is compared with static (traditional) ones using futures contracts for the five leading currencies. The traditional hedging model assumes time invariance in the joint distribution of spot and futures price changes thus leading to a constant optimal hedge ratio (OHR). However, if this time-invariance assumption is violated, time-varying OHRs are appropriate for hedging purposes. A bivariate GARCH model is employed to estimate the joint distribution of spot and futures currency returns and the sequence of dynamic (time-varying) OHRs is constructed based upon the estimated parameters of the conditional covariance matrix. The empirical evidence strongly supports time-varying OHRs but the dynamic model provides superior out-of-sample hedging performance, compared to the static model, only for the Canadian dollar. Journal: The European Journal of Finance Pages: 299-314 Issue: 4 Volume: 5 Year: 1999 Keywords: Dynamic Hedging, Optimal Hedge Ratio, Bivariate Garch Model, Currency Futures, X-DOI: 10.1080/135184799336975 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799336975 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:4:p:299-314 Template-Type: ReDIF-Article 1.0 Author-Name: J. Cable Author-X-Name-First: J. Author-X-Name-Last: Cable Author-Name: K. Holland Author-X-Name-First: K. Author-X-Name-Last: Holland Title: Modelling normal returns in event studies: a model-selection approach and pilot study Abstract: The choice of model of normal returns in event studies has been widely discussed in the literature. While researchers frequently continue to use an array of alternatives, there is currently some tendency to favour cruder but simpler mean- or market-adjusted returns models. This paper presents a general-to-specific model selection framework for testing the data admissibility of the principal models in current use. Results from a pilot study indicate a strong preliminary preference in favour of the regression-based models, with the market model generally outperforming the capital asset pricing model. Journal: The European Journal of Finance Pages: 331-341 Issue: 4 Volume: 5 Year: 1999 Keywords: Abnormal Returns, Event Studies, X-DOI: 10.1080/135184799336993 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799336993 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:4:p:331-341 Template-Type: ReDIF-Article 1.0 Author-Name: Maria Do Ceu Ribeiro Cortez Author-X-Name-First: Maria Do Ceu Ribeiro Author-X-Name-Last: Cortez Author-Name: Dean Paxson Author-X-Name-First: Dean Author-X-Name-Last: Paxson Author-Name: Manuel Jose Da Rocha Armada Author-X-Name-First: Manuel Jose Da Rocha Author-X-Name-Last: Armada Title: Persistence in Portuguese mutual fund performance Abstract: Recent evidence suggests that future performance is predictable from past performance, that is, funds with superior (inferior) performance in the past are likely to remain good (bad) performers in the future. This research addresses the persistence of mutual fund performance in a European regional market (the Portuguese equity fund market). Some of the problems in evaluating fund persistence are identified in the context of limited sample size and using the peer group median as a benchmark for contingency table analysis of performance persistence. The criteria for assessing performance persistence based on the contingency table methodology of repeated winners and losers are presented in terms of significance statistics, adjusted for small sample bias. The adjustments are accomplished through the Yates continuity correction and Fisher's exact p-value. The appropriateness of each criteria under different circumstances is also discussed. The analysis of the returns of all Portuguese domestic equity funds, since a representative number was established, shows some performance persistence (on a quarterly basis). The persistence, however, is reduced when the returns are controlled for the various dimensions of risk. Significant risk persistence has been documented. Furthermore, for more or less frequent intervals of measurement, the industry persistence is rejected, although individual funds exhibit superior/inferior performance. Journal: The European Journal of Finance Pages: 342-365 Issue: 4 Volume: 5 Year: 1999 Keywords: Performance Persistence, Contingency Tables, Small Sample Bias, X-DOI: 10.1080/135184799337000 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184799337000 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:5:y:1999:i:4:p:342-365 Template-Type: ReDIF-Article 1.0 Author-Name: J. Board Author-X-Name-First: J. Author-X-Name-Last: Board Author-Name: C. Sutcliffe Author-X-Name-First: C. Author-X-Name-Last: Sutcliffe Author-Name: E. Patrinos Author-X-Name-First: E. Author-X-Name-Last: Patrinos Title: The performance of covered calls Abstract: Writing call options against long positions in the underlying equities is the most popular options strategy. Since the variance is an inadequate measure of risk for options strategies, this paper uses a range of dominance criteria and four utility functions to compare the performance of partly and fully covered call strategies with that of the underlying equity portfolio. It is found that the dominance criteria are ineffective in choosing between strategies. However, all four utility functions (representing different combinations of absolute and relative risk aversion) find that the covered call strategy is preferable for the data period studied, supporting the widespread use of this strategy. Journal: The European Journal of Finance Pages: 1-17 Issue: 1 Volume: 6 Year: 2000 Keywords: Call Options, Covered Calls, Buy-writes, Overwrites, X-DOI: 10.1080/135184700336937 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184700336937 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:1:p:1-17 Template-Type: ReDIF-Article 1.0 Author-Name: Babak Eftekhari Author-X-Name-First: Babak Author-X-Name-Last: Eftekhari Author-Name: Christian Pedersen Author-X-Name-First: Christian Author-X-Name-Last: Pedersen Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Title: On the volatility of measures of financial risk: an investigation using returns from European markets Abstract: The statistical properties of various measures of risk were investigated with a view to explaining the reasons for lack of use in finance of risk measures other than the variance, and to see if there is a sensible measure to use for cross-European comparisons. As examples, the semi-variance, the lower partial moment, the Gini, and the absolute deviation were considered. A Monte Carlo study was conducted to study the behaviour of these measures of risk. Bootstrap methods were used by drawing random observations from real financial returns data, for the same purpose. Specifically, the equity indices from the following stock markets were used: Germany, United Kingdom, France, Italy, Holland and Belgium. It is concluded that there is little reason to reject measures of risk other than the variance based on a view that they are too volatile. Indeed the evidence shows that whilst the standard deviation may be the appropriate measure of risk for high volume markets (Germany, UK and France), it is not the most reliable risk measurement (in terms of volatility) when considering lower volume markets (Italy, Holland and Belgium). That is, the more non-normal the returns, the more likely is the standard deviation to be volatile compared to the Gini or the absolute deviation. Finally, optimized portfolios were investigated using different risk measures and substantial differences were found; this suggests these findings have practical consequences. Journal: The European Journal of Finance Pages: 18-38 Issue: 1 Volume: 6 Year: 2000 Keywords: Absolute Deviation, Bootstrap, Gini, Lower Partial Moment, Measures Of Risk, X-DOI: 10.1080/135184700336946 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184700336946 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:1:p:18-38 Template-Type: ReDIF-Article 1.0 Author-Name: Stephen Taylor Author-X-Name-First: Stephen Author-X-Name-Last: Taylor Title: Stock index and price dynamics in the UK and the US: new evidence from a trading rule and statistical analysis Abstract: The predictability of long time series of stock index levels and stock prices is investigated using both statistical and trading rule methodologies. The trading rule analysis uses a double moving-average rule and the methods of Brock, Lakonishok and LeBaron. Results are obtained for the FTA, FTSE-100, DJIA and S&P-500 indices, prices for twelve UK stocks and indices derived from these stock prices. Statistical analysis shows that the index and price series are not random walks. The trading rule analysis generally confirms this conclusion. However, small transaction costs would eliminate the profitability of the moving-average rule. Standard ARMA-ARCH models are estimated for time series of returns and bootstrap methods are used to decide if the models can explain the observed trading statistics. The models provide a reasonable description but there is evidence from the trading rule methodology that standard models sometimes fail to describe the dynamics of the indices and prices. Several comparisons are made: between an index and the stock prices that define the index, between spot levels and futures prices for indices, and between UK and US indices. Journal: The European Journal of Finance Pages: 39-69 Issue: 1 Volume: 6 Year: 2000 Keywords: Stock Prices, Predictability, Trading Rules, Moving Averages, Random Walk Tests, Market Efficiency, Arch Models, Dow Jones Industrial Average, Financial Times Indices, X-DOI: 10.1080/135184700336955 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184700336955 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:1:p:39-69 Template-Type: ReDIF-Article 1.0 Author-Name: Martin Scheicher Author-X-Name-First: Martin Author-X-Name-Last: Scheicher Title: Time-varying risk in the German stock market Abstract: This paper compares two specifications of the Capital Asset Pricing Model for a sample of German stocks. The specifications generate time-varying first and second moments by conditioning on past information. This explicit modelling of the time series behaviour of risk allows us to characterize the driving factors of variances and covariances of returns. In addition to a variety of diagnostic tests we evaluate the validity of the one-factor restriction in the CAPM. The main findings are that risk is time dependent and very variable and also that more than one factor is needed to fit the data set. Journal: The European Journal of Finance Pages: 70-91 Issue: 1 Volume: 6 Year: 2000 Keywords: Capital Asset Pricing Model Capm, Volatility Clustering, Garch, X-DOI: 10.1080/135184700336964 File-URL: http://www.tandfonline.com/doi/abs/10.1080/135184700336964 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:1:p:70-91 Template-Type: ReDIF-Article 1.0 Author-Name: Arielle Beyaert Author-X-Name-First: Arielle Author-X-Name-Last: Beyaert Author-Name: Juan rez-Castej Author-X-Name-First: Juan Author-X-Name-Last: rez-Castej Title: Switching regime models in the Spanish inter-bank market Abstract: Nonlinear present value models are adjusted to data from the Spanish inter-bank market between 1986 and 1992, with the ultimate objective of testing the rational expectations hypothesis of the term structure of the interest rates. The nonlinearity stems from using models with two stochastically switching regimes. The models are submitted to various specification tests and are compared with linear present value models. Very clearly differentiated regimes are identified, the analysis of the results in the light of the institutional, political and economic events that affected the Spanish economy during the period of study demonstrates the usefulness of this type of models. The expectation hypothesis is, however, rejected. Journal: The European Journal of Finance Pages: 93-112 Issue: 2 Volume: 6 Year: 2000 Keywords: Interest Rates Term Structure Markov Process Switching Regimes Rational Expectations Nonlinearity, X-DOI: 10.1080/13518470050020789 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020789 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:93-112 Template-Type: ReDIF-Article 1.0 Author-Name: Ramaprasad Bhar Author-X-Name-First: Ramaprasad Author-X-Name-Last: Bhar Author-Name: Carl Chiarella Author-X-Name-First: Carl Author-X-Name-Last: Chiarella Title: Expectations of monetary policy in Australia implied by the probability distribution of interest rate derivatives Abstract: The paper describes and compares different methods of extracting the implied probability distribution of the underlying interest rate futures from the prices of traded options on these futures as well as from past futures prices. These methods are applied to short-term contracts on bank accepted bills trading on the Sydney Futures Exchange. The information on the distribution of the underlying asset thus obtained is very important to the central bank authorities since this allows them to monitor market expectations regarding future price movements. Alternatively market reaction to central, bank monetary policy changes may be judged this way. It is also important to practitioners for use in pricing over the counter (OTC) or exotic products where the trading volume is not particularly high. In that situation, the information on the distribution recovered from highly traded products from the exchange may be used as representative for the OTC products as well. As an empirical application, the recovered information on distribution is analysed in the context of reductions in interest rates in Australia by the Reserve Bank between July 1996 and May 1997. Journal: The European Journal of Finance Pages: 113-125 Issue: 2 Volume: 6 Year: 2000 Keywords: Traded Options Interest Rate Futures Implied Probability Distribution Market Expectations Over The Counter Products, X-DOI: 10.1080/13518470050020798 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020798 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:113-125 Template-Type: ReDIF-Article 1.0 Author-Name: Monica Billio Author-X-Name-First: Monica Author-X-Name-Last: Billio Author-Name: Domenico Sartore Author-X-Name-First: Domenico Author-X-Name-Last: Sartore Author-Name: Carlo Toffano Author-X-Name-First: Carlo Author-X-Name-Last: Toffano Title: Combining forecasts: some results on exchange and interest rates Abstract: The aim of this work is to investigate whether the combination of forecasts plays an important role in the improvement of forecast accuracy Particular attention is paid to: (a) the methods of forecasting (the methods compared are neural networks, fuzzy logic, GARCH models, switching regime and chaotic dynamics); (b) combining the forecasts provided by the different methods. This work has also the aim of revising a short-term econometric forecast using a longer-term forecast. The revision process usually runs the opposite way (revision is made on a longer-term forecast using a short-term one to reflect the current available information, but it is not excluded that it is possible to proceed as described above. Daily data from the financial market is used. Some empirical applications on exchange and interest rates are given. Journal: The European Journal of Finance Pages: 126-145 Issue: 2 Volume: 6 Year: 2000 Keywords: Forecast Combination Composite Forecasts Forecast Comparison Exchange Rates Interest Rates, X-DOI: 10.1080/13518470050020806 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020806 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:126-145 Template-Type: ReDIF-Article 1.0 Author-Name: Catherine Bruneau Author-X-Name-First: Catherine Author-X-Name-Last: Bruneau Author-Name: Ch. Duval-Kieffer Author-X-Name-First: Ch. Author-X-Name-Last: Duval-Kieffer Author-Name: J. P. Nicolai Author-X-Name-First: J. P. Author-X-Name-Last: Nicolai Title: Managing funds in the US market: how to distinguish between transitory distortions and structural changes in the stock prices? Abstract: The paper reports estimates of a reliable fundamental value of the S&P index, standing for a long run target value in Error-Correction Modelling of the dynamics of subsequent returns. The Present Value Model suggests two fundamentals: dividends and a discount rate factor, specified as a risk free rate plus an ex ante risk premium, to capture structural breaks in the expectations. The dates of the shifts are identified by estimating recursively a cointegration relationship. Monte Carlo simulations are used to compute appropriate statistics for stationarity tests. The predictive performance of the Error-Correcting Model is then used to implement winning portfolio-investment strategies. Journal: The European Journal of Finance Pages: 146-162 Issue: 2 Volume: 6 Year: 2000 Keywords: Long Run Target Cointegration Structural Change Asset Management, X-DOI: 10.1080/13518470050020815 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020815 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:146-162 Template-Type: ReDIF-Article 1.0 Author-Name: Giampiero Gallo Author-X-Name-First: Giampiero Author-X-Name-Last: Gallo Author-Name: Barbara Pacini Author-X-Name-First: Barbara Author-X-Name-Last: Pacini Title: The effects of trading activity on market volatility Abstract: The paper re-examines the question of excessive implied persistence of volatility estimates when GARCH type models are used. Ten actively traded US stocks are considered and as already established in the literature, when volume traded is inserted in the GARCH (1, 1) or (EGARCH 1, 1) models for returns, the estimated persistence is decreased. Since volume is affected also by within-the-day price movements and hence is not weakly exogenous relative to returns, alternative proxies for trading activities are suggested. It is concluded that the difference between the opening price and the closing price of the previous day accounts also for most of the persistence in the autoregressive conditional heteroskedasticity. Journal: The European Journal of Finance Pages: 163-175 Issue: 2 Volume: 6 Year: 2000 Keywords: Persistence Market Efficiency, X-DOI: 10.1080/13518470050020824 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020824 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:163-175 Template-Type: ReDIF-Article 1.0 Author-Name: Melendres Howe Author-X-Name-First: Melendres Author-X-Name-Last: Howe Title: Bayesian approach to yield curve modelling with application to the simulation of EMU environments: generating scenarios by modelling yield curve movements Abstract: A Bayesian approach to yield curve modelling is developed where information on the current and recent yield curves is used to generate yield curve scenarios, and a model is proposed that generates return distribution for bonds. The predictive power of the model is developed by comparing out-of-sample lagged realized yields with forecast yields, and it is demonstrated that the returns generated by this scenario approach and those generated using the standard time series approach are consistent. The model is applied to pre-EMU and post-EMU environments. This paper assesses the implications of different assumptions on the early post-EMU environment for international bond portfolio selection, as well as the immediate short-term effect of EMU on risk and return. Journal: The European Journal of Finance Pages: 176-195 Issue: 2 Volume: 6 Year: 2000 X-DOI: 10.1080/13518470050020833 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020833 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:176-195 Template-Type: ReDIF-Article 1.0 Author-Name: Bertrand Maillet Author-X-Name-First: Bertrand Author-X-Name-Last: Maillet Author-Name: Thierry Michel Author-X-Name-First: Thierry Author-X-Name-Last: Michel Title: Further insights on the puzzle of technical analysis profitability Abstract: This paper extends current results concerning technical analysis efficiency on the foreign exchange market and attempts to determine whether filtering the raw exchange rate series with some trading rule significantly changes its characteristics. Because of the non-normality of exchange rate series, bootstrap methods are used on the main daily exchange rates since 1974 to show technical analysis performance. The technical analysis strategy tested generates returns whose distribution is significantly different from the basic series. The robustness of the results is tested in and out-of-sample and an explanation of the technical analysis performance based on its filtering properties is suggested. Journal: The European Journal of Finance Pages: 196-224 Issue: 2 Volume: 6 Year: 2000 Keywords: International Finance Technical Analysis Performance Market Foreign Exchange Financial Forecasting Efficient Market Hypothesis, X-DOI: 10.1080/13518470050020842 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020842 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:196-224 Template-Type: ReDIF-Article 1.0 Author-Name: Ignacio Mauleon Author-X-Name-First: Ignacio Author-X-Name-Last: Mauleon Author-Name: Javier Perote Author-X-Name-First: Javier Author-X-Name-Last: Perote Title: Testing densities with financial data: an empirical comparison of the Edgeworth-Sargan density to the Student's t Abstract: The Edgeworth—Sargan density has been shown capable of capturing salient empirical regularities of financial data in some studies. The main purpose of the reported study is to compare its performance with other densities, most notably to the Student t. Both densities can account for thick tails, and asymmetry One important by product of the comparison is to test the existence of moments. The comparison of densities is carried out with daily financial observations, spanning 25 years of data from two major world stock markets. Attention is paid to the fitting of other empirical regularities, and especially to the peak, frequently found at the middle of the densities. Journal: The European Journal of Finance Pages: 225-239 Issue: 2 Volume: 6 Year: 2000 Keywords: Densities Comparison Edgeworth-SARGAN Student T Distributions Financial Data Testing Moment Existence, X-DOI: 10.1080/13518470050020851 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020851 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:225-239 Template-Type: ReDIF-Article 1.0 Author-Name: Matti Vir Author-X-Name-First: Matti Author-X-Name-Last: Vir Title: Analysing long memory and asymmetries Abstract: The paper presents evidence on nonlinearities in Finnish financial time series. The analysis concentrates on the so-called long-memory property which is examined using, various alternative test procedures. This analysis makes use of relatively long monthly Finnish time series which cover the period 1922-1996. The results give some evidence on long memory but one cannot say that the results would overwhelmingly support the existence of long memory in Finnish time series. There are, however, considerable differences between variables and the results are quite sensitive in terms of the treatment of short memory which also applies to different ways of prefiltering the data. Clearly more work is required to obtain more affirmative results in this respect. One way, of doing that is to apply asymmetric time models to find the source of nonlinearity. When that is done with the Finnish data some weak evidence on asymmetry is obtained. Journal: The European Journal of Finance Pages: 240-258 Issue: 2 Volume: 6 Year: 2000 Keywords: Long Memory Forecasting Nonlinear Models, X-DOI: 10.1080/13518470050020860 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050020860 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:2:p:240-258 Template-Type: ReDIF-Article 1.0 Author-Name: Nigel Meade Author-X-Name-First: Nigel Author-X-Name-Last: Meade Author-Name: Gerry Salkin Author-X-Name-First: Gerry Author-X-Name-Last: Salkin Title: The selection of multinational equity portfolios: forecasting models and estimation risk Abstract: The problem considered is the selection of a portfolio of international assets, particularly the forecasting of the inputs to a selection algorithm. Four models of the asset return generating process are considered, two of which ignore the international nature of the universe of assets, two which exploit it in different ways. Several estimation methods are considered for each component: expected return, variance and covariance of returns. The combinations of model and estimation method are first evaluated in terms of their forecasting performance for the components mentioned for the individual assets. The universe used is the components of the Financial Times Eurotrack 100 Index. Significant differences were found between the forecasting accuracy of the methods considered for each component. In the final stage of the analysis, a comparison of the returns on portfolios chosen using each combination showed a significant difference. The analysis suggests that the choice of estimation method is more critical than the choice of pricing model. Journal: The European Journal of Finance Pages: 259-279 Issue: 3 Volume: 6 Year: 2000 Keywords: Portfolio Selection Forecasting Estimation Risk, X-DOI: 10.1080/13518470050085094 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050085094 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:3:p:259-279 Template-Type: ReDIF-Article 1.0 Author-Name: David Lovatt Author-X-Name-First: David Author-X-Name-Last: Lovatt Author-Name: Ashok Parikh Author-X-Name-First: Ashok Author-X-Name-Last: Parikh Title: Stock returns and economic activity: the UK case Abstract: This paper investigates the relationships between real stock returns and a number of financial and economic variables for the UK economy for the period 1980 to 1994. We begin by discussing a theoretical model proposed by Balvers et al. and then re-estimate for the UK what may be regarded as an application of that model by Fama applied to the US market. This reproduces Fama's main results. For the UK we than suggest a slightly, different application of the Balvers model, the most important feature of which is the use of expectational macro-economic variables instead of Fama's use of leading values of industrial production. We then go on to investigate the unit root properties of the data and show that much of the data is indeed characterized by the presence of unit root non stationarity In the light of this, we propose an application of the Phillips-Loretan error-correction model and show that this provides a plausible relationship between real stock returns and most of the financial and economic variables. Journal: The European Journal of Finance Pages: 280-297 Issue: 3 Volume: 6 Year: 2000 Keywords: Stock Market Models Cointegration, X-DOI: 10.1080/13518470050085102 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050085102 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:3:p:280-297 Template-Type: ReDIF-Article 1.0 Author-Name: L. Copeland Author-X-Name-First: L. Author-X-Name-Last: Copeland Author-Name: Ping Wang Author-X-Name-First: Ping Author-X-Name-Last: Wang Title: Forecasting the returns on UK investment trusts: a comparison Abstract: The well known fact that investment trusts (closed-end mutual funds in the USA) trade at a discount means that the return to an investor depends not only on the change in net asset value (NAV), but also on changes in the discount over the holding period. Using daily data, this paper models the relationship between UK investment trust prices and NAV's using cointegration methodology then shows that the forecasts based on the, error correction mechanism (ECM) compare poorly with those from vector autoregressions. And then incorporates a number of modifications to the ECM in an attempt to improve the forecasts. In particular, modelling volatility persistance and allow for asymmetric resonses in the ECM. Journal: The European Journal of Finance Pages: 298-310 Issue: 3 Volume: 6 Year: 2000 Keywords: Cointegrations Var Mutual Funds Net Asset Value Ecm Garch Asymmetry, X-DOI: 10.1080/13518470050085111 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050085111 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:3:p:298-310 Template-Type: ReDIF-Article 1.0 Author-Name: David Brookfield Author-X-Name-First: David Author-X-Name-Last: Brookfield Author-Name: Phillip Ormrod Author-X-Name-First: Phillip Author-X-Name-Last: Ormrod Title: Credit agency regulation and the impact of credit ratings in the international bond market Abstract: The use of credit ratings in financial and other legal documents — both in the USA and Europe —, has led to a situation in which the major rating agencies have become (largely unwilling) participants in the legislative process. This situation has become partly formalized in the US (and is being repeated elsewhere in the European Union, Eastern Europe and Latin America) through the creation of officially 'recognized' agencies whose ratings now carry the imprimatur of the Securities and Exchange Commission. The purpose of this paper is to contribute to the debate on the necessity for formal legal status to be sustained in the market for bond credit ratings. In this context, the criteria for a credible rating agency are examined and evidence is provided on one element of the criteria which is under-researched: namely, the impact of the ratings in the market place. The influence of rating agencies in international capital markets is assessed through an analysis of the impact of ratings on the yields of bonds, represented by a comprehensive sample of actively traded debt. The sample contains analysis of ratings introductions on both new and seasoned debt and also examines the impact of ratings revisions. It is concluded that official recognition has no market-based role and it is argued that ratings are used by regulators because of the success of the major agencies in performing their market function. Journal: The European Journal of Finance Pages: 311-331 Issue: 4 Volume: 6 Year: 2000 Keywords: Credit Ratings Credit Agencies Formal Legal Status Impact On Yields Of Bonds, X-DOI: 10.1080/13518470050195092 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050195092 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:4:p:311-331 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Pierre Lequeux Author-X-Name-First: Pierre Author-X-Name-Last: Lequeux Title: Intraday data and hedging efficiency in interest spread trading Abstract: Three government bond futures contracts and their respective 3-month interest rate futures contracts traded on LIFFE are examined. The data period covers three years of observations, January 1994-December 1996, sampled at half-hourly intervals. Borrowing from the calculation of minimum variance hedge ratios, half-hourly minimum variance spread ratios (the ratio of one contract to another, which provides the minimum variance) are estimated for the above contracts. The hypothesis under examination is whether there is any value-added in estimating minimum spread ratios based on intraday data. Three spread ratios are defined: two ratios calculated from daily data and a third one based on intraday data. Evidence tends to indicate that spread ratios calculated from intraday data exhibit a substantially lower variance than the other two spread ratio speciications. Thus, it is shown that intraday data, in comparison with daily data, allow for lower hedging costs. Moreover, the use of intraday-based spread ratios might be a contributing factor to reducing the maximum cumulative loss potentially incurred while holding a spread position. Journal: The European Journal of Finance Pages: 332-352 Issue: 4 Volume: 6 Year: 2000 Keywords: Government Bond Futures Interest Rate Futures Intraday Data Hedging Efficiency Spread Ratios, X-DOI: 10.1080/13518470050195100 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050195100 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:4:p:332-352 Template-Type: ReDIF-Article 1.0 Author-Name: Simon Wolfe Author-X-Name-First: Simon Author-X-Name-Last: Wolfe Title: Structural effects of asset-backed securitization Abstract: This paper analyses the potential changes in the operational structure of deposit-taking financial institutions that securitize assets. Findings indicate that banks can create an asset securitization pipeline structure that enables them to increase their return on capital. In other words, through securitization banks can expand their loan provision business without increasing their liabilities or their capital levels. Using a contingent claims model, four factors that impact on the bank's decision to securitize are highlighted and analysed: (i) the level of deposit insurance; (ii) capital adequacy requirements; (iii) insolvency risk; and, (iv) the risk of credit enhancements. Furthermore, we identify key accounting and regulatory challenges that emerge for banks from the process of asset backed securitization. Journal: The European Journal of Finance Pages: 353-369 Issue: 4 Volume: 6 Year: 2000 Keywords: Asset-BACKED Securitization Return On Capital Deposit Insurance Capital Adequacy, X-DOI: 10.1080/13518470050195119 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470050195119 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:6:y:2000:i:4:p:353-369 Template-Type: ReDIF-Article 1.0 Author-Name: Felipe Aparicio Author-X-Name-First: Felipe Author-X-Name-Last: Aparicio Author-Name: Javier Estrada Author-X-Name-First: Javier Author-X-Name-Last: Estrada Title: Empirical distributions of stock returns: European securities markets, 1990-95 Abstract: The assumption that daily stock returns are normally distributed has long been disputed by the data. In this article the normality assumption is tested (and clearly rejected) using time series of daily stock returns for 13 European securities markets. More importantly, four alternative specifications are fitted to the data, overall support is found for the scaled- t distribution (and partial support for a mixture of two Normal distributions), and the magnitude of the error that stems from predicting returns by using the Normal distribution is quantified. Data also show that normality may be a plausible assumption for monthly (but not for daily) stock returns. Journal: The European Journal of Finance Pages: 1-21 Issue: 1 Volume: 7 Year: 2001 Keywords: Distributions Of Stock Returns Non-NORMALITY European Markets, X-DOI: 10.1080/13518470121786 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470121786 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:1:p:1-21 Template-Type: ReDIF-Article 1.0 Author-Name: Michael McKenzie Author-X-Name-First: Michael Author-X-Name-Last: McKenzie Author-Name: Heather Mitchell Author-X-Name-First: Heather Author-X-Name-Last: Mitchell Author-Name: Robert Brooks Author-X-Name-First: Robert Author-X-Name-Last: Brooks Author-Name: Robert Faff Author-X-Name-First: Robert Author-X-Name-Last: Faff Title: Power ARCH modelling of commodity futures data on the London Metal Exchange Abstract: A recent addition to the ARCH family of econometric models was introduced by Ding and co-workers wherein the power term by which the data is transformed was estimated within the model rather than being imposed by the researcher. This paper considers the ability of the Power GARCH class of models to capture the stylized features of volatility in a range of commodity futures prices traded on the London Metals Exchange (LME). The results of this procedure suggest that asymmetric effects are not generally present in the LME futures data. Further, unlike stock market data which is well described by the model, futures data is not as well described by the APGARCH model. Nested within the APGARCH model are several other models from the ARCH family. This paper uses the standard log likelihood procedure to conduct pairwise comparisons of the relative merits of each and the results suggest that it is the Taylor GARCH model which performs best. Journal: The European Journal of Finance Pages: 22-38 Issue: 1 Volume: 7 Year: 2001 Keywords: Power Arch London Metal Exchange Futures, X-DOI: 10.1080/13518470123011 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470123011 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:1:p:22-38 Template-Type: ReDIF-Article 1.0 Author-Name: Patricia Fraser Author-X-Name-First: Patricia Author-X-Name-Last: Fraser Author-Name: Andrew McKaig Author-X-Name-First: Andrew Author-X-Name-Last: McKaig Title: Basis variation and a common source of risk: evidence from UK futures markets Abstract: Using multiple equation Generalized Method of Moments (GMM) system estimation procedures and monthly data at the three maturity horizons of 6, 9 and 12 months, the paper explores whether conditional spreads between futures and spot rates on five contracts traded on LIFFE have a common predictable component driven by a single unobservable source of risk. The future contracts studied are: 3-month ECU; 3-month Euromark; FT100 Index; German Government Bond; and 3-month Short Sterling. The sample period is October 1989 through August 1996. Movement in the price of systematic risk is proxied by ex ante variables that have been shown to have predictive power for returns from bond and stock markets. These are: the return on the US Standard and Poor index; the return on the German Dax index; the UK and US 3-month treasury bill yield differential; the spread between the UK 20-year gilt yield and the UK 3-month treasury bill yield; the spread between the debenture and loan stock yield and, the 20-year gilt yield; the dividend yield on the FT Actuaries All Share index; and the change in the yields on UK government consol 2.5% bonds. The results indicate that common variation in bases exists and that relative conditional covariances are constant over all horizons. The evidence reported also suggests that, at short horizons, common basis variation is associated with both spot price forecasts and futures market risk while, at medium and long horizons, the dominant source of the reported common basis variation is due to the systematic risk associated with the futures position. Journal: The European Journal of Finance Pages: 39-62 Issue: 1 Volume: 7 Year: 2001 Keywords: Multiple Equation Gmm Futures Maturity Horizon Common Predictable Variation In Bases Latent Variable Mode Systematic Risk Futures Risk Premium Spot Price Forecasts, X-DOI: 10.1080/13518470122691 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470122691 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:1:p:39-62 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Mallin Author-X-Name-First: Chris Author-X-Name-Last: Mallin Author-Name: Kean Ow-Yong Author-X-Name-First: Kean Author-X-Name-Last: Ow-Yong Author-Name: Martin Reynolds Author-X-Name-First: Martin Author-X-Name-Last: Reynolds Title: Derivatives usage in UK non-financial listed companies Abstract: In this paper, the authors present the results of a 1997 survey of derivative used by some 231 UK non-financial companies. The questionnaire instrument used in this research is based upon the postal survey methodology of Bodnar et al. (1995). A glossary was attached to the questionnaire survey to enable consistency in defining terminology used. A direct comparison between US and UK findings was undertaken together with an analysis of results from other published surveys conducted in the last four years. We find broadly similar trends in the use of derivatives. The results of our research show that derivatives usage to hedge financial price risk is well established amongst larger UK companies. Our findings support the size effect phenomena reported in other empirical studies. The primary objective cited in using derivatives was to manage fluctuations in accounting earnings, a focus that is inconsistent with the theoretical view of paying attention to cash flow benefits of hedging. The predominant issues of concern to UK inancial directors are the lack of evaluation of risk of proposed derivative transactions and the level of transaction costs incurred. This contrasts with the greater concerns of credit risk and market risk raised by their US counterparts in Bodnar's study. A possible explanation for these concerns could be the impact of the currency crisis happening in Asia especially for firms that are exposed to the affected currencies. It also suggests a lower level of sophistication and liquidity in UK derivatives market. The value of developing a basis for benchmarking good management practice in the use of derivatives to manage financial price risk represents an important area of research. Such a framework is of relevance to the demand and supply side of the derivatives market and to Government policy makers. Journal: The European Journal of Finance Pages: 63-91 Issue: 1 Volume: 7 Year: 2001 Keywords: Derivatives Risk Management, X-DOI: 10.1080/13518470121892 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470121892 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:1:p:63-91 Template-Type: ReDIF-Article 1.0 Author-Name: Fabio Mercurio Author-X-Name-First: Fabio Author-X-Name-Last: Mercurio Author-Name: Juan Moraleda Author-X-Name-First: Juan Author-X-Name-Last: Moraleda Title: A family of humped volatility models Abstract: Recent empirical studies on interest rate derivatives have shown that the volatility structure of interest rates is frequently humped. Several researchers have modelled interest rate dynamics in such a way that humped volatility structures are possible and yet analytical formulas for European options on discount bonds are derived. However, these models are Gaussian, and hence interest rates may become negative. Here, a family of interest rate models is proposed where (i) humped volatility structures are possible; (ii) the interest rate volatility may depend on the level of the interest rates themselves; and (iii) the valuation of interest rate derivative securities can be accomplished through recombining lattices. The second item implies that a number of probability distributions are possible for the yield curve dynamics, and some of them ensure that interest rates remain positive. Proportional models of the Ritchken and Sankarasubramanian type and the Black and Karasinski model are proposed. To ensure computational tractability the embedding of all models in this paper in either the Ritchken and Sankarasubramanian or the Hull and White class of models is demonstrated. Journal: The European Journal of Finance Pages: 93-116 Issue: 2 Volume: 7 Year: 2001 Keywords: Term Structure Of Interest Rates Interest Rate Derivatives Humped Volatility Models, X-DOI: 10.1080/13518470122553 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470122553 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:2:p:93-116 Template-Type: ReDIF-Article 1.0 Author-Name: Gauri Ghai Author-X-Name-First: Gauri Author-X-Name-Last: Ghai Author-Name: Maria De Boyrie Author-X-Name-First: Maria Author-X-Name-Last: De Boyrie Author-Name: Shahid Hamid Author-X-Name-First: Shahid Author-X-Name-Last: Hamid Author-Name: Arun Prakash Author-X-Name-First: Arun Author-X-Name-Last: Prakash Title: Estimation of global systematic risk for securities listed in multiple markets Abstract: In this era of rapid globalization of financial markets there has been a substantial increase in cross-listings of stocks in foreign and regional capital markets. As many as a third to a half of the stocks in some major exchanges are foreign listed. The multiple listings of stocks has major implications for the concept of systematic risk. This paper demonstrates that the estimator for systematic risk and the methodology itself changes when stocks are listed in multiple markets. The paper suggests general procedures, using maximum information from the multiple markets, to obtain the estimator of beta under a variety of assumptions about the error terms of the market models in the different capital markets. The assumptions pertain both to the volatilities of the abnormal returns in each market, and to the relationship between the markets. Journal: The European Journal of Finance Pages: 117-130 Issue: 2 Volume: 7 Year: 2001 Keywords: Capital Markets Systematic Risk Estimators, X-DOI: 10.1080/13518470121761 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470121761 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:2:p:117-130 Template-Type: ReDIF-Article 1.0 Author-Name: R. Dacco Author-X-Name-First: R. Author-X-Name-Last: Dacco Author-Name: S. Satchell Author-X-Name-First: S. Author-X-Name-Last: Satchell Title: Forward and spot exchange rates in a bivariate TAR framework Abstract: Structural exchange rate models explain only a small part of the movements in dollar exchange rate. Recent empirical work has focused on the failure to account for nonlinearities in the data generating mechanism, as an explanation of this bad performance. Here two bivariate threshold autoregressive models for the spot and forward exchange rates are considered. In the first model the regimes are determined by the log difference of the two rates; in the second one the regimes are driven by the forward spot no-arbitrage condition. These processes are able to capture the 'swing' behaviour observed in the exchange rate market. Finally the forecasting ability of the models for the dollar/DM exchange rate is evaluated by stochastic simulation. Journal: The European Journal of Finance Pages: 131-143 Issue: 2 Volume: 7 Year: 2001 Keywords: Nonlinear Techniques Seemingly Unrelated Bivariate Threshold Autoregression Subitar Model Stochastic Simulation Dollar Dm Exchange Rate, X-DOI: 10.1080/13518470122779 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470122779 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:2:p:131-143 Template-Type: ReDIF-Article 1.0 Author-Name: Ming-Shiun Pan Author-X-Name-First: Ming-Shiun Author-X-Name-Last: Pan Author-Name: Y. Angela Liu Author-X-Name-First: Y. Angela Author-X-Name-Last: Liu Author-Name: Herbert Roth Author-X-Name-First: Herbert Author-X-Name-Last: Roth Title: Term structure of return correlations and international diversification: evidence from European stock markets Abstract: The paper examines the term structure of correlations of weekly returns for the stock market in the US, Japan and nine European countries between 1988 and 1994. Stock indices are decomposed into permanent and temporary components using a canonical correlation analysis and then short- and long-horizon return correlations are calculated from these two price components. The empirical results reveal that the relationships of return correlations among these stock markets are not stable across return horizons. While correlations, in general, tend to increase with return horizons, there are several cases showing that correlations decline when investment horizons increase. Journal: The European Journal of Finance Pages: 144-164 Issue: 2 Volume: 7 Year: 2001 Keywords: Stock Markets Weekly Returns Term Structure Correlation Analysis Short Horizon Long Horizon, X-DOI: 10.1080/13518470122843 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470122843 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:2:p:144-164 Template-Type: ReDIF-Article 1.0 Author-Name: Cecilio Mar-Molinero Author-X-Name-First: Cecilio Author-X-Name-Last: Mar-Molinero Author-Name: Carlos Serrano-Cinca Author-X-Name-First: Carlos Author-X-Name-Last: Serrano-Cinca Title: Bank failure: a multidimensional scaling approach Abstract: Mathematical models for the prediction of company failure are by now well established. Most of the work on multivariate modelling of distress prediction attempts to obtain a score that gives the failure probability of a company. A data set of 66 Spanish banks, 29 of which failed, is used to show that multidimensional scaling (MDS) techniques can be of use to produce simple tools for the analysis of financial health. MDS has the advantage of producing pictorial representations that are easy to interpret and use. This is done without loss of statistical rigour given the very close links between MDS and other multivariate statistical techniques that are normally used in the analysis of failure. As an example, the technique is used to trace the financial path of an ailing bank. Journal: The European Journal of Finance Pages: 165-183 Issue: 2 Volume: 7 Year: 2001 Keywords: Bankruptcy Prediction Financial Ratios Multidimensional Scaling Box And Whiskers Diagrams Spanish Banking System, X-DOI: 10.1080/13518470122202 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470122202 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:2:p:165-183 Template-Type: ReDIF-Article 1.0 Author-Name: Shmuel Hauser Author-X-Name-First: Shmuel Author-X-Name-Last: Hauser Author-Name: Azriel Levy Author-X-Name-First: Azriel Author-X-Name-Last: Levy Author-Name: Uzi Yaari Author-X-Name-First: Uzi Author-X-Name-Last: Yaari Title: Trading frequency and the efficiency of price discovery in a non-dealer market Abstract: The increasing popularity of non-dealer security markets that offer automated, computer-based, continuous trading reflects a presumption that institutionally-set trading sessions are economically obsolete. This theoretical paper investigates the effect of the trading frequency, a key feature of the trading mechanism, on the efficiency of price discovery in a non-dealer market. By tracing the market pricing error to the correlation structures of arriving information and pricing errors of individual traders, the effect of diverging expectations on error-based and overall return volatility is isolated. The analysis reveals that, due to a portfolio effect, an increase in the trading time interval has contradictory effects on the portion of return volatility stemming from pricing errors. The greater accumulation of information increases error-based return volatility, but the greater volume and number of traders per session have the opposite effect. The net effect on overall return volatility can go either way. It is found that the return volatility of heavily traded securities is likely to be minimized under continuous trading, but that of thinly traded securities may be minimized under discrete trading at moderate time intervals. The latter is more likely to occur the greater is the divergence of expectations among traders. These findings challenge the presumption that automated continuous trading in a non-dealer market is more efficient than discrete trading for all securities, regardless of trading volume. The findings are applicable to all economies, but have special importance for developing countries where typically a single market is dominated by small issues and a low volume of trade. As a by-product of the analysis, it is shown how to correct the biased estimate of inter-session price volatility when observations are less frequent than the trading sessions themselves. Journal: The European Journal of Finance Pages: 187-197 Issue: 3 Volume: 7 Year: 2001 Keywords: Trading Frequency Non-DEALER Security Markets Price Discovery Portfolio Effect Return Volatility, X-DOI: 10.1080/13518470122687 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470122687 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:3:p:187-197 Template-Type: ReDIF-Article 1.0 Author-Name: Robert Tompkins Author-X-Name-First: Robert Author-X-Name-Last: Tompkins Title: Implied volatility surfaces: uncovering regularities for options on financial futures Abstract: It is well known that the implied volatilities of options on the same underlying asset differ across strike prices and terms to expiration. However, the reason for this remains unclear. Before the development of theory to explain this phenomenon, it may be helpful to better understand the empirical record of implied volatility surfaces. If regularities are discovered which are stable over time, this may aid the development of theories to explain implied volatility surfaces and provide a means to test alternative models. This paper identifies these regularities and subsequent research will examine the implications of these results. While a number of papers have examined individual option markets and identified smile patterns, it is not clear whether the conclusions found are based upon idiosyncrasies of a particular market or more generally apply to options in other markets. This research fills this gap in the literature by examining sixteen options markets on financial futures (comprising four asset classes) and compares the smile patterns across markets. Furthermore, this analysis considers a longer period of analysis than previously examined in the literature. This allows assessment of the stability of the implied volatility patterns for a variety of subperiods and testing of models outside of sample. Journal: The European Journal of Finance Pages: 198-230 Issue: 3 Volume: 7 Year: 2001 Keywords: Implied Volatility Surfaces Volatility Smiles Shocks Risk Neutral Processes Skewness Kurtosis Heterokurtosis, X-DOI: 10.1080/13518470110040375 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110040375 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:3:p:198-230 Template-Type: ReDIF-Article 1.0 Author-Name: Vivek Bhargava Author-X-Name-First: Vivek Author-X-Name-Last: Bhargava Author-Name: Robert Brooks Author-X-Name-First: Robert Author-X-Name-Last: Brooks Author-Name: D. K. Malhotra Author-X-Name-First: D. K. Author-X-Name-Last: Malhotra Title: Implied volatilities, stochastic interest rates, and currency futures options valuation: an empirical investigation Abstract: Different models of pricing currency call and put options on futures are empirically tested. Option prices are determined using different models and compared to actual market prices. Option prices are determined using historical as well as implied volatility. The different models tested include both constant and stochastic interest rate models. To determine if the model prices are different from the market prices, regression analysis and paired t-tests are performed. To see which model misprices the least, root mean square errors are determined. It is found that better results are obtained when implied volatility is used. Stochastic interest rate models perform better than constant interest rate models. Journal: The European Journal of Finance Pages: 231-246 Issue: 3 Volume: 7 Year: 2001 Keywords: Currency Options Implied Volatility Stochastic Interest Rates Currency Futures Options, X-DOI: 10.1080/13518470121944 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470121944 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:3:p:231-246 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Jochum Author-X-Name-First: Christian Author-X-Name-Last: Jochum Title: Is the covariance of international stock market returns regime dependent? Abstract: The application of a SWARCH model to stock market returns allows one to endogenously determine the regime dependence of the stock market volatility. Comparison of the results from a sample of daily data from five major stock markets shows that the majority of the markets switch regimes simultaneously. This fact is used to investigate the relation between market volatility and the behaviour of the variance—;covariance matrix. It is found that the international variance—;covariance matrix is not stable and that changes in the matrix are dependent on the volatility regime. A high level of variance causes an increase in the average correlation coefficient. The co-movement of the markets is further described by a steady increase in the covariance over the whole sample period. It can be shown that both the time component and the regime dependence of the average correlation have separate and significant explanatory power. Journal: The European Journal of Finance Pages: 247-268 Issue: 3 Volume: 7 Year: 2001 Keywords: Swarch Correlation International Financial Markets, X-DOI: 10.1080/13518470010042210 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470010042210 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:3:p:247-268 Template-Type: ReDIF-Article 1.0 Author-Name: Ah-Boon Sim Author-X-Name-First: Ah-Boon Author-X-Name-Last: Sim Author-Name: Ralf Zurbruegg Author-X-Name-First: Ralf Author-X-Name-Last: Zurbruegg Title: Optimal hedge ratios and alternative hedging strategies in the presence of cointegrated time-varying risks Abstract: This paper utilizes the inter-temporal relationship between the FTSE-100 stock index and its futures price level between 1992 and 1999 to examine the characteristics of several minimum variance hedge ratios and the performances of several alternative hedging strategies for dynamic portfolio management in the presence of cointegrated time-varying risks. Earlier studies neglected the importance of cointegration between the two variables which resulted in biased estimates. These studies, in general, also assume that the hedging period is the same as the estimation time interval. This paper also looks at several key issues when the holding period is longer than the estimation period, such as the construction of optimal minimum variance hedge ratios, and the trade-off between transaction costs and risk reduction. Journal: The European Journal of Finance Pages: 269-283 Issue: 3 Volume: 7 Year: 2001 Keywords: Hedge Ratios Hedging Strategies Cointegrated Time-VARYING Risk Ftse-100, X-DOI: 10.1080/13518470110046153 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110046153 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:3:p:269-283 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Abstract: Journal: The European Journal of Finance Pages: 285-285 Issue: 4 Volume: 7 Year: 2001 X-DOI: 10.1080/13518470152652019 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470152652019 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:4:p:285-285 Template-Type: ReDIF-Article 1.0 Author-Name: Giulio Cifarelli Author-X-Name-First: Giulio Author-X-Name-Last: Cifarelli Title: Introduction Abstract: Journal: The European Journal of Finance Pages: 286-288 Issue: 4 Volume: 7 Year: 2001 X-DOI: 10.1080/13518470152652028 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470152652028 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:4:p:286-288 Template-Type: ReDIF-Article 1.0 Author-Name: Mehdi Azzouzi Author-X-Name-First: Mehdi Author-X-Name-Last: Azzouzi Author-Name: Ian Nabney Author-X-Name-First: Ian Author-X-Name-Last: Nabney Title: Dynamic local models for segmentation and prediction of financial time series Abstract: In the analysis and prediction of many real-world time series, the assumption of stationarity is not valid. Aspecial form of non-stationarity, where the underlying generator switches between (approximately) stationary regimes, seems particularly appropriate for financial markets. We introduce a new model which combines a dynamic switching (controlled by a hidden Markov model) and a non-linear dynamical system. We show how to train this hybrid model in a maximum likelihood approach and evaluate its performance on both synthetic and financial data. Journal: The European Journal of Finance Pages: 289-311 Issue: 4 Volume: 7 Year: 2001 Keywords: Time Series Segmentation Hidden Variational Techniques Bayesian Error Bars Markov Models State Space Models, X-DOI: 10.1080/13518470110071155 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110071155 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:4:p:289-311 Template-Type: ReDIF-Article 1.0 Author-Name: Christophe Morel Author-X-Name-First: Christophe Author-X-Name-Last: Morel Title: Stock selection using a multi-factor model - empirical evidence from the French stock market Abstract: Using a Barra-type factor model, we have attempted to determine whether it is possible to beat the benchmark by taking advantage of anomalies established in the financial empirical literature. More specifically we have built an equity premium model based on three sets of factors (accounting variables, stock market characteristics and sector indicators) using a Bayesian method corrected for heteroscedasticity to estimate risk premiums, a technique that takes agents' learning into account. The results are encouraging: first, the factors that carried most weight on the equity premiums corroborated the results of empirical studies described in the financial literature, secondly, the portfolios constructed from our methodology and simulated outside our sample, returned higher performance than the benchmark and rewarded the supplement of volatility. Journal: The European Journal of Finance Pages: 312-334 Issue: 4 Volume: 7 Year: 2001 Keywords: Anomalies Bayesian Estimation Equity Premium Multi-FACTOR Model, X-DOI: 10.1080/13518470110071137 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110071137 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:4:p:312-334 Template-Type: ReDIF-Article 1.0 Author-Name: Foort Hamelink Author-X-Name-First: Foort Author-X-Name-Last: Hamelink Title: Nonlinear analysis for forecasting currencies: are they useful to the portfolio manager? Abstract: The importance of a time-varying specification for both the return and the risk of financial assets is well known. The purpose of this study is to investigate if some of the most recently developed econometric models, combined with technical indicators often used by practitioners, can significantly predict future returns. While most studies have focused on either univariate series or in-sample analyses of a given econometric specification, this study considers a multivariate framework where a US based investor daily reallocates a portfolio of three currencies (Deutschmark, Swiss Franc and Japanese Yen). Series of three years out-of-sample forecasts are analysed in terms of risk and return and it is shown that some of the tested speciications can indeed signiicantly predict future daily returns and correlations over this three-year period. Journal: The European Journal of Finance Pages: 335-355 Issue: 4 Volume: 7 Year: 2001 Keywords: Time-VARYING Specification Financial Assets Econometric Models Technical Indicators Future Returns Multivariate Framework, X-DOI: 10.1080/13518470110071146 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110071146 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:7:y:2001:i:4:p:335-355 Template-Type: ReDIF-Article 1.0 Author-Name: Greet Asselbergh Author-X-Name-First: Greet Author-X-Name-Last: Asselbergh Title: Financing firms with restricted access to financial markets: the use of trade credit and factoring in Belgium Abstract: Many authors emphasize the implications of restricted access to financial markets for both small and new firms. The paper reports investigations into the use of alternative means of financing. More specifically, the use of trade credit and factoring are examined. Indeed, following the trade credit management literature both institutional and macro economic restrictions on small business finance can be overcome by 'larger suppliers' extending trade credit to their smaller customers. However, the DSO-rate cannot be used to measure the supplier's willingness to invest in trade credit as it depends on both suppliers' and customers' characteristics. The decision to extend trade credit is therefore approximated by the will to control its management and operationalized by the decision to factor or not to factor. The results of our study are twofold. First, factoring is mainly used by small and medium-sized companies. Moreover, when looking at the characteristics of the factor's customers, new companies facing huge capital expenditure programmes and seasonal sales decide to factor. The prejudice about factoring being a last resort means of finance is, however, not supported: companies that decide to use factoring are indeed less profitable, but this is simply due to their high growth and/or capital intensive investment programmes. Journal: The European Journal of Finance Pages: 2-20 Issue: 1 Volume: 8 Year: 2002 Keywords: Factoring, Trade Credit, Small Business Finance, New Business Finance, Belgium, X-DOI: 10.1080/13518470110076286 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110076286 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:1:p:2-20 Template-Type: ReDIF-Article 1.0 Author-Name: Gianna Boero Author-X-Name-First: Gianna Author-X-Name-Last: Boero Author-Name: Costanza Torricelli Author-X-Name-First: Costanza Author-X-Name-Last: Torricelli Title: The information in the term structure of German interest rates Abstract: This paper tests the Expectations Hypothesis (EH) of the term structure of interest rates using new data for Germany. The German term structure appears to forecast future short-term interest rates surprisingly well, compared with previous studies with US data, while it has lower predictive power for long-term interest rates. However, the direction suggested by the coefficient estimates is consistent with that implied by the EH, that is when the term spread widens, long rates increase. The use of instrumental variables to deal with possible measurement errors in the data significantly improves regressions for the long rates. Moreover, re-estimation with proxy variables to account for the possibility of time-varying term premia confirms that the evolution of both short and long rates corresponds to the predictions of the EH and that most of the information is in the term spread. These results are important as they suggest that monetary policy in Germany could be guided by the slope of the term structure. Journal: The European Journal of Finance Pages: 21-45 Issue: 1 Volume: 8 Year: 2002 Keywords: Expectations Hypothesis, Interest Rate, Term Structure, Term Premia, Forward Rates, Measurement Errors, Volatility, X-DOI: 10.1080/13518470110040609 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110040609 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:1:p:21-45 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Hanousek Author-X-Name-First: Jan Author-X-Name-Last: Hanousek Author-Name: Libor Nemecek Author-X-Name-First: Libor Author-X-Name-Last: Nemecek Title: Mispricing and lasting arbitrage between parallel markets in the Czech Republic Abstract: If co-existing parallel markets are efficient, then arbitrage will maintain a correct pricing relationship. A related question is whether two parallel emerging markets offering more or less the same securities but using different institutional designs, can behave as a single, fully integrated market. In this paper an explicit model of price convergence (with transaction costs) is introduced, in which price differences are studied using levels of arbitrage activity. For the empirical analysis two parallel markets in the Czech Republic are used — the Prague Stock Exchange (PSE) and the RMS (over-the-counter system). In particular, the degree of arbitrage activity is studied for different segments of the PSE and the evolution of arbitrage in the early history of these emerging markets. The empirical results provide evidence of market linkage for actively traded stocks. A significant relationship is found between the segment of the market to which a given firm belongs and the estimated level of arbitrage trading. Moreover, the level of arbitrage activity increases over time for all market segments, and as the markets mature, the differences among the segments gradually disappear. Journal: The European Journal of Finance Pages: 46-69 Issue: 1 Volume: 8 Year: 2002 Keywords: Arbitrage, Emerging Markets, Integration Of Emerging Markets, Mispricing, X-DOI: 10.1080/13518470110047639 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110047639 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:1:p:46-69 Template-Type: ReDIF-Article 1.0 Author-Name: David McMillan Author-X-Name-First: David Author-X-Name-Last: McMillan Author-Name: Alan Speight Author-X-Name-First: Alan Author-X-Name-Last: Speight Title: Temporal aggregation, volatility components and volume in high frequency UK bond futures Abstract: This paper examines volatility in UK Long Gilt and Short Sterling futures over several intra-day frequencies. Initial GARCH model estimates are found to exhibit remaining residual structure and to be inconsistent with theoretical temporal aggregation results for all frequencies other than the full day. Further estimates suggest that intra-day volatility is more adequately characterized by a component model which decomposes volatility into short-run effects which dominate intra-day periods and long-run effects which dominate inter-day horizons, and that such components are associated with the arrival of information flows as proxied by volume. This component volatility model is also able to account for all dependence in Long Gilt futures at frequencies of 15 minutes and lower, and in Short Sterling futures at 1 hour and lower. Journal: The European Journal of Finance Pages: 70-92 Issue: 1 Volume: 8 Year: 2002 Keywords: Conditional Variance, Component Model, Intra, Temporal Aggregation, Futures Markets, X-DOI: 10.1080/13518470110073676 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110073676 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:1:p:70-92 Template-Type: ReDIF-Article 1.0 Author-Name: Nelson Manuel Areal Author-X-Name-First: Nelson Manuel Author-X-Name-Last: Areal Author-Name: Manuel Jose Da Rocha Armada Author-X-Name-First: Manuel Jose Da Rocha Author-X-Name-Last: Armada Title: The long-horizon returns behaviour of the Portuguese stock market1 Abstract: In the last few years several research studies have challenged the traditional weak-form efficiency tests of the stock market. These studies suggested an alternative to the random walk model, containing temporary and permanent components. If stocks follow such a model then the traditional tests, using returns computed for short intervals would be unable to detect them. To investigate the evidence for such models in the Portuguese stock market ten stock indexes were created. This is a pioneer study of the Portuguese stock market, and uses nominal, real and excess returns, computed for longer horizons. Three methodologies were used: variance ratios, ordinary least squares regressions and weighted least squares regressions. The statistical significance of the results was studied using traditional parametric tests as well as non-parametric tests. The evidence is mixed, as the presence of tendencies towards mean aversion and mean reversion were detected. Results also show that the evidence is very sensitive to the methodology used and the signifcance tests performed. These results, however, do not necessarily reject the weak-form market efficiency hypothesis. Journal: The European Journal of Finance Pages: 93-122 Issue: 1 Volume: 8 Year: 2002 Keywords: Market Efficiency, Stock Market Anomalies, Statistical Simulation Methods, Monte Carlo Methods, X-DOI: 10.1080/13518470110076303 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110076303 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:1:p:93-122 Template-Type: ReDIF-Article 1.0 Author-Name: Laura Cavallo Author-X-Name-First: Laura Author-X-Name-Last: Cavallo Author-Name: Stefania Rossi Author-X-Name-First: Stefania Author-X-Name-Last: Rossi Title: Do environmental variables affect the performance and technical efficiency of the European banking systems? A parametric analysis using the stochastic frontier approach Abstract: The paper compares the efficiency of the European banking systems in view of the constitution of the European Monetary Union. Since competition among banks will increase, it is important to identify the most efficient banking system able to play a role in that market. A parametric approach is adopted, based on the estimation of a stochastic cost frontier. This methodology enables one to measure X-inefficiency and to model it as a function of environmental variables which may influence firms' efficiency. By means of this analysis it is possible to identify the most efficient banking systems and to focus on the determinants of deviations from cost minimizing. The analysis highlights significant efficiency gaps among the performances of banks in different countries and of different institutional types. In particular, it is found that the Mittel-European model is the one that operates closest to the efficient frontier. This may indicate that, compared with separated banks, the universal banking system allows for production plans which come closer to the optimal frontier. The analysis suggests that, at the beginning of European Monetary Union, national barriers and regulatory frameworks are still responsible for deviation from the efficient frontiers. Journal: The European Journal of Finance Pages: 123-146 Issue: 1 Volume: 8 Year: 2002 Keywords: Stochastic Cost Frontier, Productivity, Technical Efficiency, Cost Efficiency, Banking Systems, X-DOI: 10.1080/13518470110076277 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110076277 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:1:p:123-146 Template-Type: ReDIF-Article 1.0 Author-Name: David T. Llewellyn Author-X-Name-First: David T. Author-X-Name-Last: Llewellyn Title: An analysis of the causes of recent banking crises Abstract: The incidence of systemic banking crises has risen over the past twenty years and the costs have been high. Although each country's experience has country-specific factors, several common elements appear in most crisis countries: (1) volatility in the macro economy; (2) the inheritance of structural weaknesses in the economy and financial system; (3) hazardous banking practices; (4) hazardous incentive structures and moral hazard within the financial system; (5) ineffective regulation; (6) weak monitoring and supervision by official agencies; (7) the absence of effective market discipline on banks, and (8) structurally unsound corporate governance mechanisms within banks and their borrowing customers. Causes of such crises are complex and a myopic focus on single factors (e. g. instability in the macro economy, weak regulation, etc.) misses the essential feature of interrelated and multidimensional causal factors. Although macro-instability has been a common feature, and may often have been the proximate cause, banking crises usually emerge because instability in the economy reveals existing weaknesses within the banking system. Journal: The European Journal of Finance Pages: 152-175 Issue: 2 Volume: 8 Year: 2002 Month: 6 X-DOI: 10.1080/13518470110071182 File-URL: http://hdl.handle.net/10.1080/13518470110071182 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:152-175 Template-Type: ReDIF-Article 1.0 Author-Name: Adi Schnytzer Author-X-Name-First: Adi Author-X-Name-Last: Schnytzer Author-Name: Yuval Shilony Author-X-Name-First: Yuval Author-X-Name-Last: Shilony Title: On the timing of inside trades in a betting market Abstract: The paper presents a game-theoretical model to examine the equilibrium timing of insider trades in a market with a finite life span. An example of such a market is that for horse betting, where insiders must bet before the race or their information is of no value. We show that there is no equilibrium in pure strategies but that there is a unique, sub game perfect equilibrium in mixed strategies. The issue arises because waiting to bet may lead to information leaks whereas betting too soon may imply paying too high a price for the bet. We derive empirical hypotheses and test them. Journal: The European Journal of Finance Pages: 176-186 Issue: 2 Volume: 8 Year: 2002 Month: 6 X-DOI: 10.1080/13518470110071164 File-URL: http://hdl.handle.net/10.1080/13518470110071164 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:176-186 Template-Type: ReDIF-Article 1.0 Author-Name: Bent Jesper Christensen Author-X-Name-First: Bent Jesper Author-X-Name-Last: Christensen Author-Name: Charlotte Strunk Hansen Author-X-Name-First: Charlotte Strunk Author-X-Name-Last: Hansen Title: New evidence on the implied-realized volatility relation Abstract: We consider the relation between the volatility implied in an option's price and the subsequently realized volatility. Earlier studies on stock index options have found biases and inefficiencies in implied volatility as a forecast of future volatility. More recently, Christensen and Prabhala find that implied volatility in at-the-money one-month OEX call options on the S&P 100 index in fact is an unbiased and efficient forecast of ex-post realized index volatility after the 1987 stock market crash. In this paper, the robustness of the unbiasedness and efficiency result is extended to a more recent period covering April 1993 to February 1997. As a new contribution, implied volatility is constructed as a trade weighted average of implied volatilities from both in-the-money and out-of-the-money options and both puts and calls. We run a horse race between implied call, implied put, and historical return volatility. Several robustness checks, including a new simultaneous equation approach, underscore our conclusion, that implied volatility is an efficient forecast of realized return volatility. Journal: The European Journal of Finance Pages: 187-205 Issue: 2 Volume: 8 Year: 2002 Month: 6 X-DOI: 10.1080/13518470110071209 File-URL: http://hdl.handle.net/10.1080/13518470110071209 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:187-205 Template-Type: ReDIF-Article 1.0 Author-Name: Keith Pond Author-X-Name-First: Keith Author-X-Name-Last: Pond Title: Administration of recoveries in individual insolvency: case studies of two UK banks Abstract: Against a background of greater competition, market saturation and falling margins over the past decade UK banks have sought greater efficiencies in credit and risk assessment procedures, especially with personal lending products. In the same way they have attempted to reduce costs associated with the monitoring and collection of bad debts. Failure to monitor debt recoveries adequately, however, can lead to further pressure on profits. This paper uses a case study approach to outline key strategies adopted by two major banks in respect of formal insolvency, the 'tip' of a considerable debt recovery 'iceberg'. The paper illustrates the reactions and changing administrative practices of banks, as unsecured creditors, and draws on empirical research that has charted the effect of the Insolvency Act 1986 as regards individual debtors. The collection of bad debts presents banks with risks, heightened by adverse selection and moral hazard problems greater than those applicable to credit risk assessment. However, while the 'downside risk' equates with the debt write-off plus transaction costs the 'upside potential' has elements of both tangible and intangible benefit. The paper goes on to review specific centralization and outsourcing policies against the critical risks in insolvency. It also suggests that the bargaining power of major creditors, including banks, is increased through these activities, to the possible detriment of smaller creditors and of debtors. Journal: The European Journal of Finance Pages: 206-221 Issue: 2 Volume: 8 Year: 2002 Month: 6 X-DOI: 10.1080/13518470110071191 File-URL: http://hdl.handle.net/10.1080/13518470110071191 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:206-221 Template-Type: ReDIF-Article 1.0 Author-Name: Eric J. Levin Author-X-Name-First: Eric J. Author-X-Name-Last: Levin Author-Name: Robert E. Wright Author-X-Name-First: Robert E. Author-X-Name-Last: Wright Title: Estimating the price elasticity of demand in the London stock market Abstract: The hypothesis that demand curves for individual stocks slope downwards is typically investigated by empirical analysis of stock price movements following events that cause shifts in demand or supply. However, it is difficult to attribute observed price movements between downward sloping demand curves and information conveyed by the event. In this paper an econometric approach, based on market-maker response to unexpected changes in inventory, is used to separate out the slope of the demand curve from information effects and estimate the slopes of the demand curves for twenty stocks included in the Financial Times-Stock Exchange 100 Share Index (FTSE100). The analysis suggests that downward sloping demand curves would decrease the price by about 7.5% for a 1% increase in the number of outstanding shares. Journal: The European Journal of Finance Pages: 222-237 Issue: 2 Volume: 8 Year: 2002 Month: 6 X-DOI: 10.1080/13518470110071218 File-URL: http://hdl.handle.net/10.1080/13518470110071218 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:222-237 Template-Type: ReDIF-Article 1.0 Author-Name: Jane M. Binner Author-X-Name-First: Jane M. Author-X-Name-Last: Binner Author-Name: Alicia M. Gazely Author-X-Name-First: Alicia M. Author-X-Name-Last: Gazely Author-Name: Shu-Heng Chen Author-X-Name-First: Shu-Heng Author-X-Name-Last: Chen Title: Financial innovation and Divisia monetary indices in Taiwan: a neural network approach Abstract: In this paper a weighted index measure of money using the 'Divisia' formulation is constructed for the Taiwan economy and its inflation forecasting potential is compared with that of its traditional simple sum counterpart. This research extends an earlier study by Gazely and Binner by examining the theory that rapid financial innovation, particularly during the financial liberalization of the 1980s, has been responsible for the poor performance of conventional simple sum monetary aggregates. The Divisia index is adjusted in two ways to allow for the major financial innovations that Taiwan has experienced since the 1970s. The technique of neural networks is used to allow a completely flexible mapping of the variables and a greater variety of functional form than is currently achievable using conventional econometric techniques. Results suggest that superior tracking of inflation is possible for networks that employ a Divisia M2 measure of money that has been adjusted to incorporate a learning mechanism to allow individuals to gradually alter their perceptions of the increased productivity of money. Divisia measures of money appear to offer advantages over their simple sum counter parts as macroeconomic indicators. Journal: The European Journal of Finance Pages: 238-247 Issue: 2 Volume: 8 Year: 2002 Month: 6 X-DOI: 10.1080/13518470110071173 File-URL: http://hdl.handle.net/10.1080/13518470110071173 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:2:p:238-247 Template-Type: ReDIF-Article 1.0 Author-Name: R. D. Brooks Author-X-Name-First: R. D. Author-X-Name-Last: Brooks Author-Name: R. W. Faff Author-X-Name-First: R. W. Author-X-Name-Last: Faff Author-Name: M. McKenzie Author-X-Name-First: M. Author-X-Name-Last: McKenzie Title: Time varying country risk: an assessment of alternative modelling techniques Abstract: Three different techniques for the estimation of a time-varying beta are investigated: a bivariate GARCH model, the Schwert and Seguin approach, and the Kalman filter method. These approaches are applied to a set of monthly Morgan Stanley country index data over the period 1970 to 1995 and their relative performances compared. In-sample forecast tests of the performance of each of these methods for generating conditional beta suggest that the GARCH-based estimates of risk generate the lowest forecast error although these are not necessarily significantly less than those generated by the other techniques considered. Journal: The European Journal of Finance Pages: 249-274 Issue: 3 Volume: 8 Year: 2002 Keywords: Time, Country Risk, Garch, Kalman Filter, X-DOI: 10.1080/13518470110074837 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110074837 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:3:p:249-274 Template-Type: ReDIF-Article 1.0 Author-Name: M. A. H. Dempster Author-X-Name-First: M. A. H. Author-X-Name-Last: Dempster Author-Name: C. M. Jones Author-X-Name-First: C. M. Author-X-Name-Last: Jones Title: Can channel pattern trading be profitably automated? Abstract: Financial markets, such as the global foreign exchange (FX) market, often exhibit trending behaviour. Within such trends, the market level oscillates with changes in market consensus. Continued oscillations of this type result in the formation of wave patterns within the underlying trend known as channels, which are used by technical analysts as trade entry signals. A sample space of such channels has been constructed from a set of US dollar/British pound Spot FX tick data from 1989-1997 using pattern recognition algorithms and the profitability of trading using such patterns has been estimated. A number of attributes of the resulting collection of channels has been subjected to statistical analysis with the aim of classifying patterns that can be traded profitably using a number of simple trading rules. Results of this analysis show that there exist statistically significant links between the channels' attributes and profitability. Journal: The European Journal of Finance Pages: 275-301 Issue: 3 Volume: 8 Year: 2002 Keywords: Technical Analysis, Technical Trading, Currency Trading, Intra, High Frequency Financial Data, Multivariate Discriminant Analysis, Pattern Recognition, X-DOI: 10.1080/13518470110052831 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110052831 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:3:p:275-301 Template-Type: ReDIF-Article 1.0 Author-Name: Holger Claessen Author-X-Name-First: Holger Author-X-Name-Last: Claessen Author-Name: Stefan Mittnik Author-X-Name-First: Stefan Author-X-Name-Last: Mittnik Title: Forecasting stock market volatility and the informational efficiency of the DAX-index options market Abstract: Alternative strategies for predicting stock market volatility are examined. In out-of-sample forecasting experiments implied-volatility information, derived from contemporaneously observed option prices or history-based volatility predictors, such as GARCH models, are investigated to determine if they are more appropriate for predicting future return volatility. Employing German DAX-index return data it is found that past returns do not contain useful information beyond the volatility expectations already reflected in option prices. This supports the efficient market hypothesis for the DAX-index options market. Journal: The European Journal of Finance Pages: 302-321 Issue: 3 Volume: 8 Year: 2002 Keywords: Market Efficiency, Implied Volatility, Garch, Combined Forecasting, X-DOI: 10.1080/13518470110074828 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110074828 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:3:p:302-321 Template-Type: ReDIF-Article 1.0 Author-Name: Kim Nummelin Author-X-Name-First: Kim Author-X-Name-Last: Nummelin Author-Name: Mika Vaihekoski Author-X-Name-First: Mika Author-X-Name-Last: Vaihekoski Title: World capital markets and Finnish stock returns Abstract: The paper explores issues related to time-varying global equity market integration from a Finnish perspective. Finland is an interesting market since profound economic changes and financial deregulation have taken place since the mid-1980s. Using Finnish firm size ranked portfolios and a conditional four-factor asset pricing model, several restrictions on asset behaviour are examined. It is found that a proxy for changing market integration — lagged foreign equity ownership — has a significant impact on the relative importance of local and global risk factors. Significant differences are found between the pricing of shares that were freely-available to all (unrestricted shares) and domestic investors only (restricted shares). Results also suggest that major capital market reforms profoundly affect the degree of market integration, but local risk factors do not become redundant. Journal: The European Journal of Finance Pages: 322-343 Issue: 3 Volume: 8 Year: 2002 Keywords: Conditional Asset Pricing, Integration, Partial Segmentation, Intertemporal Gmm, Finnish Stock Market, X-DOI: 10.1080/13518470010007418 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470010007418 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:3:p:322-343 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Abstract: Journal: The European Journal of Finance Pages: 345-345 Issue: 4 Volume: 8 Year: 2002 X-DOI: 10.1080/1351847022000047565 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847022000047565 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:4:p:345-345 Template-Type: ReDIF-Article 1.0 Author-Name: Domenico Sartore Author-X-Name-First: Domenico Author-X-Name-Last: Sartore Author-Name: Marcello Esposito Author-X-Name-First: Marcello Author-X-Name-Last: Esposito Title: Guest Editorial Abstract: Journal: The European Journal of Finance Pages: 346-351 Issue: 4 Volume: 8 Year: 2002 X-DOI: 10.1080/1351847021000015803 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000015803 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:4:p:346-351 Template-Type: ReDIF-Article 1.0 Author-Name: Roberto Golinelli Author-X-Name-First: Roberto Author-X-Name-Last: Golinelli Author-Name: Sergio Pastorello Author-X-Name-First: Sergio Author-X-Name-Last: Pastorello Title: Modelling the demand for M3 in the Euro area Abstract: Modelling monetary transmission is central to understanding the role of monetary policy in the Euro area, and money demand is commonly seen as a link in that transmission mechanism. Since the beginning of the 1990s, many studies have suggested that the demand for Euro area broad money is stable over the long run because the estimation of an area-wide demand for money function provides an appropriate solution to a number of potential causes of misspecification of the single-country relations (such as spillover effects and currency substitution), and enjoys the positive consequences of a statistical averaging effect. On the other side, it must be stressed that previous benefits can be achieved at the risk of introducing parameter heterogeneity into the area-wide relationship. In order to shed some light on the issue, this study is first devoted to an analysis of the main econometric features of the money M3 demand at Euro area and single country levels, then it compares the two sets of results in a common framework that, differently from all previous studies, explicitly takes account of the potential nonstationarity of the variables of interest in both estimation and testing phases. The comparison shows that the area-wide money demand is more smooth and less subject to shocks than the single-country ones. Finally, a number of poolability tests run over subgroups highlight that low precision associated with the estimates of the parameters of the national models makes it impossible to exclude that their long-run specifications do in fact coincide. Journal: The European Journal of Finance Pages: 371-401 Issue: 4 Volume: 8 Year: 2002 Keywords: Money Demand, Area-WIDE, Country-SPECIFIC, Poolability, X-DOI: 10.1080/13518470210160911 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210160911 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:4:p:371-401 Template-Type: ReDIF-Article 1.0 Author-Name: A. Espasa Author-X-Name-First: A. Author-X-Name-Last: Espasa Author-Name: E. Senra Author-X-Name-First: E. Author-X-Name-Last: Senra Author-Name: R. Albacete Author-X-Name-First: R. Author-X-Name-Last: Albacete Title: Forecasting inflation in the European Monetary Union: A disaggregated approach by countries and by sectors Abstract: Inflation in the European Monetary Union is measured by the Harmonized Indices of Consumer Prices (HICP) and it can be analysed by breaking down the aggregate index in two different ways. One refers to the breakdown into price indexes corresponding to big groups of markets throughout the European countries and another considers the HICP by countries. Both disaggregations are of interest because in each one, the component prices are not fully cointegrated, having more than one common factor in their trends. The paper shows that the breakdown by group of markets improves the European inflation forecasts and constitutes a framework in which general and specific indicators can be introduced for further improvements. Journal: The European Journal of Finance Pages: 402-421 Issue: 4 Volume: 8 Year: 2002 Keywords: Core Inflation, Cointegration, Common Factor, Univariate Models, Veqcm, Bottom-UP, Approach, X-DOI: 10.1080/13518470210167284 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210167284 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:4:p:402-421 Template-Type: ReDIF-Article 1.0 Author-Name: Asmara Jamaleh Author-X-Name-First: Asmara Author-X-Name-Last: Jamaleh Title: Explaining and forecasting the euro/dollar exchange rate through a non-linear threshold model Abstract: A linear econometric error correction model (ECM) model is built, based on short interest rates, gross domestic product (GDP) growth expectations and inflation differentials, in order to explain the euro/dollar exchange rate dynamics and provide reliable forecasts. This specification performs well. However, the introduction of non-linear threshold dynamics provides a better understanding of 'abnormal' features other than deviations from long-run equilibrium levels, allowing for the possibility of asymmetric behaviour. Empirical evidence of this is found in the actual dynamics of the euro. The non-linear specification performs better than the linear model in both in-sample fitting and out-of-sample forecasting, showing that fundamentals hold, working also through some non-linear mechanism, in explaining the euro/dollar dynamics. Journal: The European Journal of Finance Pages: 422-448 Issue: 4 Volume: 8 Year: 2002 Keywords: Euro Dollar Exchange Rate, Economic Fundamentals, Long-RUN, Equilibrium, Outliers, Non-LINEARITY, Threshold Models, X-DOI: 10.1080/13518470210167301 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210167301 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:4:p:422-448 Template-Type: ReDIF-Article 1.0 Author-Name: Silvia Sgherri Author-X-Name-First: Silvia Author-X-Name-Last: Sgherri Title: The fiscal dimension of a common monetary policy: results with a non-Ricardian global model Abstract: The paper studies the interaction of fiscal and monetary policy within an Economic and Monetary Union (EMU). Results suggest that, in a model in which bonds and money are counted as net wealth, an important source of cross-country heterogeneity in response to a common monetary shock is the differences in national economies' budgetary positions. In particular, we note that centralising seigniorage revenues may lead, in the long term, to wealth redistribution across countries. Although institutional arrangements such as the Stability Pact might not be necessary to ensure fiscal sustainability, its strict enforcement is shown to be associated with overall ever-lasting benefits. Transition to the new steady state is, however, likely to be remarkably costly for high-debt EMU countries. Finally, different degrees of efficiency characterising European credit markets do not seem to play a major role in explaining asymmetric responses. Journal: The European Journal of Finance Pages: 449-479 Issue: 4 Volume: 8 Year: 2002 Keywords: Economic And Monetary Union, Asymmetric Monetary Transmissions, Stability, And Growth Pact, Ricardian Non-NEUTRALITIES, Multimod Mark Iii, X-DOI: 10.1080/1351847021000025759 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000025759 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:4:p:449-479 Template-Type: ReDIF-Article 1.0 Author-Name: Domenico Sartore Author-X-Name-First: Domenico Author-X-Name-Last: Sartore Author-Name: Lucia Trevisan Author-X-Name-First: Lucia Author-X-Name-Last: Trevisan Author-Name: Michele Trova Author-X-Name-First: Michele Author-X-Name-Last: Trova Author-Name: Francesca Volo Author-X-Name-First: Francesca Author-X-Name-Last: Volo Title: US dollar/Euro exchange rate: a monthly econometric model for forecasting Abstract: The intent of this paper is the construction of an econometric model able to produce reliable and reasonable forecasts for the US dollar/Euro real exchange rate. In order to achieve this aim, an area-wide model is analysed. The aggregation is motivated by the fact that the Euro-zone is under a single monetary policy. Furthermore, a more parsimonious parametric model enables one to consider an important source of non-stationarity given by the presence of structural breaks using the multivariate cointegration analysis. Against the Meese-Rogoff critique, the out-of-sample one-step-ahead forecasts using actual values of the exogenous produced by the estimated VECM are reasonably satisfactory. Journal: The European Journal of Finance Pages: 480-501 Issue: 4 Volume: 8 Year: 2002 Keywords: Real Exchange Rates, Cointegration, Structural Breaks, Area-WIDE Model, Forecasting, X-DOI: 10.1080/13518470210160894 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210160894 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:8:y:2002:i:4:p:480-501 Template-Type: ReDIF-Article 1.0 Author-Name: Miguel Martinez Sedano Author-X-Name-First: Miguel Martinez Author-X-Name-Last: Sedano Title: Legal constraints, transaction costs and the evaluation of mutual funds Abstract: The paper considers the legal restrictions on investment and the transaction costs related to optimal turnover that affect mutual funds. A method is developed for mutual fund performance evaluation when both these factors are included in the reference portfolios, and it is applied to a sample of available Spanish mutual funds. The poor performance results reflected in previous studies are not significantly modified. However, when net returns on the reference portfolios are used in the evaluation the performance is clearly improved. Journal: The European Journal of Finance Pages: 199-218 Issue: 3 Volume: 9 Year: 2003 Keywords: legal restrictions, transaction costs, net returns, reference portfolio, performance, X-DOI: 10.1080/13518470010011260 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470010011260 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:3:p:199-218 Template-Type: ReDIF-Article 1.0 Author-Name: Hossein Asgharian Author-X-Name-First: Hossein Author-X-Name-Last: Asgharian Title: Are highly leveraged firms more sensitive to an economic downturn? Abstract: The paper tests the hypothesis that highly leveraged firms lose market shares to their less leveraged rivals in an industry downturn. Both parametric and semiparametric regression methods are applied to analyse the relationships between firm performance and leverage. It is found that the highly leveraged firms in distressed industries face relatively lower sales growth and stock returns but are still able to retain a relatively higher growth in profitability. The findings may suggest that the decline in sales of the highly leveraged firms might be a result of managers' preferences to decrease the activity of product lines with low profitability. Journal: The European Journal of Finance Pages: 219-241 Issue: 3 Volume: 9 Year: 2003 Keywords: financial distress, firm performance, nonlinear model, semiparametric regression, robust regression, X-DOI: 10.1080/13518470210132381 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210132381 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:3:p:219-241 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Stephane Chauvin Author-X-Name-First: Stephane Author-X-Name-Last: Chauvin Title: FX volatility forecasts and the informational content of market data for volatility Abstract: The paper examines the medium-term forecasting ability of several alternative models of currency volatility. The data period covers more than eight years of daily observations, January 1991 to March 1999, for the spot exchange rate, 1- and 3-month volatility of the DEM/JPY, GBP/DEM, GBP/USD, USD/CHF, USD/DEM and USD/JPY. Comparing with the results of 'pure' time series models, the reported work investigates whether market implied volatility data can add value in terms of medium-term forecasting accuracy. This is done using data directly available from the marketplace in order to avoid the potential biases arising from 'backing out' volatility from a specific option pricing model. On the basis of the over 34 000 out-of-sample forecasts produced, evidence tends to indicate that, although no single volatility model emerges as an overall winner in terms of forecasting accuracy, the 'mixed' models incorporating market data for currency volatility perform best most of the time. Journal: The European Journal of Finance Pages: 242-272 Issue: 3 Volume: 9 Year: 2003 Keywords: forecasting accuracy, implied volatility, model combination, volatility models, X-DOI: 10.1080/13518470210151100 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210151100 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:3:p:242-272 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Pedersen Author-X-Name-First: Christian Author-X-Name-Last: Pedersen Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Title: Can NN-algorithms and macroeconomic data improve OLS industry returns forecasts?* Abstract: Using an extensive range of macroeconomic indicators and a number of two-stage models mixing OLS and a non-parametric approach known as the nearest neighbour algorithm, the authors analyse the potential for improving forecasts of US industry returns over those built by OLS on industry-specific variables only. Basic performance is measured by the average cross-sectional correlation over time between the 55 forecasted returns and the realized returns across industries. Since investors and asset managers typically want a steady performance over time, the volatility of this cross-sectional correlation is further taken into account in an adaptation of the Sharpe Ratio. Strong evidence is found in favour of certain macroeconomic factors as dominant industry return predictors, and some two-stage models based either purely on OLS or a mix between OLS and the non-linear model can lift both cross-sectional forecasting correlation and Sharpe Ratio. However, viewed overall in relation to the benchmark OLS model, performance is not consistently improved by any particular model. Journal: The European Journal of Finance Pages: 273-289 Issue: 3 Volume: 9 Year: 2003 Keywords: nearest neighbour algorithm, OLS industry returns, forecasting, X-DOI: 10.1080/1351847032000051244 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000051244 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:3:p:273-289 Template-Type: ReDIF-Article 1.0 Author-Name: Graham Smith Author-X-Name-First: Graham Author-X-Name-Last: Smith Author-Name: Hyun-Jung Ryoo Author-X-Name-First: Hyun-Jung Author-X-Name-Last: Ryoo Title: Variance ratio tests of the random walk hypothesis for European emerging stock markets Abstract: The hypothesis that stock market price indices follow a random walk is tested for five European emerging markets, Greece, Hungary, Poland, Portugal and Turkey, using the multiple variance ratio test. In four of the markets, the random walk hypothesis is rejected because of autocorrelation in returns. For the Istanbul market, which had markedly higher turnover than the other markets in the 1990s, the stock price index follows a random walk. This contrasts with the results of earlier research, carried out for periods of lower turnover, which rejected the random walk hypothesis. Journal: The European Journal of Finance Pages: 290-300 Issue: 3 Volume: 9 Year: 2003 Keywords: emerging markets, random walk hypothesis, stock prices, variance ratio tests, X-DOI: 10.1080/1351847021000025777 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000025777 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:3:p:290-300 Template-Type: ReDIF-Article 1.0 Author-Name: Bruce Burton Author-X-Name-First: Bruce Author-X-Name-Last: Burton Author-Name: A. Alasdair Lonie Author-X-Name-First: A. Alasdair Author-X-Name-Last: Lonie Author-Name: David Power Author-X-Name-First: David Author-X-Name-Last: Power Title: Insider trading, growth opportunities and the market reaction to new financing announcements Abstract: The paper examines three hypotheses about the effect of insider trading on the market response to new financing announcements (NFAs) using a sample of disclosures made by UK firms between 1989 and 1991. The study demonstrates first that no systematic relationships exist between the market response to NFAs and pre-announcement insider trading. Second, contrary to the predictions of John and Mishra (1990), the values of growth indicators do not differ significantly between firms that are subject to insider buying and selling prior to NFAs. Third, while there is some evidence to suggest that insider trading and growth prospects influence the market reaction to debt issue announcements, the evidence is not pervasive across growth measures and does not extend to equity issues. This final result helps to resolve an apparent contradiction between the signalling models of John and Mishra (1990), and John and Lang (1991), and suggests that prior studies of the market reaction to NFAs are not significantly flawed by their failure to consider the signalling role of pre-announcement insider trading. The findings are also shown to be relevant to the current debate about whether, and how, insider trading regulations should be tightened. Journal: The European Journal of Finance Pages: 301-322 Issue: 4 Volume: 9 Year: 2003 X-DOI: 10.1080/1351847021000025786 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000025786 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:4:p:301-322 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Bo Jakobsen Author-X-Name-First: Jan Bo Author-X-Name-Last: Jakobsen Author-Name: Torben Voetmann Author-X-Name-First: Torben Author-X-Name-Last: Voetmann Title: Post-acquisition performance in the short and long run. Evidence from the Copenhagen Stock Exchange 1993-1997 Abstract: The paper investigates the short-run price adjustment around acquisition announcements and the long-run upward bias of cross-sectional average buy-and-hold returns. The geometric Brownian motion model is applied to decompose the cross-sectional average long-run returns into transformed mean and volatility components. The decomposition improves the interpretation of security performance. The methodology is demonstrated on the security performance of bidding firms listed on the Copenhagen Stock Exchange. The most surprising finding is that the long-run abnormal return after three years is not significantly different from zero. This implies that the bidding firms do not under-perform relative to the market. This result stands in contrast to findings in other studies and it may reflect that earlier studies do not adjust correctly for the volatility component. These current findings indicate that the market efficiency hypothesis is intact in the long run. It is only in the very short run, a few days around acquisition announcements, that the market makes a significant adjustment to uphold the efficiency hypothesis. Journal: The European Journal of Finance Pages: 323-342 Issue: 4 Volume: 9 Year: 2003 Keywords: event-study methodology, wealth relatives, long-run returns, acquisitions, right-skewness, X-DOI: 10.1080/1351847031000074475 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847031000074475 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:4:p:323-342 Template-Type: ReDIF-Article 1.0 Author-Name: Juan-Pedro Gomez Author-X-Name-First: Juan-Pedro Author-X-Name-Last: Gomez Author-Name: Fernando Zapatero Author-X-Name-First: Fernando Author-X-Name-Last: Zapatero Title: Asset pricing implications of benchmarking: a two-factor CAPM Abstract: The paper considers the equilibrium effects of an institutional investor whose performance is benchmarked to an index. In a partial equilibrium setting, the objective of the institutional investor is modelled as the maximization of expected utility (an increasing and concave function, in order to accommodate risk aversion) of final wealth minus a benchmark. In equilibrium this optimal strategy gives rise to the two-beta CAPM: together with the market beta a new risk-factor (termed active management risk) is brought into the analysis. This new beta is defined as the normalized (to the benchmark's variance) covariance between the asset excess return and the excess return of the market over the benchmark index. The empirical test supports the model's predictions. The cross-section return on the active management risk is positive and significant, especially after 1990, when institutional investors became the representative agent of the market. Journal: The European Journal of Finance Pages: 343-357 Issue: 4 Volume: 9 Year: 2003 Keywords: asset pricing, benchmark portfolio, relative performance, X-DOI: 10.1080/1351847021000025768 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000025768 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:4:p:343-357 Template-Type: ReDIF-Article 1.0 Author-Name: Jose Montalvo Author-X-Name-First: Jose Author-X-Name-Last: Montalvo Title: Liquidity and market makers: a pseudo-experimental analysis with ultrahigh frequency data Abstract: An analysis is given of the effect of market makers on liquidity using a transaction-level database. For this purpose, the focus is on a financial market where a change in regulations created explicitly the category of market maker in 1997 and that date is used to construct a pseudo-experiment. In contrast with other studies that use ultrahigh frequency data, the days to be analysed are selected using a statistical procedure to match observations before and after the change in regulation. The propensity score is used to perform the matching. After choosing the days, an estimate of an ordered probit model is made to explain the intraday behaviour of price changes. The coefficient estimates from the ordered probit model are used to calculate a measure of liquidity based on the steepness of the response function of price changes to volume. The results show that liquidity, measured in this way, has not been affected by the introduction of the market makers. Journal: The European Journal of Finance Pages: 358-378 Issue: 4 Volume: 9 Year: 2003 Keywords: market makers, change in regulations, ordered probit model, liquidity, X-DOI: 10.1080/1351847021000025795 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000025795 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:4:p:358-378 Template-Type: ReDIF-Article 1.0 Author-Name: Balasingham Balachandran Author-X-Name-First: Balasingham Author-X-Name-Last: Balachandran Title: UK interim and final dividend reductions: a note on price reaction Abstract: Price reactions to interim and final dividend reductions are found to be significantly negative and stronger for interim dividend reductions. Although the market reacted negatively around final dividend reduction announcements it bounced back to its prior level within one month of the announcements. The magnitude of price reactions to dividend reductions is found to be statistically related to the size of the dividend reduction, the post-announcement effect from day 2 to day 20, the pre-announcement effect from day -20 to day -2, the gearing ratio and the dummy variable interim versus final dividend reduction. Journal: The European Journal of Finance Pages: 379-390 Issue: 4 Volume: 9 Year: 2003 Keywords: price reactions, UK dividend reductions, interim shock effect, X-DOI: 10.1080/1351847022000028430 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847022000028430 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:4:p:379-390 Template-Type: ReDIF-Article 1.0 Author-Name: Manuel J. da Rocha Armada Author-X-Name-First: Manuel J. Author-X-Name-Last: da Rocha Armada Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Abstract: Journal: The European Journal of Finance Pages: 392-392 Issue: 5 Volume: 9 Year: 2003 X-DOI: 10.1080/1351847032000166039 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000166039 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:392-392 Template-Type: ReDIF-Article 1.0 Author-Name: Olivier Brandouy Author-X-Name-First: Olivier Author-X-Name-Last: Brandouy Author-Name: Pascal Barneto Author-X-Name-First: Pascal Author-X-Name-Last: Barneto Author-Name: Lawrence Leger Author-X-Name-First: Lawrence Author-X-Name-Last: Leger Title: Asymmetric information, imitative behaviour and communication: price formation in an experimental asset market Abstract: The paper describes experimental results from a simulated stock market with manipulation of asymmetric information and communication, including conditions intended to promote imitative behaviour and rumour. Price discovery was inefficient when the presence of insiders was disguised, compared to a homogeneous expectations baseline. When the presence of insiders was revealed observed prices became efficient with respect to bad news but not with respect to good news, possibly suggesting loss-averse behaviour. With free communication there was a decrease in both efficiency and price volatility—insider information was masked by noise. Price formation under these conditions was similar to baseline, but with weak evidence of speculative pricing. It is conjectured that other factors than informational noise may be necessary determinants of herd behaviour, but further work is indicated. Journal: The European Journal of Finance Pages: 393-419 Issue: 5 Volume: 9 Year: 2003 Keywords: experimental markets, limitation, rumour, asymmetric information, X-DOI: 10.1080/1351847032000087786 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000087786 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:393-419 Template-Type: ReDIF-Article 1.0 Author-Name: Per Bjarte Solibakke Author-X-Name-First: Per Bjarte Author-X-Name-Last: Solibakke Title: Validity of discrete-time stochastic volatility models in non-synchronous equity markets Abstract: The paper investigates the validity of versions of discrete-time stochastic volatility models for index series known to contain component stocks exhibiting non-synchronous trading. The efficient method of moments (EMM) is used to fit versions of the discrete-time stochastic volatility (SV) model. The EMM methodology confronts moment conditions generated by a score generator (SNP) that are valid by construction. The moment generator suggests non-linearity in the index series. The EMM construction shows that a classical discrete time stochastic volatility model is rejected. An extended model incorporating an asymmetric volatility specification validates all the moment scores. Option values from Black and Scholes (BS) and Monte Carlo simulations (MC) seem significantly different. The results suggest that BS does not price asymmetry adequately. Asymmetry suggests increased market risk inducing higher BS call prices and lower (higher) BS put pricing for ATM and OTM options (ITM) relative to MC. Journal: The European Journal of Finance Pages: 420-448 Issue: 5 Volume: 9 Year: 2003 Keywords: non-synchronous trading, discrete-time stochastic volatility, efficient method of moments, X-DOI: 10.1080/1351847032000087795 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000087795 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:420-448 Template-Type: ReDIF-Article 1.0 Author-Name: Jongwoo Lee Author-X-Name-First: Jongwoo Author-X-Name-Last: Lee Author-Name: Dean Paxson Author-X-Name-First: Dean Author-X-Name-Last: Paxson Title: Confined exponential approximations for the valuation of American options Abstract: We provide an alternative analytic approximation for the value of an American option using a confined exponential distribution with tight upper bounds. This is an extension of the Geske and Johnson compound option approach and the Ho et al. exponential extrapolation method. Use of a perpetual American put value, and then a European put with high input volatility is suggested in order to provide a tighter upper bound for an American put price than simply the exercise price. Numerical results show that the new method not only overcomes the deficiencies in existing two-point extrapolation methods for long-term options but also further improves pricing accuracy for short-term options, which may substitute adequately for numerical solutions. As an extension, an analytic approximation is presented for a two-factor American call option. Journal: The European Journal of Finance Pages: 449-474 Issue: 5 Volume: 9 Year: 2003 Keywords: confined exponential distribution, analytical approximations, tight upper bounds, two-factor American option, X-DOI: 10.1080/1351847032000082796 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000082796 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:449-474 Template-Type: ReDIF-Article 1.0 Author-Name: Joao Amaro De Matos Author-X-Name-First: Joao Amaro Author-X-Name-Last: De Matos Author-Name: Paula Antao Author-X-Name-First: Paula Author-X-Name-Last: Antao Title: Market illiquidity and bounds on European option prices Abstract: The paper analyses the impact of illiquidity of a stock paying no dividends on the pricing of European options written on that stock. In particular, it is shown how illiquidity generates price bounds on an option on this stock, even in the absence of other imperfections, such as transaction costs and trading constraints, or the assumption of stochastic volatility. Moreover, price bounds are shown to be asymmetric with respect to the option price under perfect liquidity. This fact explains, under some conditions, the appearance of a smile effect when the implied volatility is estimated from the mid-quote. Journal: The European Journal of Finance Pages: 475-498 Issue: 5 Volume: 9 Year: 2003 Keywords: illiquidity, stock, dividends, European options, price bounds, smile effect, X-DOI: 10.1080/1351847032000087777 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000087777 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:475-498 Template-Type: ReDIF-Article 1.0 Author-Name: Wai Mun Fong Author-X-Name-First: Wai Mun Author-X-Name-Last: Fong Author-Name: Kim Hock See Author-X-Name-First: Kim Hock Author-X-Name-Last: See Title: Basis variations and regime shifts in the oil futures market Abstract: The conditional volatility of crude oil futures returns is modelled as a regime switching process. The model features transition probabilities that are functions of the basis. Consistent with the theory of storage, in volatile periods, an increase in backwardation is associated with an increase in the likellihood of switching to or remaining in the high-volatility state. Conditional on regimes, GARCH persistence is significantly reduced. Out-of-sample tests show that incorporating regime shifts improves the accuracy of short-term volatility forecasts. Journal: The European Journal of Finance Pages: 499-513 Issue: 5 Volume: 9 Year: 2003 Keywords: crude oil futures, conditional volatility, regime switching, forecasting, GARCH persistence, X-DOI: 10.1080/1351847032000082808 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000082808 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:499-513 Template-Type: ReDIF-Article 1.0 Author-Name: Isabel Vieira Author-X-Name-First: Isabel Author-X-Name-Last: Vieira Title: Evaluating capital mobility in the EU: a new approach using swaps data Abstract: The level of capital mobility prevailing within a group of core European Union (EU) countries is evaluated by means of cointegration-based tests of the covered interest parity (CIP). Unlike previous studies, this one concentrates on long maturities, investigating three to ten-year assets, and employing swap rates as a means of covering foreign exchange risk. Although CIP has not been previously assessed for EU long-term interest rates, such evaluation has practical interest. In fact, given EU member states' scarcity of mechanisms to react to asymmetric shocks, financial markets may become one major source of adjustment and stabilization. To this end, it is the mobility of long-term capital that is of critical importance. The analysis in this paper suggests that long-term financial flows appear to be completely unrestrained only between domestic Dutch and German markets. Journal: The European Journal of Finance Pages: 514-532 Issue: 5 Volume: 9 Year: 2003 Keywords: financial integration, capital mobility, covered interest parity, X-DOI: 10.1080/1351847032000082817 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000082817 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:5:p:514-532 Template-Type: ReDIF-Article 1.0 Author-Name: Raphael Markellos Author-X-Name-First: Raphael Author-X-Name-Last: Markellos Author-Name: Terence Mills Author-X-Name-First: Terence Author-X-Name-Last: Mills Title: Asset pricing dynamics Abstract: This paper is concerned with the issue of dynamics in financial data and asset pricing models such as the CAPM. A literature review in this area is undertaken and highlights the need for a modern time series econometric approach in asset pricing. Such an approach is discussed and deals with problems related to structural breaks and microstructures, dynamics in the mean and variance process, and non-stationary regressions and cointegration. An empirical application using UK stock market data demonstrates the merit of the proposed methodology in correcting market model regressions. Journal: The European Journal of Finance Pages: 533-556 Issue: 6 Volume: 9 Year: 2003 Keywords: Capital Asset Pricing Model, time series, econometrics, UK market model, X-DOI: 10.1080/1351847032000082547 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000082547 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:6:p:533-556 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Brooks Author-X-Name-First: Chris Author-X-Name-Last: Brooks Author-Name: Simon Burke Author-X-Name-First: Simon Author-X-Name-Last: Burke Title: Information criteria for GARCH model selection Abstract: In this paper, a set of appropriately modified information criteria for selection of models from the AR-GARCH class is derived. It is argued that unmodified or naively modified traditional information criteria cannot be used for order determination in the context of conditionally heteroscedastic models. The models selected using the modified criteria are then used to forecast both the conditional mean and the conditional variance of two high frequency exchange rate series. The analysis indicates that although the use of such model selection methods does lead to significantly improved forecasting accuracies for the conditional variance in some instances, these improvements are by no means universal. The use of these criteria to jointly select conditional mean and conditional variance model orders leads to performance degradation for the conditional mean forecasts compared to models which do not allow for the heteroscedasticity. Journal: The European Journal of Finance Pages: 557-580 Issue: 6 Volume: 9 Year: 2003 Keywords: Akaike information criterion, Schwarz information criterion, GARCH, high frequency financial data, exchange rate prediction, volatility forecasting, X-DOI: 10.1080/1351847021000029188 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000029188 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:6:p:557-580 Template-Type: ReDIF-Article 1.0 Author-Name: Matilde Olvido Fernandez Author-X-Name-First: Matilde Olvido Author-X-Name-Last: Fernandez Author-Name: Juan Samuel Baixauli Author-X-Name-First: Juan Samuel Author-X-Name-Last: Baixauli Title: Motives for partial acquisitions between firms in the spanish stock market Abstract: The paper analyses the motivations for inter-company investment on the Spanish Stock Market through the study of a sample of significant acquisitions reported to the CNMV (the Spanish Securities and Exchange Commission) by quoted firms. By analysing the sign of the cumulative abnormal returns (CAR) and of the correlations among the gains produced by the operation, an attempt is made to find out which motives predominate of the three most important ones suggested by the literature for takeovers: synergy, agency and hubris. Empirical evidence is presented that in the Spanish Stock Market the main motive for acquiring a holding is similar to synergy, especially in partial acquisitions with positive total gains. However, in the samples with negative total gains a main motive similar to hubris always appears. The analysis takes into account the size of the investment and distinguishes between the first report and subsequent ones. Results are similar to those obtained by other authors for takeovers in the US Stock Market, except that in this sample, agency motives do not appear clearly. Journal: The European Journal of Finance Pages: 581-601 Issue: 6 Volume: 9 Year: 2003 Keywords: partial acquisition, event study, seemingly unrelated regression, bootstrap simulations, correlation between gains, X-DOI: 10.1080/1351847032000051956 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000051956 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:6:p:581-601 Template-Type: ReDIF-Article 1.0 Author-Name: Frank Riedel Author-X-Name-First: Frank Author-X-Name-Last: Riedel Title: Heterogeneous time preferences and interest rates—the preferred habitat theory revisited Abstract: The influence of heterogeneous time preferences on the term structure is studied in the framework of a continuous-time pure exchange economy, in which agents have, apart from differential time preferences, the same degree of relative risk aversion. A closed-form solution for the financial equilibrium is obtained. In equilibrium, one long-term bond and one short-term bond form a complete market. Agents use these bonds to finance their consumption plans. The long-term bond is bought by agents with a long habitat. The short rate is a weighted average of the short rates which prevail in homogeneous economies populated by one type of agent only. It is shown by example that heterogeneity of time preferences can produce additional humps in the yield curve. Journal: The European Journal of Finance Pages: 3-22 Issue: 1 Volume: 10 Year: 2004 Keywords: time preferences, term structure, interest rates, Preferred Habitat Theory, heterogeneity, X-DOI: 10.1080/13518470210160885 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210160885 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:1:p:3-22 Template-Type: ReDIF-Article 1.0 Author-Name: Seth Armitage Author-X-Name-First: Seth Author-X-Name-Last: Armitage Title: Returns after personal tax on UK equity and gilts, 1919-1998 Abstract: This paper investigates whether personal tax could help explain the size of the historic equity premium in the UK measured before personal tax. If there has been a higher tax burden on equity, some of the premium could be viewed as compensation for tax. It is estimated here that personal tax reduces the arithmetic mean nominal return on equity from 13.3% to 11.1% pa during the period 1919-1998, and the mean return on gilts from 7.1% to 5.6% pa. Thus, personal tax accounts for a slightly higher proportion of the before-tax return on gilts than on equity, implying that the equity premium is not a compensation for a higher tax burden on equity. Journal: The European Journal of Finance Pages: 23-43 Issue: 1 Volume: 10 Year: 2004 Keywords: personal tax, equity risk premium, long term returns, X-DOI: 10.1080/1351847032000143404 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000143404 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:1:p:23-43 Template-Type: ReDIF-Article 1.0 Author-Name: Hans Bystrom Author-X-Name-First: Hans Author-X-Name-Last: Bystrom Title: Orthogonal GARCH and covariance matrix forecasting: The Nordic stock markets during the Asian financial crisis 1997-1998 Abstract: In risk management, modelling large numbers of assets and their variances and covariances in a unified framework is often important. In such multivariate frameworks, it is difficult to incorporate GARCH models and thus a new member of the ARCH-family, Orthogonal GARCH, has been suggested as a remedy to inherent estimation problems in multivariate ARCH modelling. Orthogonal GARCH creates positive definite covariance matrices of any size but builds on assumptions that partly break down during stress scenarios. This article therefore assesses the stress performance of the model by looking at four Nordic stock indices and covariance matrix forecasts during the highly volatile years of 1997 and 1998. Overall, Orthogonal GARCH is found to perform significantly better than traditional historical variance and moving average methods. Out-of-sample evaluation measures include symmetric loss functions (RMSE), asymmetric loss functions, operational methods suggested by the Basle Committee on Banking Supervision, as well as a forecast evaluation methodology based on pricing of simulated 'rainbow options'. Journal: The European Journal of Finance Pages: 44-67 Issue: 1 Volume: 10 Year: 2004 Keywords: principal components, multivariate GARCH, covariance matrix, forecast evaluation, X-DOI: 10.1080/1351847032000061379 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000061379 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:1:p:44-67 Template-Type: ReDIF-Article 1.0 Author-Name: Juergen Bufka Author-X-Name-First: Juergen Author-X-Name-Last: Bufka Author-Name: Oliver Kemper Author-X-Name-First: Oliver Author-X-Name-Last: Kemper Author-Name: Dirk Schiereck Author-X-Name-First: Dirk Author-X-Name-Last: Schiereck Title: A note on estimating the divisional cost of capital for diversified companies: an empirical evaluation of heuristic-based approaches Abstract: This note provides an empirical analysis of the potential for heuristic-based approaches to derive a divisional cost of equity from a firm's total cost of capital. Since an empirical relationship between fundamental information and systematic risk has previously been shown in other studies, idiosyncratic information on risk and performance ought to serve as a good proxy to calculate divisional adjustments. Two practically used, heuristic-based approaches are tested and a significant relationship is found between one of the measures and CAPM beta. This method may offer a plausible and comparatively uncomplicated method for adjusting a firm's total cost of capital for divisional use. Journal: The European Journal of Finance Pages: 68-80 Issue: 1 Volume: 10 Year: 2004 Keywords: divisional cost of capital, heuristic-based approaches, risk adjustment, X-DOI: 10.1080/1351847032000137410 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000137410 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:1:p:68-80 Template-Type: ReDIF-Article 1.0 Author-Name: Rumi Masih Author-X-Name-First: Rumi Author-X-Name-Last: Masih Author-Name: A. Mansur Author-X-Name-First: A. Author-X-Name-Last: Mansur Author-Name: M. Masih Author-X-Name-First: M. Author-X-Name-Last: Masih Title: Common stochastic trends and the dynamic linkages driving european stock markets: evidence from pre- and post-october 1987 crash eras Abstract: Given the impact of the October 1987 crash pre-empting fears of a deep-seated financial collapse, there is now much scope for assessing its importance quantitatively. In this paper, time series techniques are used to analyse the dynamic linkages and propagation of shocks among five European stock markets. While we do not find any long-run relationship of stock markets over the entire sample ped, evidence is found in support of a unique cointegrating vector over each of the pre- and post-crash samples. Furthermore, the dynamic analysis reveals that the lead-lag relationships changed quite significantly over the sample following the crash. Journal: The European Journal of Finance Pages: 81-104 Issue: 1 Volume: 10 Year: 2004 Keywords: Stock price index, Pre/post crash, Granger temporal causality, Cointegration, Vector error-correction model, Variance decomposition, Impulse response function, X-DOI: 10.1080/13518470110040591 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110040591 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:1:p:81-104 Template-Type: ReDIF-Article 1.0 Author-Name: Seppo Ikaheimo Author-X-Name-First: Seppo Author-X-Name-Last: Ikaheimo Author-Name: Anders Kjellman Author-X-Name-First: Anders Author-X-Name-Last: Kjellman Author-Name: Jan Holmberg Author-X-Name-First: Jan Author-X-Name-Last: Holmberg Author-Name: Sari Jussila Author-X-Name-First: Sari Author-X-Name-Last: Jussila Title: Employee stock option plans and stock market reaction: evidence from Finland Abstract: This paper examines whether the adoption of stock option plans results in changes in shareholders' wealth, and whether the stock market reactions to ESOP announcements could be explained by the target group of ESOP and the dilution effect. Short-horizon test methods are applied for this purpose. The sample consists of ESOP announcements of Finnish publicly quoted companies on the Helsinki Stock Exchange during the time period 1988-1998. The event study results show a slightly positive market reaction to announcements of ESOPs targeted to management and a negative market reaction in the case of ESOPs targeted to all employees. The results of regression analysis show that the ESOPs with limited dilution convey positive information to the stock market and the dilution effect has a negative impact on stock returns, especially in the case of ESOPs targeted to all employees. Journal: The European Journal of Finance Pages: 105-122 Issue: 2 Volume: 10 Year: 2004 Keywords: stock options, security market reaction, X-DOI: 10.1080/1351847032000137447 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000137447 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:2:p:105-122 Template-Type: ReDIF-Article 1.0 Author-Name: Edward McLaney Author-X-Name-First: Edward Author-X-Name-Last: McLaney Author-Name: John Pointon Author-X-Name-First: John Author-X-Name-Last: Pointon Author-Name: Melanie Thomas Author-X-Name-First: Melanie Author-X-Name-Last: Thomas Author-Name: Jon Tucker Author-X-Name-First: Jon Author-X-Name-Last: Tucker Title: Practitioners' perspectives on the UK cost of capital Abstract: The aims of this study were to determine how UK finance practitioners derive and review the cost of capital, and to ascertain whether the final figure varied with the choice of method. To investigate behaviour in the real world a survey questionnaire was employed, eliciting responses from the finance directors of 193 UK quoted firms. The results suggest that the cost of capital calculation is subject to wide variation across firms, both with regard to the overall figure and the precise computation of its components. The intuitive appeal of the WACC and CAPM approaches appears to ensure their continued popularity in the real world. However, firms tend not to make all of the adjustments to the overall figure which academics might expect, only making simple adjustments for risk and the tax advantage to debt. The after-tax money cost of capital which is approximately 10%, is influenced by the choice of method, and firms do not appear to revise their overall cost figure rapidly in response to the environment. The cost of capital decision is of such strategic importance for the longer-term maintenance and expansion of firm value that it is nearly always made within the domain of the board of directors. Journal: The European Journal of Finance Pages: 123-138 Issue: 2 Volume: 10 Year: 2004 Keywords: cost of capital, CAPM, WACC, dividends, earnings, X-DOI: 10.1080/1351847032000137401 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000137401 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:2:p:123-138 Template-Type: ReDIF-Article 1.0 Author-Name: Frank Westermann Author-X-Name-First: Frank Author-X-Name-Last: Westermann Title: Does the Euro affect the dynamic interactions of stock markets in Europe? Evidence from France, Germany and Italy Abstract: The dynamic links between stock market indices are analyzed in a GARCH-M framework, using daily data from France, Germany, Italy and the USA. It is shown that indices in the periods before and after the introduction of the Euro as a single currency display a very distinct behaviour. Consistent with the literature, in the earlier period price changes are found to have an impact the next day on other markets. In the latter period this type of co-movement disappeared within Europe. Feedback trading has been shown to induce (negative) autocorrelation in national stock markets. In this paper an international version of the feedback trading model is used to illustrate that the lead-lag relationships across countries and the strength of these links depend on the currency regime. Journal: The European Journal of Finance Pages: 139-148 Issue: 2 Volume: 10 Year: 2004 Keywords: Euro, feedback trading model, GARCH model, stock market indices, X-DOI: 10.1080/1351847032000143378 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000143378 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:2:p:139-148 Template-Type: ReDIF-Article 1.0 Author-Name: Nico Valckx Author-X-Name-First: Nico Author-X-Name-Last: Valckx Title: The decomposition of US and Euro area stock and bond returns and their sensitivity to economic state variables Abstract: This paper decomposes US and Euro area excess stock and bond return innovations into news factors using the Campbell-Schiller methodology. The results indicate that stock return volatility is mostly due to volatility of future excess return news. Inflation news plays a minor role although it is significantly correlated with excess return innovations. For the bond market too, it is future return news—not inflation news—that moves bond returns most. For finite investment horizons, however, asset market movements give a differential importance to the various news components. Results are comparable for the US and the Euro area, but differ in terms of magnitudes. In addition, sensitivities ('betas') to a set of state variables are estimated, yielding high interest rate betas and low money growth betas. Generally, inflation, unemployment and leading indicator betas are significant. Asset market exposures to oil and exchange rate changes are more significant for the Euro area than in the US. Journal: The European Journal of Finance Pages: 149-173 Issue: 2 Volume: 10 Year: 2004 Keywords: equity premium, term premium, dynamic Gordon model, variance decomposition, asset pricing factor sensitivities, X-DOI: 10.1080/1351847032000137393 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000137393 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:2:p:149-173 Template-Type: ReDIF-Article 1.0 Author-Name: Gust Janssen Author-X-Name-First: Gust Author-X-Name-Last: Janssen Title: Public information arrival and volatility persistence in financial markets Abstract: This paper explores the relationship between daily market volatility and the arrival of public information in four different financial markets. Public information is measured as the daily number of economic news headlines, divided in six categories of news. Statistical analysis of the news data suggests the presence of particular seasonality effects, as well as a strong degree of autocorrelation. Over the period 1994-1998, significant effects of specific news categories on the volatility of US stocks, treasury bills, bonds and dollar were detected. However, the effects - in size and duration - vary by news category and by financial market. It is demonstrated that most of the volatility persistence, as observed by GARCH models, tends to disappear when news is included in the conditional variance equation. Journal: The European Journal of Finance Pages: 177-197 Issue: 3 Volume: 10 Year: 2004 Keywords: news, volatility, persistence, autocorrelation, GARCH, X-DOI: 10.1080/1351847022000015812 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847022000015812 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:3:p:177-197 Template-Type: ReDIF-Article 1.0 Author-Name: Carlos Bana Author-X-Name-First: Carlos Author-X-Name-Last: Bana Author-Name: E. Costa Author-X-Name-First: E. Author-X-Name-Last: Costa Author-Name: Joao Oliveira Soares Author-X-Name-First: Joao Oliveira Author-X-Name-Last: Soares Title: A multicriteria model for portfolio management Abstract: The paper presents a new model to support the selection of a portfolio of stocks based on the results of the fieldwork undertaken with fund managers and using direct rating, MACBETH and optimisation techniques. The model consists of defining a benchmark portfolio (in this case, the Dow Jones Eurostoxx50) and scoring its different stocks according to several expected return criteria. Based on this multicriteria value analysis, a procedure is proposed to suggest adjustments to the proportions of the stocks in the portfolio. Finally, the risk of this modified portfolio is taken into consideration in an optimization module that includes constraints concerning the limits of variation for the proportion of each stock. Journal: The European Journal of Finance Pages: 198-211 Issue: 3 Volume: 10 Year: 2004 Keywords: portfolio management, financial markets, multicriteria decision analysis, X-DOI: 10.1080/1351847032000113254 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000113254 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:3:p:198-211 Template-Type: ReDIF-Article 1.0 Author-Name: A. Mayo Author-X-Name-First: A. Author-X-Name-Last: Mayo Title: High-order accurate implicit finite difference method for evaluating American options Abstract: A numerical method is presented for valuing vanilla American options on a single asset that is up to fourth-order accurate in the log of the asset price, and second-order accurate in time. The method overcomes the standard difficulty encountered in developing high-order accurate finite difference schemes for valuing American options; that is, the lack of smoothness in the option price at the critical boundary. This is done by making special corrections to the right-hand side of the differnce equations near the boundary, so they retain their level of accuracy. These corrections are easily evaluated using estimates of the boundary location and jump in the gamma that occurs there, such as those developed by Carr and Eaguet. Results of numerical experiments are presented comparing the method with more standard finite difference methods. Journal: The European Journal of Finance Pages: 212-237 Issue: 3 Volume: 10 Year: 2004 Keywords: American options, finite difference method, X-DOI: 10.1080/1351847032000168641 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000168641 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:3:p:212-237 Template-Type: ReDIF-Article 1.0 Author-Name: Javier Estrada Author-X-Name-First: Javier Author-X-Name-Last: Estrada Title: The cost of equity of internet stocks: a downside risk approach Abstract: Beta as a measure of risk has been under fire for many years. Although practitioners still widely use the CAPM to estimate the cost of equity of companies, they are aware of its problems and are looking for alternatives. A possible alternative is to estimate the cost of equity based on the semideviation, a well-known and intuitively plausible measure of downside risk. Complementing evidence reported elsewhere about the ability of the semideviation to explain the cross-section of returns in emerging markets and that of industries in emerging markets, this article reports results showing that the semideviation also explains the cross-section of Internet stock returns. Journal: The European Journal of Finance Pages: 239-254 Issue: 4 Volume: 10 Year: 2004 Keywords: Internet, equity, risk, beta, downside, semideviation, X-DOI: 10.1080/1351847032000137429 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000137429 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:4:p:239-254 Template-Type: ReDIF-Article 1.0 Author-Name: Patricia Fraser Author-X-Name-First: Patricia Author-X-Name-Last: Fraser Author-Name: Foort Hamelink Author-X-Name-First: Foort Author-X-Name-Last: Hamelink Author-Name: Martin Hoesli Author-X-Name-First: Martin Author-X-Name-Last: Hoesli Author-Name: Bryan Macgregor Author-X-Name-First: Bryan Author-X-Name-Last: Macgregor Title: Time-varying betas and the cross-sectional return-risk relation: evidence from the UK Abstract: The seminal study by Fama and MacBeth in 1973 initiated a stream of papers testing for the cross-sectional relation between return and risk. The debate as to whether beta is a valid measure of risk was reanimated by Fama and French and subsequent studies. Rather than focusing on exogenous variables that have a larger explanatory power than an asset's beta in cross-sectional tests, the matrix of variances-covariances is assumed to follow a time varying ARCH process. Using monthly data from the UK market from February 1975 to December 1996, the cross-sectional return-risk relations obtained with an unconditional specification for assets' betas are compared to those obtained when the estimated betas are based on an ARCH model. The approach taken by Pettengill, Sundaram and Mathur, which allows a negative cross sectional return-risk relation in periods in which the market portfolio yields a negative return relative to the risk free rate, was also investigated. These tests are also carried out on samples pertaining to a specific month and on samples from which a particular month is removed. Results suggest that the CAPM holds better in downward moving markets than in upward moving markets hence beta is a more appropriate measure of risk in bear markets. Journal: The European Journal of Finance Pages: 255-276 Issue: 4 Volume: 10 Year: 2004 Keywords: CAPM, QTARCH, return-risk relation, UK market, X-DOI: 10.1080/13518470110053407 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110053407 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:4:p:255-276 Template-Type: ReDIF-Article 1.0 Author-Name: Ralf Ostermark Author-X-Name-First: Ralf Author-X-Name-Last: Ostermark Author-Name: Jaana Aaltonen Author-X-Name-First: Jaana Author-X-Name-Last: Aaltonen Author-Name: Henrik Saxen Author-X-Name-First: Henrik Author-X-Name-Last: Saxen Author-Name: Kenneth Soderlund Author-X-Name-First: Kenneth Author-X-Name-Last: Soderlund Title: Nonlinear modelling of the Finnish Banking and Finance branch index Abstract: It is well documented that daily returns of several financial assets cannot be modelled by pure linear processes. It seems to be generally accepted that many economic variables follow nonlinear processes. The sources of nonlinearity can be divided in two classes: those where nonlinearities stem from the conditional variance and those where non-linearities enter through the conditional mean. Efforts in modelling the former have resulted in development of the ARCH-family models. There is, however, less evidence on nonlinearity in the mean of financial time series. One family of models that is applied in finance is the STAR. In this paper some nonlinear modelling techniques are applied to a Finnish financial time series, the daily Banking and Finance branch index on the Helsinki Stock Exchange. The techniques include a variance-nonlinear model from the ARCH family, a mean-nonlinear model, namely Smooth Transition Autoregression (STAR)-model and a neural network. Linearity is tested for by standard autocorrelation tests, LM-tests against the specific nonlinear models and the BDS-test. The study provides supplements to a range of earlier research. It demonstrates that the stock series is both linearly and nonlinearly dependent. Adapting an ARCH(3) eliminates the dependencies most satisfactorily. The ARCH-models and STAR-models were estimated using the SHAZAM-package. Journal: The European Journal of Finance Pages: 277-289 Issue: 4 Volume: 10 Year: 2004 Keywords: nonlinear time series, variance-nonlinearity, mean-nonlinearity, X-DOI: 10.1080/13518470210124641 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210124641 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:4:p:277-289 Template-Type: ReDIF-Article 1.0 Author-Name: Mary Thomson Author-X-Name-First: Mary Author-X-Name-Last: Thomson Author-Name: Andrew Pollock Author-X-Name-First: Andrew Author-X-Name-Last: Pollock Author-Name: Karen Henriksen Author-X-Name-First: Karen Author-X-Name-Last: Henriksen Author-Name: Alex Macaulay Author-X-Name-First: Alex Author-X-Name-Last: Macaulay Title: The influence of the forecast horizon on judgemental probability forecasts of exchange rate movements Abstract: An experiment is reported which compares directional forecasting performance of experts, novices and simple statistical models over three time horizons on a task involving probabilistic forecasts of exchange rate movements. Probability-judgement accuracy analyses illustrated no clear overall performance differences between experts and novices, but significant differences between the groups on various important components of judgement suggested that the groups obtained their similar overall scores using different cognitive strategies. Striking horizon effects and expertize-horizon interactions were also observed. The subjects performed better than a random walk forecaster, but worse than the random walk with constant drift and first-order autoregressive models. Composite human judgement, however, not only improved on individual judgement but, also, surpassed the simple statistical models in many instances. Possible explanations are offered for these results, suggestions are made for future research, and practical implications are emphasized. Journal: The European Journal of Finance Pages: 290-307 Issue: 4 Volume: 10 Year: 2004 Keywords: exchange rate movements, forecasting, judgement, probability, X-DOI: 10.1080/13518470110047620 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110047620 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:4:p:290-307 Template-Type: ReDIF-Article 1.0 Author-Name: Sudipto Sarkar Author-X-Name-First: Sudipto Author-X-Name-Last: Sarkar Title: Yield spreads, agency costs and the corporate bond call feature Abstract: This paper theoretically compares yields and optimal default policies for callable and non-callable corporate debt. It shows that, contrary to the conventional wisdom, it is possible for the yield spread (callable minus non-callable) to be negative. It also identifies the key determinants of the yield spread. Next, it shows that the optimal default trigger for non-callable debt is higher than the trigger for callable debt, resulting in additional default-related costs. Thus, the use of non-callable debt gives rise to an indirect agency cost of early default, which is the difference in total firm value with callable and non-callable debt. This agency cost provides a rationale for the existence of callable debt. By examining the determinants of the magnitude of this agency cost, the conditions that make callable debt more attractive (to the issuing firm) relative to non-callable debt are identified. This allows certain predictions to be made regarding the likelihood of a call feature in a corporate bond. The model's implications are supported by existing empirical studies. Journal: The European Journal of Finance Pages: 308-327 Issue: 4 Volume: 10 Year: 2004 Keywords: callable debt yield spread, agency cost, default policy, X-DOI: 10.1080/13518470110046162 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110046162 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:4:p:308-327 Template-Type: ReDIF-Article 1.0 Author-Name: Wojciech Charemza Author-X-Name-First: Wojciech Author-X-Name-Last: Charemza Author-Name: Kalvinder Shields Author-X-Name-First: Kalvinder Author-X-Name-Last: Shields Author-Name: Anna Zalewska Author-X-Name-First: Anna Author-X-Name-Last: Zalewska Title: Predictability of stock markets with disequilibrium trading Abstract: This paper analyses the predictability of a hypothetical market with freely negotiated prices on which exists a censoring of one-period returns which are in excess of an arbitrary level ('floor' and 'ceiling'). It is shown that the expected value of returns (adjusted for drift) conditional on last period information regarding the censoring are equal to zero (and therefore the market is not predictable in mean) if there is no intertemporal spillover on the market. A simple simulation model is proposed and applied for the analysis of the effects of intertemporal and cross-spillovers resulting from quantity constraints. Statistical predictability tests are proposed, based on the corrected Student-t statistic of a regression of returns of some information concerning the previous censoring. An illustrative empirical analysis of six main time series of returns on the Warsaw Stock Exchange confirms their ex-ante, but not ex-post, predictability. Journal: The European Journal of Finance Pages: 329-344 Issue: 5 Volume: 10 Year: 2004 Keywords: efficient markets, East European financial markets, censored returns, X-DOI: 10.1080/13518470210167293 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210167293 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:329-344 Template-Type: ReDIF-Article 1.0 Author-Name: Pawel Miłobędzki Author-X-Name-First: Pawel Author-X-Name-Last: Miłobędzki Title: Predictability of stock markets with disequilibrium trading. A commentary paper Abstract: The paper focuses on the problem of predictability of stock market returns with disequilibrium trading. It is shown that the predictability of returns may be the consequence of quantity constraints appearing in the markets due to the imposition of administrative restrictions on trade. A relevant test of predictability for the Warsaw Stock Exchange (WSE) based on information referring to disequilibrium states occurrence is proposed. The empirical results of its application to the WSE on a sample containing session-to-session observations from the period January 1995 to December 1999 strongly support the hypothesis of predictability. Journal: The European Journal of Finance Pages: 345-352 Issue: 5 Volume: 10 Year: 2004 Keywords: efficient market hypothesis, martingale, predictability of stock returns, disequilibrium trading, emerging markets, Warsaw Stock Exchange, X-DOI: 10.1080/1351847042000199033 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000199033 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:345-352 Template-Type: ReDIF-Article 1.0 Author-Name: Daniel Lane Author-X-Name-First: Daniel Author-X-Name-Last: Lane Author-Name: William Ziemba Author-X-Name-First: William Author-X-Name-Last: Ziemba Title: Jai Alai arbitrage strategies Abstract: This paper presents arbitrage and risk arbitrage betting strategies for Team Jai Alai. This game is the setting for the analysis and most results generalize to other sports betting situations and some financial market applications. The arbitrage conditions are utility free while the risk arbitrage wagers are constructed according to the Kelly criterion/capital growth theory that maximizes asymptotically long-run wealth almost surely. Journal: The European Journal of Finance Pages: 353-369 Issue: 5 Volume: 10 Year: 2004 Keywords: arbitrage, risk arbitrage, hedging, sequential investing, X-DOI: 10.1080/1351847042000254239 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000254239 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:353-369 Template-Type: ReDIF-Article 1.0 Author-Name: David Edelman Author-X-Name-First: David Author-X-Name-Last: Edelman Author-Name: Nigel O'Brian Author-X-Name-First: Nigel Author-X-Name-Last: O'Brian Title: Tote arbitrage and lock opportunities in racetrack betting Abstract: A game-theoretic approach to the investigation of arbitrage opportunities based on combinations of exotic wagers for the same event is described. This situation is also known as a 'lock' or 'Dutch Book'. The technique is applied to recent totalizator data from Australian thoroughbred races. It appears that such opportunities appear fairly regularly, at least according to published final dividends for various bet types. The method is demonstrated in some detail on a particular example. Journal: The European Journal of Finance Pages: 370-378 Issue: 5 Volume: 10 Year: 2004 Keywords: dutch book, lock, arbitrage, zero-sum game, minimax, totalisator, pari-mutuel, gambling, bet, wager, racetrack, X-DOI: 10.1080/1351847042000199042 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000199042 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:370-378 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Cain Author-X-Name-First: Michael Author-X-Name-Last: Cain Author-Name: David Peel Author-X-Name-First: David Author-X-Name-Last: Peel Title: The utility of gambling and the favourite-longshot bias Abstract: The traditional explanation for the usual favourite-longshot bias in gambling is that gamblers are risk-lovers. Conditions are derived under which the bias occurs and it is shown to be consistent with a utility function that has elasticity greater than one in a certain range. With a utility function that displays risk-aversion as well as risk-loving behaviour over its domain, it is demonstrated that the expected return-win probability frontier is not monotonic as has been hitherto tacitly assumed. This provides a consistent explanation for both the usual favourite-longshot bias and also for the few examples where a reverse bias has been observed. Pooled data supports the thesis that the frontier is not completely monotonic but does indeed have a turning point. Journal: The European Journal of Finance Pages: 379-390 Issue: 5 Volume: 10 Year: 2004 Keywords: betting markets, risk-return frontier, reverse bias, X-DOI: 10.1080/1351847042000199051 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000199051 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:379-390 Template-Type: ReDIF-Article 1.0 Author-Name: Simon Stevenson Author-X-Name-First: Simon Author-X-Name-Last: Stevenson Title: A performance evaluation of portfolio managers: tests of micro and macro forecasting Abstract: This study examines the performance of Irish domiciled funds over the period 1988 to 2000. The study specifically examines whether Irish portfolio managers, particularly in light of the small and thinly traded domestic market, can effectively partake in micro or macro forecasting. Four alternative models are used to jointly assess micro and macro forecasting, while a fifth non-parametric model is used to solely examine market timing effects. The results reveal consistent evidence of poor micro forecasting/stock selection ability across the funds examined. The macro forecasting results are more varied, with some evidence of positive timing ability in two of the models. In addition, significant correlations are generally found between the funds micro and macro forecasting ability, while diagnostic tests reveal limited evidence of mis-specification in the models used. Journal: The European Journal of Finance Pages: 391-411 Issue: 5 Volume: 10 Year: 2004 Keywords: Ireland, portfolio managers, micro/macro forecasting, models, market timing, X-DOI: 10.1080/1351847032000143413 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000143413 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:391-411 Template-Type: ReDIF-Article 1.0 Author-Name: Nihat Aktas Author-X-Name-First: Nihat Author-X-Name-Last: Aktas Author-Name: Eric de Bodt Author-X-Name-First: Eric Author-X-Name-Last: de Bodt Author-Name: Michel Levasseur Author-X-Name-First: Michel Author-X-Name-Last: Levasseur Title: Heterogeneity effects from market interventions Abstract: The aim of this paper is to test whether the European Commission activities generate a heterogeneity effect on the merging parties. A sample of 74 firms involved in 45 contested merger and acquisition operations during the years 1990 to 1999 is used. The methodology is based on the GARCH framework. The main result is that, globally, the DGC interventions seem not to reduce significantly the heterogeneity among investors, except for the operations where it takes strong decisions like prohibition. In these last cases, the signal coming from the DGC encompasses valuable information and is well understood by market participants. Journal: The European Journal of Finance Pages: 412-436 Issue: 5 Volume: 10 Year: 2004 Keywords: heterogeneity, flow of information, event studies, (G)ARCH, abnormal returns, X-DOI: 10.1080/1351847032000166922 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000166922 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:412-436 Template-Type: ReDIF-Article 1.0 Author-Name: Edward Jones Author-X-Name-First: Edward Author-X-Name-Last: Jones Author-Name: Jo Danbolt Author-X-Name-First: Jo Author-X-Name-Last: Danbolt Author-Name: Ian Hirst Author-X-Name-First: Ian Author-X-Name-Last: Hirst Title: Company investment announcements and the market value of the firm Abstract: This paper examines the stock market reaction to 402 company investment announcements made by UK companies during the 1991-1996 period. The market-adjusted abnormal returns are generally positive but small. Investment announcements are classified according to functional categories, and we find the level of abnormal returns to vary according to the type of capital investment being announced. In particular, we find the market to react more favourably to investments that 'create' future investment opportunities, than to investments which can be categorized as 'exercising' investment opportunities. The market reaction also varies with firm size, with large companies tending to experience smaller responses to announcements than do smaller firms. Chung et al. (1998) reported that the quality of a company's investment opportunities is the primary determinant of market reactions to capital expenditure decisions. The findings presented here lend some support to a role for investment opportunities in market valuations. Project size is also found to have a significant positive impact on the level of abnormal returns. Journal: The European Journal of Finance Pages: 437-452 Issue: 5 Volume: 10 Year: 2004 Keywords: capita1 investment, investment announcements, event study, X-DOI: 10.1080/1351847032000168696 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000168696 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:5:p:437-452 Template-Type: ReDIF-Article 1.0 Author-Name: Francisco Alonso Author-X-Name-First: Francisco Author-X-Name-Last: Alonso Author-Name: Roberto Blanco Author-X-Name-First: Roberto Author-X-Name-Last: Blanco Author-Name: Ana Del Rio Author-X-Name-First: Ana Del Author-X-Name-Last: Rio Author-Name: Alicia Sanchis Author-X-Name-First: Alicia Author-X-Name-Last: Sanchis Title: Estimating liquidity premia in the Spanish government securities market Abstract: This paper investigates the presence of liquidity premia in the relative pricing of assets traded on the Spanish government securities market. First, a classification of bonds into four different categories based on their degree of liquidity is proposed. Second, liquidity premia are estimated introducing liquidity parameters in the estimation of the zero-coupon yield curve. Results suggest the existence of a liquidity premium for post-benchmark bonds (both strippable and non-strippable). The size of this premium is relatively small. In the case of pre-benchmark bonds, the lack of liquidity does not seem to be priced. It is also shown that these pricing discrepancies are robust to the impact of taxes on bonds. Journal: The European Journal of Finance Pages: 453-474 Issue: 6 Volume: 10 Year: 2004 Keywords: liquidity premium, bid-ask spread, yield curve, benchmark, X-DOI: 10.1080/1351847042000254202 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000254202 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:453-474 Template-Type: ReDIF-Article 1.0 Author-Name: Abdulnasser Hatemi-J Author-X-Name-First: Abdulnasser Author-X-Name-Last: Hatemi-J Author-Name: Eduardo Roca Author-X-Name-First: Eduardo Author-X-Name-Last: Roca Title: An examination of the equity market price linkage between Australia and the European Union using leveraged bootstrap method Abstract: The paper examines the equity market price interaction between Australia and the European Union - represented by the UK, Germany and France - based on the Toda-Yamamoto causality test, which is bootstrapped with leveraged adjustments. A new information criterion is used to choose the optimal lag order. Weekly MSCI data covering the period 1988 to 2001 is used, divided into two subperiods to allow for a structural break arising from the ERM crisis of 1992. Results show that, during the period before the ERM crisis, no significant causal links exist between Australia and any of three EU countries. During the period after the ERM crisis, Australia also had no causal links with Germany and France but it had with the UK, with causality running from the UK to Australia but not vice-versa. Thus, Australian investors may find the German and French, but not the UK, equity markets, attractive venues for their international diversification. German and French, but not British, investors may also obtain the same benefit from the Australian equity market. Journal: The European Journal of Finance Pages: 475-488 Issue: 6 Volume: 10 Year: 2004 Keywords: equity market integration, leveraged bootstrap, causality, European Union, X-DOI: 10.1080/1351847032000168678 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000168678 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:475-488 Template-Type: ReDIF-Article 1.0 Author-Name: Jyh-Bang Jou Author-X-Name-First: Jyh-Bang Author-X-Name-Last: Jou Author-Name: Tan Lee Author-X-Name-First: Tan Author-X-Name-Last: Lee Title: The agency problem, investment decision, and optimal financial structure Abstract: This article constructs a real options model in which a firm has a privileged right to exercise an irreversible investment project with a stochastic payoff. Supposing that the investment costs are fully sunk, a firm that exercises the investment option after debt is in place will then choose a better state to exercise this option as it issues more bonds. This debt-overhang phenomenon, however, benefits the firm since waiting is itself valuable. Accordingly, the firm will both exercise the investment option later and issue more bonds as compared with a firm that issues bonds upon exercising the investment option. Journal: The European Journal of Finance Pages: 489-509 Issue: 6 Volume: 10 Year: 2004 Keywords: bankruptcy, financial structure, irreversible investment, limited liability, X-DOI: 10.1080/1351847032000168669 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000168669 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:489-509 Template-Type: ReDIF-Article 1.0 Author-Name: Attila Odabasl Author-X-Name-First: Attila Author-X-Name-Last: Odabasl Author-Name: Celal Asku Author-X-Name-First: Celal Author-X-Name-Last: Asku Author-Name: Vedat Akgiray Author-X-Name-First: Vedat Author-X-Name-Last: Akgiray Title: The statistical evolution of prices on the Istanbul stock exchange Abstract: This study documents the statistical properties of the stock returns on the Istanbul Stock Exchange (ISE) for the January 1988 to December 1999 period and tries to assess the evolution of the underlying stochastic structure over this time period. It also investigates empirically the relative efficiency of the ISE to test whether the rapid development of this market over the last decade caused it to become a relatively more efficient market. This is accomplished through a number of parametric and non-parametric tests of the random walk hypothesis using daily, weekly and monthly observations of the value-weighted ISE-100 index series. The emphasis is more on the evolution of the price process than on static tests of a random walk model as such. The findings indicate that the price mechanism in the ISE has evolved into a more informationally efficient process in little more than a decade of existence. Journal: The European Journal of Finance Pages: 510-525 Issue: 6 Volume: 10 Year: 2004 Keywords: market efficiency, emerging markets, ISE Index returns, unit-root tests, variance-ratio tests, non-stationarity, X-DOI: 10.1080/1351847032000166931 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000166931 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:510-525 Template-Type: ReDIF-Article 1.0 Author-Name: Victor Gonzalez Author-X-Name-First: Victor Author-X-Name-Last: Gonzalez Author-Name: Francisco Gonzalez Author-X-Name-First: Francisco Author-X-Name-Last: Gonzalez Title: Stock repurchases with legal restrictions. Evidence from Spain Abstract: This paper analyses the consequences of legal restrictions on the volume of shares firms can repurchase. Results suggest that the imposition of a limit on the volume of common stock favours the use of open market repurchases (OMRs) compared to other methods of repurchase such as tender offer repurchases (TORs) and Dutch auctions (DAs). The positive share abnormal returns around both announcements of open market buybacks and sellbacks in the full sample suggest that they are basically used to change the ownership structure of the firm in a consistent way with the convergence of interest hypothesis. The positive abnormal stock returns around open market repurchases, which are significantly different to the negative ones around sellbacks, when there are no changes in ownership structure also indicates the existence of a signalling and free cash flow effects. Journal: The European Journal of Finance Pages: 526-541 Issue: 6 Volume: 10 Year: 2004 Keywords: buybacks, sellbacks, corporate control, signalling, free cash flow, event study, X-DOI: 10.1080/13518470410001674341 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470410001674341 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:526-541 Template-Type: ReDIF-Article 1.0 Author-Name: Roberto Pascual Author-X-Name-First: Roberto Author-X-Name-Last: Pascual Author-Name: Alvaro Escribano Author-X-Name-First: Alvaro Author-X-Name-Last: Escribano Author-Name: Mikel Tapia Author-X-Name-First: Mikel Author-X-Name-Last: Tapia Title: On the bi-dimensionality of liquidity Abstract: Variations in overall liquidity can be measured by simultaneous changes in both immediacy costs and depth. Liquidity changes, however, are ambiguous whenever both liquidity dimensions do not reinforce each other. In this paper, ambiguity is characterized using an instantaneous time-varying elasticity concept. Several bi-dimensional liquidity measures that cope with the ambiguity problem are constructed. First, it is shown that bi-dimensional measures are superior since commonalities in overall liquidity cannot be fully explained by the common factors in one-dimensional proxies of liquidity. Second, it is shown that an infinitesimal variation in either market volatility or trading activity augments the probability of observing an unambiguous liquidity adjustment. Ambiguity strongly depends on the expected (deterministic) component of volatility. Journal: The European Journal of Finance Pages: 542-566 Issue: 6 Volume: 10 Year: 2004 Keywords: liquidity, measurement, immediacy, depth, elasticity, ambiguity, bi-dimensional, X-DOI: 10.1080/13518470410001674323 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470410001674323 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:542-566 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Bartholdy Author-X-Name-First: Jan Author-X-Name-Last: Bartholdy Author-Name: Glenn Boyle Author-X-Name-First: Glenn Author-X-Name-Last: Boyle Author-Name: Roger Stover Author-X-Name-First: Roger Author-X-Name-Last: Stover Title: Deposit insurance and the stock market: evidence from Denmark Abstract: Previous studies of the relationship between deposit insurance and bank market values have usually been limited to consideration of minor changes in bank regulations, but the 1987 initiation of deposit insurance in Denmark permits examination of a potentially major policy shift. It is found that the market values of large Danish banks exhibited a modest positive reaction to the announcement of insurance, but that small risky banks responded negatively. These results partially contrast with those previously found for the USA, an outcome that seems likely to reflect the interaction of deposit insurance with the particular characteristics of the pre-existing Danish regulatory system. Journal: The European Journal of Finance Pages: 567-578 Issue: 6 Volume: 10 Year: 2004 Keywords: deposit insurance, bank regulation, Denmark, X-DOI: 10.1080/1351847042000255670 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000255670 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:10:y:2004:i:6:p:567-578 Template-Type: ReDIF-Article 1.0 Author-Name: Soosung Hwang Author-X-Name-First: Soosung Author-X-Name-Last: Hwang Author-Name: Steve Satchell Author-X-Name-First: Steve Author-X-Name-Last: Satchell Title: Valuing information using utility functions: how much should we pay for linear factor models? Abstract: Thus paper reports on an investigation into what is an appropriate level of investment management fees. Existing results are extended and several formulae are provided for the case of power utility and normal returns. Using the CRRA utility function with the range of the coefficient of the CRRA suggested by Mehra and Prescott, it is found that the value of information added by the linear factor models of Fama and French exceeds observed management fees and only equals them for hitherto unmeasured magnitudes of risk aversion. Journal: The European Journal of Finance Pages: 1-16 Issue: 1 Volume: 11 Year: 2005 Keywords: CAPM, Fama-French model, value of information, logarithmic and power utilities, X-DOI: 10.1080/1351847042000286630 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286630 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:1:p:1-16 Template-Type: ReDIF-Article 1.0 Author-Name: Peter Anker Author-X-Name-First: Peter Author-X-Name-Last: Anker Author-Name: Jorn Wasmund Author-X-Name-First: Jorn Author-X-Name-Last: Wasmund Title: Signalling with official interest rates: the case of the German discount and lombard rate Abstract: A major characteristic of the operating procedure of the European Central Bank (ECB) is its reliance on standing facilities. It is intended that the official rates on those facilities also serve the function of signalling. The case of Germany, where the Bundesbank followed a similar signalling strategy, is analysed. In particular the paper investigates whether announcements of official interest rates provide information not already contained in other policy measures and whether the resulting revisions of expectations are efficient. Significant differences are found between signalling in the case of increasing and decreasing interest rates. Journal: The European Journal of Finance Pages: 17-31 Issue: 1 Volume: 11 Year: 2005 Keywords: Term structure, operating procedure, market efficiency, X-DOI: 10.1080/13518470010011251 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470010011251 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:1:p:17-31 Template-Type: ReDIF-Article 1.0 Author-Name: Bjorn Hansson Author-X-Name-First: Bjorn Author-X-Name-Last: Hansson Author-Name: Peter Hordahl Author-X-Name-First: Peter Author-X-Name-Last: Hordahl Title: Forecasting variance using stochastic volatility and GARCH Abstract: This paper estimates the conditional variance of daily Swedish OMX-index returns with stochastic volatility (SV) models and GARCH models and evaluates the in-sample performance as well as the out-of-sample forecasting ability of the models. Asymmetric as well as weekend/holiday effects are allowed for in the variance, and the assumption that errors are Gaussian is released. Evidence is found of a leverage effect and of higher variance during weekends. In both in-sample and out-of-sample comparisons SV models outperform GARCH models. However, while asymmetry, weekend/holiday effects and non-Gaussian errors are important for the in-sample fit, it is found that these factors do not contribute to enhancing the forecasting ability of the SV models. Journal: The European Journal of Finance Pages: 33-57 Issue: 1 Volume: 11 Year: 2005 Keywords: Variance, stochastic volatility, GARCH models, forecasting ability, weekend/holiday effects, X-DOI: 10.1080/1351847021000025803 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847021000025803 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:1:p:33-57 Template-Type: ReDIF-Article 1.0 Author-Name: Giampaolo Gabbi Author-X-Name-First: Giampaolo Author-X-Name-Last: Gabbi Author-Name: Andrea Sironi Author-X-Name-First: Andrea Author-X-Name-Last: Sironi Title: Which factors affect corporate bonds pricing? Empirical evidence from eurobonds primary market spreads Abstract: The question of which factors determine corporate bonds pricing is investigated by analysing the spreads of eurobonds issued by major G-10 companies during the 1991-2001 period. Three main results emerge from the analysis. First, bond ratings appear as the most important determinant of yield spreads, with investors' reliance on rating agencies judgments increasing over time. Second, the primary market efficiency and the expected secondary market liquidity are not relevant explanatory factors of spreads cross-sectional variability. Finally, rating agencies adopt a different, 'through the cycle', evaluation criteria of default risk with respect to the forward looking one adopted by bond investors. Journal: The European Journal of Finance Pages: 59-74 Issue: 1 Volume: 11 Year: 2005 Keywords: Eurobonds, credit ratings, spreads, default risk, bonds, X-DOI: 10.1080/1351847032000143422 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000143422 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:1:p:59-74 Template-Type: ReDIF-Article 1.0 Author-Name: Tobias Miarka Author-X-Name-First: Tobias Author-X-Name-Last: Miarka Author-Name: Michael Troge Author-X-Name-First: Michael Author-X-Name-Last: Troge Title: Do bank-firm relationships reduce bank debt? Evidence from Japan Abstract: The paper analyses how close relationships to banks influence a firm's choice of financing its debt through publicly marketed bonds or bank loans. It is shown that large Japanese firms use less bank debt, if banks own shares in the firm or bank employees are members of the firm's board. This result supports a theoretical framework, where banks are able to control agency problems associated with debt. Firms use bank loans in order to be monitored, which enables them to access cheaper bond finance. Closer bank-firm relationships facilitate monitoring for the bank and reduce therefore the need for bank finance. Journal: The European Journal of Finance Pages: 75-92 Issue: 1 Volume: 11 Year: 2005 Keywords: Bank-firm relationships, monitoring, bond finance, X-DOI: 10.1080/1351847032000168687 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000168687 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:1:p:75-92 Template-Type: ReDIF-Article 1.0 Author-Name: Chun Lee Author-X-Name-First: Chun Author-X-Name-Last: Lee Author-Name: Ike Mathur Author-X-Name-First: Ike Author-X-Name-Last: Mathur Author-Name: Kimberly Gleason Author-X-Name-First: Kimberly Author-X-Name-Last: Gleason Title: The tick/volatility ratio as a determinant of the compass rose pattern Abstract: This study provides evidence that low frequency data masks certain returns phenomena in the foreign exchange (forex) market. It is shown that the compass rose pattern is entirely absent in daily returns in the spot and futures forex markets. In contrast, the intraday returns, especially those for holding periods of less than an hour, clearly exhibit the pattern. Monte Carlo investigation of the tick/volatility ratio provides convincing evidence that the pattern appears only if the tick/volatility ratio is above some threshold level. Since intraday returns have a ratio above the threshold value, they exhibit the pattern. On the other hand, the absence of the pattern in daily returns is due to the fact that the spot and futures currency returns examined have a ratio much smaller than the threshold value. Overall, the evidence is consistent with the hypothesis that the tick/volatility ratio is a determinant of the compass rose pattern. The economic implications of this pattern are discussed. Journal: The European Journal of Finance Pages: 93-109 Issue: 2 Volume: 11 Year: 2005 X-DOI: 10.1080/1351847032000137438 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000137438 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:2:p:93-109 Template-Type: ReDIF-Article 1.0 Author-Name: P. B. Solibakke Author-X-Name-First: P. B. Author-X-Name-Last: Solibakke Title: Non-linear dependence and conditional heteroscedasticity in stock returns evidence from the norwegian thinly traded equity market Abstract: The paper investigates the presence of non-linear dependencies in stock returns for the Norwegian equity market as it is very difficult to interpret the unconditional distribution of stock returns and its economic implications if the i.i.d. assumption is violated. Standard tests of non-linear dependence give strong evidence for the presence of non-linearity in raw returns. Modelling non-linear dependence must distinguish between models that are non-linear in mean and hence depart from the Martingale hypothesis, and models that are non-linear in variance and hence depart from independence but not from the Martingale hypothesis. Therefore, three non-linear models of asset returns are formulated applying ARMA-GARCH specifications for the conditional mean and variance equations. The paper goes on to answer which model has the necessary characteristics that are sufficient to account for most of the non-linear dependence. In the Norwegian equity market most of the non-linear dependence seems to be conditional heteroscedasticity. However, the most thinly traded assets still report significant non-linear dependence for all non-linear specifications. These results imply that the independence hypothesis can be rejected for all assets, portfolios and indices. Moreover, for thinly traded assets the Martingale hypothesis can also be rejected. The economic implications from the unconditional distributions of thinly traded assets are therefore very difficult to interpret and are unfamiliar territory for those who are accustomed to thinking analytically, intuitively and linearly. Journal: The European Journal of Finance Pages: 111-136 Issue: 2 Volume: 11 Year: 2005 Keywords: non-linearity, conditional heteroscedasticity, trading/non-trading, ARMA-ARCH/GARCH, non-linear test statistic, X-DOI: 10.1080/13518470110074350 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110074350 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:2:p:111-136 Template-Type: ReDIF-Article 1.0 Author-Name: D. Guegan Author-X-Name-First: D. Author-X-Name-Last: Guegan Author-Name: L. Mercier Author-X-Name-First: L. Author-X-Name-Last: Mercier Title: Prediction in chaotic time series: methods and comparisons with an application to financial intra-day data Abstract: Different prediction methods for chaotic deterministic systems are compared. Two methods of reconstructing the dynamics of the systems are considered with a view to producing a profitable trading model. The methods developed are the 'nearest neighbours' method and the 'radial basis functions' method. The optimal prediction horizon according to the sampling time step, and a reliable method to measure the prediction error are discussed. These methods are applied to the intra-day series of exchange rates, namely DEM/FRF. Developments concerning the importance of noise when chaotic systems are studied are provided. Journal: The European Journal of Finance Pages: 137-150 Issue: 2 Volume: 11 Year: 2005 Keywords: Chaotic systems, nearest neighbors, prediction radial basis functions, X-DOI: 10.1080/13518470110074846 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470110074846 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:2:p:137-150 Template-Type: ReDIF-Article 1.0 Author-Name: Gabriela De Raaij Author-X-Name-First: Gabriela Author-X-Name-Last: De Raaij Author-Name: Burkhard Raunig Author-X-Name-First: Burkhard Author-X-Name-Last: Raunig Title: Evaluating density forecasts from models of stock market returns Abstract: Density forecasts have become important in finance and play a key role in modern risk management. Using a flexible density forecast evaluation framework that extends the Berkowitz likelihood ratio test this paper evaluates in- and out-of-sample density forecasts of daily returns on the DAX, ATX and S&P 500 stock market indices from models of financial returns that are currently widely used in the financial industry. The results indicate that GARCH-t models produce good in-sample forecasts. No model considered in this study delivers fully acceptable out-of-sample forecasts. The empirical findings emphasize that proper distributional assumptions combined with an adequate specification of relevant conditional higher moments are necessary to obtain good density forecasts. Journal: The European Journal of Finance Pages: 151-166 Issue: 2 Volume: 11 Year: 2005 Keywords: Density forecasting, forecast evaluation, risk management, GARCH models, X-DOI: 10.1080/1351847042000255652 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000255652 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:2:p:151-166 Template-Type: ReDIF-Article 1.0 Author-Name: Albert Link Author-X-Name-First: Albert Author-X-Name-Last: Link Author-Name: Donald Siegel Author-X-Name-First: Donald Author-X-Name-Last: Siegel Title: Generating science-based growth: an econometric analysis of the impact of organizational incentives on university-industry technology transfer Abstract: In recent years, there has been a rapid rise in commercial knowledge transfers from universities to practitioners or university/industry technology transfer (UITT), via licensing agreements, research joint ventures, and startups. In a previous study in 1999, the authors outlined a production function model to assess the relative efficiency of UITT and conducted field research to identify several organizational factors that could enhance the effectiveness of university management of intellectual property portfolios. This paper extends this framework and evaluates the impact of organizational incentives on the effectiveness of UITT. It is found that universities having more attractive incentive structures for UITT, i.e. those that allocate a higher %age of royalty payments to faculty members, tend to be more efficient in technology transfer activities. University administrators who wish to foster UITT should be mindful of the importance of financial incentives. Journal: The European Journal of Finance Pages: 169-181 Issue: 3 Volume: 11 Year: 2005 Keywords: University/industry technology transfer (UITT), stochastic frontier estimation (SFE), organizational incentives, X-DOI: 10.1080/1351847042000254211 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000254211 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:169-181 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Graff Author-X-Name-First: Michael Author-X-Name-Last: Graff Title: Abstract Abstract: The finance-growth nexus is discussed, and a framework for empirical analysis is formulated. Based on data for 93 countries from 1960-1990, a growth equation is estimated. It includes the standard regressors as well as a new proxy for financial activity and interaction effects of the latter with catching-up, education, and physical capital accumulation. Financial activity generally has a positive impact on economic growth. Then, the countries are ranked with respect to their degree of corporatism, institutional quality, democracy, market orientation and characteristics of their financial systems. The sample is split according to these control variables. It is shown that the finance-growth nexus is indeed contingent on socio-economic factors. Specifically, the growth effect of a given level of financial activity is higher in more law enforcing and more corporatist countries, whereas the results are inconclusive with respect to democracy, market orientation and financial structure. Journal: The European Journal of Finance Pages: 183-205 Issue: 3 Volume: 11 Year: 2005 Keywords: Financial activity, economic growth, cross-country regressions, institutional quality, market orientation, X-DOI: 10.1080/13518470410001674332 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470410001674332 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:183-205 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Doucouliagos Author-X-Name-First: Chris Author-X-Name-Last: Doucouliagos Title: Price exhaustion and number preference: time and price confluence in Australian stock prices Abstract: Confluence occurs when different trading filters generate signals that point to the same directional move. Using regression analysis, this paper investigates confluence trading signals associated with number preference and price exhaustion, for a sample of Australian stocks. The results show that certain price levels tend to act as psychological barriers, and that price exhaustion signals are a real phenomenon in the Australian stock market. It is shown also that confluence exists in the Australian stock market. Importantly, confluence is associated with price retracements that are of economic and statistical significance, offering profitable trading opportunities. The results suggest that Australian stocks do not follow a random walk. Journal: The European Journal of Finance Pages: 207-221 Issue: 3 Volume: 11 Year: 2005 Keywords: Price exhaustion, number preference, confluence, X-DOI: 10.1080/1351847042000254194 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000254194 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:207-221 Template-Type: ReDIF-Article 1.0 Author-Name: Francesco Menoncin Author-X-Name-First: Francesco Author-X-Name-Last: Menoncin Title: Risk management and asset allocation with jump-diffusion exogenous risks: Some algebraic approximated solutions Abstract: This paper analyses the portfolio problem of an investor who wants to maximize the expected utility of his terminal wealth both in a complete and an incomplete financial market. The investor must cope with two sets of exogenous risks following jump-diffusion processes. Thanks to an approximated solution some rules are provided to follow for hedging portfolio against exogenous risks. Finally, some comparisons with models computing the optimal portfolio in a closed form are carried out in order to check the goodness of our approximation. Journal: The European Journal of Finance Pages: 223-246 Issue: 3 Volume: 11 Year: 2005 Keywords: Asset allocation, exogenous risk, Feynman-Kac-super-˘ theorem, stochastic investment opportunities, X-DOI: 10.1080/1351847042000254220 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000254220 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:223-246 Template-Type: ReDIF-Article 1.0 Author-Name: Marco Mazzoli Author-X-Name-First: Marco Author-X-Name-Last: Mazzoli Title: Investments, financial structure and imperfect financial markets: An intertemporal discrete-time framework Abstract: This paper deals with the problem of simultaneity between the firm's investments and financial structure in the context of dynamic optimization where the process of information spreading that associates the profitability of the firm to its share price only takes part gradually, due to market imperfections and diverging incentives between shareholders and managers. In particular, the latter are assumed to hold the control of the firm and decide upon the allocation of its cash-flow. This creates a link between cash-flow and rate of discount of profits, generating a 'financial channel of transmission' of the real shocks. Journal: The European Journal of Finance Pages: 247-258 Issue: 3 Volume: 11 Year: 2005 Keywords: Investment, intertemporal firm choice, capital structure, financing policy, X-DOI: 10.1080/1351847042000286649 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286649 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:247-258 Template-Type: ReDIF-Article 1.0 Author-Name: Joao Liborio Author-X-Name-First: Joao Author-X-Name-Last: Liborio Title: Dynamic bond portfolio choice in a model with Gaussian diffusion regimes Abstract: This paper studies bond prices, intertemporal consumption and portfolio choice in a simple two-factor continuous-time regime-switching term structure model. The real interest rate and the expected inflation are modelled as an “extended” Ornstein-Uhlenbeck process, whose mean and variance shift randomly within a high-low Markovian regime. The prices of nominal and indexed bonds, the nominal and real term premia and the consumption-portfolio choice of a typical risk-averse investor are studied in the case in which the regime is observed. Journal: The European Journal of Finance Pages: 259-270 Issue: 3 Volume: 11 Year: 2005 Keywords: Portfolio choice, regime-switching models, term structure, X-DOI: 10.1080/13518470500039287 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039287 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:259-270 Template-Type: ReDIF-Article 1.0 Author-Name: Giampaolo Gabbi Author-X-Name-First: Giampaolo Author-X-Name-Last: Gabbi Title: Semi-correlations as a tool for geographical and sector asset allocation Abstract: Many studies show that international correlations have changed over time. This phenomenon has modified the practices of many portfolio managers, which are now preferably linked with sector behaviour. In order to prove the benefits of this management style, some new evidence is provided for correlation dynamics among geographic areas and business sectors. The concept of semi-correlation is applied to asset allocation in order to compare whether it applies efficiently to sectors and countries. The paper shows that use of semi-correlations has the potential both to improve expected return and to reduce volatility. Journal: The European Journal of Finance Pages: 271-281 Issue: 3 Volume: 11 Year: 2005 Keywords: Asset allocation, correlation, neural networks, return forecast, X-DOI: 10.1080/13518470500039220 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039220 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:271-281 Template-Type: ReDIF-Article 1.0 Author-Name: Giovanni Ferri Author-X-Name-First: Giovanni Author-X-Name-Last: Ferri Author-Name: Li-gang Liu Author-X-Name-First: Li-gang Author-X-Name-Last: Liu Title: Assessing the effort of rating agencies in emerging economies: Some empirical evidence Abstract: Credit rating agencies (RAs) help reduce information asymmetries between corporate issuers and investors. However, although information asymmetries are more severe in emerging than in developed countries, corporate ratings bestow lower information content in the former. This is a problem since deserving corporations that are based in emerging countries require that the suitable rating they receive by a major RA—indispensable for them to issue debt in developed capital markets—be a credible signal to investors. Among the possible explanations, it is conjectured that this unsatisfactory situation might result from RAs not investing enough in collecting information on emerging countries' corporations. Here, an indicator is used of RAs' effort to gather information and test econometrically whether—controlling for both sovereign ratings and the corporate performance indicators used by RAs—higher effort affects corporate ratings. A negative relationship between RAs' effort and corporate ratings is found in developed countries whereas the relationship is positive in emerging countries. While the result for developed countries is coherent with the hypothesis that RAs raise their effort vis-a-vis problematic corporations, the result for emerging countries is inconsistent with such hypothesis. This evidence suggests that inducing RAs to raise their effort is desirable for corporations in emerging countries. Journal: The European Journal of Finance Pages: 283-295 Issue: 3 Volume: 11 Year: 2005 Keywords: Credit risk, sovereign risk, corporate credit ratings, X-DOI: 10.1080/13518470500039246 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039246 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:3:p:283-295 Template-Type: ReDIF-Article 1.0 Author-Name: Roberto Casarin Author-X-Name-First: Roberto Author-X-Name-Last: Casarin Author-Name: Marco Lazzarin Author-X-Name-First: Marco Author-X-Name-Last: Lazzarin Author-Name: Loriana Pelizzon Author-X-Name-First: Loriana Author-X-Name-Last: Pelizzon Author-Name: Domenico Sartore Author-X-Name-First: Domenico Author-X-Name-Last: Sartore Title: Relative benchmark rating and persistence analysis: Evidence from Italian equity funds Abstract: The recent introduction into the Italian mutual fund market of Morningstar performance rating of private institutions gives rise to the question of what is the relation between this relative benchmark measure and the other traditional performance measures. This paper provides a comprehensive analysis of the relative benchmark performance measure (Morningstar rating) applied to Italian equity funds. It is found that this performance measure is highly correlated with the classical performance measures (Sharpe ratio, Sortino ratio and Treynor ratio) and poorly correlated with the customized benchmark measure (Information ratio). Furthermore, performing a persistence analysis, using non-parametric methods Cross-product Ratio and Chi-squared test, it is observed that only the Morningstar rating measure generates a strong degree of persistence. These results deviate from most European studies, which argue that Italian mutual funds display weak persistence. Journal: The European Journal of Finance Pages: 297-308 Issue: 4 Volume: 11 Year: 2005 Keywords: Mutual funds, performance evaluation, persistence analysis, Morningstar rating, X-DOI: 10.1080/1351847042000286658 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286658 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:4:p:297-308 Template-Type: ReDIF-Article 1.0 Author-Name: Pierre Giot Author-X-Name-First: Pierre Author-X-Name-Last: Giot Title: Market risk models for intraday data Abstract: In this paper, market risk at an intraday time horizon is quantified using normal GARCH, Student GARCH, RiskMetrics and high-frequency duration (log-ACD) models set in the framework of the conditional VaR methodology. Because of the small time horizon of the intraday returns (15 and 30 minute returns in this paper), an evaluation of intraday market risk can be useful to market participants (traders, market makers) involved in frequent trading. As expected, the volatility features an important intraday seasonality, which must be removed prior to using the market risk models. The four models are applied to intraday returns data for three stocks traded on the New York Stock Exchange and it is shown that the Student GARCH model performs best. The use of price durations as a measure of risk on time is commented upon. Journal: The European Journal of Finance Pages: 309-324 Issue: 4 Volume: 11 Year: 2005 Keywords: Intraday market risk, value-at-risk, duration models, NYSE, X-DOI: 10.1080/1351847032000143396 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000143396 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:4:p:309-324 Template-Type: ReDIF-Article 1.0 Author-Name: John Cotter Author-X-Name-First: John Author-X-Name-Last: Cotter Title: Uncovering long memory in high frequency UK futures Abstract: Accurate volatility modelling is paramount for optimal risk management practices. One stylized feature of financial volatility that impacts the modelling process is long memory explored in this paper for alternative risk measures, observed absolute and squared returns for high frequency intraday UK futures. Volatility series for three different asset types, using stock index, interest rate and bond futures are analysed. Long memory is strongest for the bond contract. Long memory is always strongest for the absolute returns series and at a power transformation of k < 1. The long memory findings generally incorporate intraday periodicity. The APARCH model incorporating seven related GARCH processes generally models the futures series adequately documenting ARCH, GARCH and leverage effects. Journal: The European Journal of Finance Pages: 325-337 Issue: 4 Volume: 11 Year: 2005 Keywords: Long memory, APARCH, high frequency futures, X-DOI: 10.1080/13518470410001674314 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470410001674314 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:4:p:325-337 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Til Klein Author-X-Name-First: Til Author-X-Name-Last: Klein Title: Analysing mergers and acquisitions in European financial services: An application of real options Abstract: This paper applies real option pricing theory to the analysis of a sample of 15 recent mergers and acquisitions in the European financial services industry. Overall, it is found that those acquisitions were not on average overpaid. Nevertheless, further analysis, assuming the option premium equalled the takeover premium, shows that either the implicitly assumed volatility was too low, the assumed time to maturity was very short and/or the assumed subsequent market performance was too optimistic. Journal: The European Journal of Finance Pages: 339-355 Issue: 4 Volume: 11 Year: 2005 Keywords: Banking system, event studies, mergers and acquisitions, real options, X-DOI: 10.1080/1351847032000137456 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847032000137456 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:4:p:339-355 Template-Type: ReDIF-Article 1.0 Author-Name: Daniel Capocci Author-X-Name-First: Daniel Author-X-Name-Last: Capocci Author-Name: Albert Corhay Author-X-Name-First: Albert Author-X-Name-Last: Corhay Author-Name: Georges Hubner Author-X-Name-First: Georges Author-X-Name-Last: Hubner Title: Hedge fund performance and persistence in bull and bear markets Abstract: This paper tests the performance of 2894 hedge funds in a time period that encompasses unambiguously bullish and bearish trends whose pivot is commonly set at March 2000. The database proves to be fairly trustable with respect to the most important biases in hedge funds studies, despite the high attrition rate of funds observed in the down market. An original ten-factor composite performance model is applied that achieves very high significance levels. The analysis of performance indicates that most hedge funds significantly outperformed the market during the whole test period, mostly thanks to the bullish subperiod. In contrast, no significant underperformance of individual hedge funds strategies is observed when markets headed south. The analysis of persistence yields very similar results, with most of the predictability being found among middle performers during the bullish period. However, the 'Market Neutral' strategy represents a remarkable exception, as abnormal performance is sustained throughout and significant persistence can be found between the 20% and 69% best performers in this category, probably thanks to an extreme adaptability and a very active investment behaviour. Journal: The European Journal of Finance Pages: 361-392 Issue: 5 Volume: 11 Year: 2005 Keywords: Hedge funds, funds of funds, selection bias, abnormal returns, bullish market, bearish market, persistence, X-DOI: 10.1080/1351847042000286676 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286676 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:5:p:361-392 Template-Type: ReDIF-Article 1.0 Author-Name: Greg Gregoriou Author-X-Name-First: Greg Author-X-Name-Last: Gregoriou Author-Name: Fabrice Rouah Author-X-Name-First: Fabrice Author-X-Name-Last: Rouah Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Author-Name: Fernando Diz Author-X-Name-First: Fernando Author-X-Name-Last: Diz Title: Simple and cross efficiency of CTAs using data envelopment analysis Abstract: Data envelopment analysis (DEA) is applied, and basic and cross-efficiency models are used to evaluate the performance of CTA classifications. With the ever-increasing number of CTAs, there is an urgent requirement to provide money managers, pension funds, and high-net-worth individuals with a trustworthy appraisal method in ranking their efficiency. DEA can achieve this, and one important benefit of this measure is that benchmarks are not required, thereby alleviating the problem of using traditional benchmarks to examine non-normal returns. This article aims to investigate CTAs and to identify the ones that have achieved superior performance or, in other words, have an efficiency score of 100 in a risk/return setting. Journal: The European Journal of Finance Pages: 393-409 Issue: 5 Volume: 11 Year: 2005 Keywords: Data envelopment analysis, commodity trading advisors, efficiency, benchmark, X-DOI: 10.1080/1351847042000286667 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286667 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:5:p:393-409 Template-Type: ReDIF-Article 1.0 Author-Name: James Hedges Author-X-Name-First: James Author-X-Name-Last: Hedges Title: Hedge Fund Transparency Abstract: This paper presents an overview of key issues for hedge fund investment taken from a practitioners perspective. Journal: The European Journal of Finance Pages: 411-417 Issue: 5 Volume: 11 Year: 2005 X-DOI: 10.1080/1351847042000286685 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286685 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:5:p:411-417 Template-Type: ReDIF-Article 1.0 Author-Name: Alessio Sancetta Author-X-Name-First: Alessio Author-X-Name-Last: Sancetta Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Title: New test statistics for market timing with applications to emerging markets hedge funds Abstract: A new framework is provided for identifying market timing. The analysis focuses on the local joint history of the hedge fund with the benchmark. The approach is fully nonparametric. Therefore, it has the advantage of avoiding the misspecification problems so common in this literature. The test statistic is some rank preserving function of a second-order U-process. This empirical process allows one to define a set of statistics for market timing. The relevant asymptotic distribution is detailed. Some of these statistics are used to study the timing component of emerging markets funds using the 1999 dataset of Hwang and Satchell. Journal: The European Journal of Finance Pages: 419-443 Issue: 5 Volume: 11 Year: 2005 Keywords: Empirical process, Kendall's tau, nonparametric estimation, performance measurement, X-DOI: 10.1080/1351847042000286694 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286694 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:5:p:419-443 Template-Type: ReDIF-Article 1.0 Author-Name: C. J. Adcock Author-X-Name-First: C. J. Author-X-Name-Last: Adcock Title: Exploiting skewness to build an optimal hedge fund with a currency overlay Abstract: This paper documents an investigation into the use of portfolio selection methods to construct a hedge fund with a currency overlay. The fund, which is based on number of international stock and bond market indices and is constructed from the perspective of a Sterling investor, allows the individual exposures in the currency overlay to be optimally determined. As well as using traditional mean variance, the paper constructs the hedge funds using portfolio selection methods that incorporate skewness in the optimisation process. These methods are based on the multivariate skewnormal distribution, which motivates the use of a linear skewness shock. An extension to Stein's lemma gives the ability to explore the mean-variance-skewness efficient surface without the necessity to be concerned with the precise form of an individual investor's utility function. The results suggest that it is possible to use mean variance optimisation methods to build a hedge fund based on the assets and return forecasts described. The results also suggest that the inclusion of a skewness component in the optimisation is beneficial. In many of the cases reported, the skewness term contributes to an improvement in performance over and above that given by mean variance methods. Journal: The European Journal of Finance Pages: 445-462 Issue: 5 Volume: 11 Year: 2005 Keywords: Currency hedging, multivariate skew normal distribution, portfolio selection, X-DOI: 10.1080/13518470500039527 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039527 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:5:p:445-462 Template-Type: ReDIF-Article 1.0 Author-Name: Bertrand Maillet Author-X-Name-First: Bertrand Author-X-Name-Last: Maillet Author-Name: Thierry Michel Author-X-Name-First: Thierry Author-X-Name-Last: Michel Title: Technical analysis profitability when exchange rates are pegged: A note Abstract: This note extends earlier results which concluded that generally technical analysis trading rules were profitable when applied to several US dollar exchange rates. These results were linked to the presence of long swings in the dollar series, and here, it is tested whether they still hold in a different setting, with a quasi-fixed exchange rate system. Applying non-parametric and parametric tests to the main European currencies does not allow to confirm, in this case, the profitability of these rules. These results strengthen the likelihood of the hypothesis of a causal link from the exchange rate DGP to the profitability of technical analysis trading rules, as already highlighted in several articles. Journal: The European Journal of Finance Pages: 463-470 Issue: 6 Volume: 11 Year: 2005 Keywords: International finance, technical analysis, performance, foreign exchange market, financial forecasting, efficient market hypothesis, X-DOI: 10.1080/13518470210124614 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470210124614 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:6:p:463-470 Template-Type: ReDIF-Article 1.0 Author-Name: Dennis Dittrich Author-X-Name-First: Dennis Author-X-Name-Last: Dittrich Author-Name: Werner Guth Author-X-Name-First: Werner Author-X-Name-Last: Guth Author-Name: Boris Maciejovsky Author-X-Name-First: Boris Author-X-Name-Last: Maciejovsky Title: Overconfidence in investment decisions: An experimental approach Abstract: By experimentally inducing risk aversion, overconfidence in an investment setting is investigated, comparing the evaluation of actual investment decisions with alternative choices. After selecting their own investment, subjects confront three alternative investment choices, including the optimal one, and are asked about their willingness to pay and to substitute their own for alternative choices. Overconfidence is defined as the persistent overevaluation of the own investment decision. Results indicate that overconfidence increases (i) with the absolute deviation from optimal choices, (ii) with task complexity involving the number of risky assets, and (iii) decreases with individual perceived uncertainty. Journal: The European Journal of Finance Pages: 471-491 Issue: 6 Volume: 11 Year: 2005 Keywords: Risky decision making, behavioural finance, portfolio choice, experimental economics, X-DOI: 10.1080/1351847042000255643 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000255643 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:6:p:471-491 Template-Type: ReDIF-Article 1.0 Author-Name: Gabe De Bondt Author-X-Name-First: Gabe Author-X-Name-Last: De Bondt Title: Determinants of corporate debt securities in the Euro area Abstract: This study examines the macroeconomic determinants of corporate debt securities in the euro area. The financing costs, as approximated by the cost of debt securities vis-a-vis other sources of corporate finance, and financing needs, as captured by mergers and acquisitions and gross domestic product, are found to be significant determinants in the short and long run. The empirical results are also supportive of substitution between debt security and internal financing unrelated to cost of differentials in the short run and of differences in the determination of long- and short-term debt securities. These findings are robust across different samples and specifications. Journal: The European Journal of Finance Pages: 493-509 Issue: 6 Volume: 11 Year: 2005 Keywords: Corporate finance, debt securities, euro area, X-DOI: 10.1080/1351847042000255661 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000255661 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:6:p:493-509 Template-Type: ReDIF-Article 1.0 Author-Name: Anders Ekholm Author-X-Name-First: Anders Author-X-Name-Last: Ekholm Author-Name: Daniel Pasternack Author-X-Name-First: Daniel Author-X-Name-Last: Pasternack Title: The negative news threshold—An explanation for negative skewness in stock returns Abstract: A vast literature documents negative skewness in stock index return distributions on several markets. In this paper the issue of negative skewness is approached from a different angle to previous studies by combining the Trueman's 1997 model of management disclosure practices with symmetric market responses in order to explain negative skewness in stock returns. Empirical tests reveal that returns for days when non-scheduled news items are disclosed are the source of negative skewness in stock returns, as predicted. These findings suggest that negative skewness in stock returns is induced by asymmetries in the news disclosure policies of firm management. Furthermore, it is found that the returns are negatively skewed only for non-scheduled firm-specific news disclosures for firms where the management is compensated with stock options. Journal: The European Journal of Finance Pages: 511-529 Issue: 6 Volume: 11 Year: 2005 Keywords: Disclosure policies, stock return distributions, negative skewness, X-DOI: 10.1080/1351847042000286702 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000286702 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:6:p:511-529 Template-Type: ReDIF-Article 1.0 Author-Name: Suzanne Fifield Author-X-Name-First: Suzanne Author-X-Name-Last: Fifield Author-Name: David Power Author-X-Name-First: David Author-X-Name-Last: Power Author-Name: C. Donald Sinclair Author-X-Name-First: C. Donald Author-X-Name-Last: Sinclair Title: An analysis of trading strategies in eleven European stock markets Abstract: In recent years, the validity of the weak form efficient market hypothesis (EMH) has been called into question as several studies have uncovered evidence that technical trading rules have predictive ability with respect to both developed and emerging stock market indices. This study analyses the forecasting power of 2 of the most popular trading rules using index data for a selection of 11 European stock markets over the January 1991 to December 2000 period. The findings indicate that the emerging markets included in this paper are informationally inefficient; these markets displayed some degree of predictability in their share returns, although the developed markets did not. Furthermore, the results point to large differences in the performance of the rules examined; while small size filters consistently outperformed the buy-and-hold strategy in the emerging markets examined even after the consideration of transaction costs, the performance of the moving average rules was erratic and varied dramatically from market to market. Journal: The European Journal of Finance Pages: 531-548 Issue: 6 Volume: 11 Year: 2005 Keywords: Trading rules, emerging markets, market efficiency, X-DOI: 10.1080/1351847042000304099 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000304099 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:11:y:2005:i:6:p:531-548 Template-Type: ReDIF-Article 1.0 Author-Name: Konstantinos Tolikas Author-X-Name-First: Konstantinos Author-X-Name-Last: Tolikas Author-Name: Richard Brown Author-X-Name-First: Richard Author-X-Name-Last: Brown Title: The distribution of the extreme daily share returns in the Athens stock exchange Abstract: Extreme Value Theory (EVT) methods are used to investigate the asymptotic distribution of the lower tail for daily returns in the Athens Stock Exchange (ASE) over the period 1986 to 2001. Overall, the Generalised Logistic (GL) distribution is found to provide adequate descriptions of the stochastic behaviour of the ASE index extreme minima over the period studied. However, using moving windows techniques we show that the parameters of this distribution appear to vary with a tendency to become less fat tailed over time. This paper argues that market risk measurement models that are able to exploit this time varying behaviour could lead to more accurate risk estimates and therefore, have potentially important implications for risk assessment. Journal: The European Journal of Finance Pages: 1-22 Issue: 1 Volume: 12 Year: 2006 Keywords: Extreme value theory, L-moments, probability weighted moments, anderson-darling goodness of fit test, generalised extreme value distribution, generalised logistic distribution, X-DOI: 10.1080/1351847042000304107 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000304107 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:1:p:1-22 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Annaert Author-X-Name-First: Jan Author-X-Name-Last: Annaert Author-Name: Anouk Claes Author-X-Name-First: Anouk Author-X-Name-Last: Claes Author-Name: Marc De Ceuster Author-X-Name-First: Marc Author-X-Name-Last: De Ceuster Title: Intertemporal stability of the European credit spread co-movement structure1 Abstract: Corporate bonds expose the investor to credit risk, which will be reflected in the credit spread. Based on the EMU Broad Market indices, this paper reports studies of the intertemporal stability of the covariance and correlation matrices of credit spread changes on weekly data. For a multivariate framework, the Box and Jennrich tests are the most commonly used test statistics in the literature. However, it is shown that for small samples these tests are not well specified when the normality assumption is relaxed. A bootstrap-based statistical inference provides evidence that correlations and covariances between various (investment grade) credit spread changes are unstable over the 1998-2003 period. Journal: The European Journal of Finance Pages: 23-32 Issue: 1 Volume: 12 Year: 2006 Keywords: Credit spreads, diversification, correlations, corporate bonds, X-DOI: 10.1080/1351847042000304116 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000304116 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:1:p:23-32 Template-Type: ReDIF-Article 1.0 Author-Name: Sven Husmann Author-X-Name-First: Sven Author-X-Name-Last: Husmann Author-Name: Lutz Kruschwitz Author-X-Name-First: Lutz Author-X-Name-Last: Kruschwitz Author-Name: Andreas Loffler Author-X-Name-First: Andreas Author-X-Name-Last: Loffler Title: WACC and a generalized tax code Abstract: Valuation of firms is generally based on the WACC approach which typically neglects personal income taxes. This paper extends this approach to incorporate personal income taxes and develop a generalized valuation formula which can be used for any taxation system. The approach is illustrated for four different taxation systems highlighting the importance of considering personal taxes. Journal: The European Journal of Finance Pages: 33-40 Issue: 1 Volume: 12 Year: 2006 Keywords: WACC, tax shield, imputation system, X-DOI: 10.1080/1351847042000304125 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847042000304125 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:1:p:33-40 Template-Type: ReDIF-Article 1.0 Author-Name: Chiara Pederzoli Author-X-Name-First: Chiara Author-X-Name-Last: Pederzoli Title: Stochastic Volatility and GARCH: a Comparison Based on UK Stock Data Abstract: This paper compares two types of volatility models for returns, ARCH-type and stochastic volatility (SV) models, both from a theoretical and an empirical point of view. In particular a GARCH(1,1) model, an EGARCH(1,1) model and a log-normal AR(1) stochastic volatility model are considered. The three models are estimated on UK stock data: a series of the British equity index FTSE100 is used to estimate the relevant parameters. Diagnostic tests are implemented to evaluate how well the models fit the data. The models are used to obtain daily volatility forecasts and these volatilities are used to estimate the “VaR” on a simple one-unit position on FTSE100. The VaR accuracy is tested by means of a backtest. While the results do not lead to a straightforward preference between GARCH(1,1) and SV, the EGARCH shows the best performance. Journal: The European Journal of Finance Pages: 41-59 Issue: 1 Volume: 12 Year: 2006 Keywords: Volatility models, stochastic volatility, GARCH, value at risk, X-DOI: 10.1080/13518470500039121 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039121 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:1:p:41-59 Template-Type: ReDIF-Article 1.0 Author-Name: Hannu Kahra Author-X-Name-First: Hannu Author-X-Name-Last: Kahra Author-Name: Antti Kanto Author-X-Name-First: Antti Author-X-Name-Last: Kanto Author-Name: Hannu Schadewitz Author-X-Name-First: Hannu Author-X-Name-Last: Schadewitz Author-Name: Dallas Blevins Author-X-Name-First: Dallas Author-X-Name-Last: Blevins Title: Anatomy of Interim Disclosures During Bimodal Return Distributions Abstract: For over 30 years, observers of financial markets have been puzzled by the behaviour of the market model residuals. This research offers one answer to two of the questions raised by the anomalous behaviour of the residuals. The first is the failure of cumulative abnormal residuals (CARs) to be centred at zero and normally or t distributed. The second is the failure of CARs to be homoscedastic. The authors argue that, in some cases, a bimodal distribution fits the data better. During the period 1985-1993 there were 47 Helsinki Exchanges listed firms having at least one bimodal return distribution after the publication of an interim report. This frequency represents 76% of the total number of firms observed. Bimodality occurs most prominently during the first few days after the event. Internal factors, contained in the interim reports, and external factors, available exogenously, help explain the uncertainty that gives rise to expost bimodality. Sometimes bimodality disappears during the investigation period, while at other times bimodality remains. These findings should promote the use of more sophisticated methods for non-normal return distributions and longer examination periods after the event. On the practical side, these results should help managers refine their communication practices. Journal: The European Journal of Finance Pages: 61-75 Issue: 1 Volume: 12 Year: 2006 Keywords: Bimodal distribution, interim reports, voluntary disclosure, X-DOI: 10.1080/13518470500039501 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039501 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:1:p:61-75 Template-Type: ReDIF-Article 1.0 Author-Name: Edith Ginglinger Author-X-Name-First: Edith Author-X-Name-Last: Ginglinger Author-Name: Jean-Francois L'her Author-X-Name-First: Jean-Francois Author-X-Name-Last: L'her Title: Ownership structure and open market stock repurchases in France Abstract: This paper examines open market stock repurchases in France. We find a positive average market reaction to the repurchase announcement. However, the magnitude of the price reaction is found to depend on a number of corporate governance structure measures. The positive aspects of the announcement only appear for a company with a low likelihood of being taken over, and with a low risk of minority shareholder expropriation. Specifically, stock repurchase programmes are good news when the firm is supported by foreign institutional investors, and in the case of controlled firms, when the firm has a second large shareholder, which guarantees an effective balance of power for the controlling shareholders. Journal: The European Journal of Finance Pages: 77-94 Issue: 1 Volume: 12 Year: 2006 Keywords: Open market share repurchases, undervaluation, ownership structure, X-DOI: 10.1080/13518470500039543 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039543 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:1:p:77-94 Template-Type: ReDIF-Article 1.0 Author-Name: Robert Lensink Author-X-Name-First: Robert Author-X-Name-Last: Lensink Author-Name: Victor Murinde Author-X-Name-First: Victor Author-X-Name-Last: Murinde Title: The Inverted-U hypothesis for the effect of uncertainty on investment: Evidence from UK firms Abstract: This paper offers the first attempt to test the inverted-U hypothesis for the effect of uncertainty on investment, implied by a number of recent theoretical studies, using a panel of UK firms. It is found that the effect of uncertainty on corporate investment is indeed approximated by an inverted-U shaped relationship: at low levels of uncertainty the effect is positive, but it becomes negative at high levels of uncertainty. This result represents the first empirical verification of the hypothesis with respect to UK firms. Journal: The European Journal of Finance Pages: 95-105 Issue: 2 Volume: 12 Year: 2006 Keywords: Inverted-U hypothesis, corporate investment and uncertainty, UK firms, X-DOI: 10.1080/13518470500145928 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500145928 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:2:p:95-105 Template-Type: ReDIF-Article 1.0 Author-Name: Manfred Fruhwirth Author-X-Name-First: Manfred Author-X-Name-Last: Fruhwirth Author-Name: Leopold Sogner Author-X-Name-First: Leopold Author-X-Name-Last: Sogner Title: The Jarrow/Turnbull default risk model—Evidence from the German market Abstract: This article estimates default intensities within the continuous-time Jarrow and Turnbull model for German bank and corporate bond prices. It is shown that a joint implicit estimation of the default intensity and the recovery rate is numerically unstable. In addition to cross-sectional estimations, separate estimations (for each bond individually) are performed. Results strongly support separate estimation over the building of any cross-sections. In contrast to preceeding literature, the optimum volume of data required to provide reasonable estimates of the default intensity is also investigated. It is shown that calibration based on daily data as a rule does not minimize the ex ante mean squared pricing errors. Finally, it is shown that the constant default intensity assumption is not sound with the underlying data and the determinants of the default intensity are investigated. Regressions show that the lagged default intensity estimate, the level of the default-free term structure and liquidity proxies affect the estimated default intensity via joint parameters. Journal: The European Journal of Finance Pages: 107-135 Issue: 2 Volume: 12 Year: 2006 Keywords: Credit risk, intensity-based models, Jarrow/Turnbull model, term structure of interest rates, X-DOI: 10.1080/13518470500145969 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500145969 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:2:p:107-135 Template-Type: ReDIF-Article 1.0 Author-Name: G. Geoffrey Booth Author-X-Name-First: G. Geoffrey Author-X-Name-Last: Booth Author-Name: Aydin Yuksel Author-X-Name-First: Aydin Author-X-Name-Last: Yuksel Title: Price resolution in an emerging market: Evidence from the Istanbul Stock Exchange Abstract: This study examines price resolution an emerging market that uses a very large relative tick size. Intraday transaction data from the Istanbul Stock Exchange are used to provide evidence concerning clustering when prices change and when they do not change. The results show that in this one-tick market there exists little if any clustering. The clustering that does exist primarily arises from sequential transactions at the same price. The observed positive relation between clustering associated with price changes and uncertainty occurs in periods of high uncertainty during which multiple-tick spreads and price changes are observed. Journal: The European Journal of Finance Pages: 137-152 Issue: 2 Volume: 12 Year: 2006 Keywords: Stock price clustering, tick size, emerging markets, Istanbul Stock Exchange, X-DOI: 10.1080/13518470500146017 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500146017 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:2:p:137-152 Template-Type: ReDIF-Article 1.0 Author-Name: R. Jankowitsch Author-X-Name-First: R. Author-X-Name-Last: Jankowitsch Author-Name: H. Mosenbacher Author-X-Name-First: H. Author-X-Name-Last: Mosenbacher Author-Name: S. Pichler Author-X-Name-First: S. Author-X-Name-Last: Pichler Title: Measuring the liquidity impact on EMU government bond prices Abstract: The work reported in this paper aimed to measure the impact of liquidity on European Monetary Union (EMU) government bond prices. Although there is a growing theoretical and empirical literature on liquidity effects in fixed income markets there is no clear answer to the questions how to measure liquidity and whether liquidity is priced in the market at all. The empirical analysis here is based on a unique data set containing individual bond data from six major EMU government bond markets, allowing one to compare yield curves estimated for subportfolios formed with respect to different potential liquidity measures. In a second procedure, liquidity measures are collected on the individual bond level and estimated pricing errors, given some reference yield curve, are regressed against these liquidity variables. This enables the conduction of formal tests on the pricing impact of liquidity measures. Results indicate that the benchmark property and the number of contributors are the most promising liquidity proxies having significant results in most countries. The results do not support the hypothesis that other liquidity measures under consideration, such as the on-the-run property, the issue size, and bid-ask spread related measures have a persistent price impact. A cross-country analysis of the subportfolio level indicates that liquidity effects cannot explain the size of the yield spreads between different issuers. This implies that effects other than liquidity, such as credit risk, are important driving factors of cross-country yield spreads. Journal: The European Journal of Finance Pages: 153-169 Issue: 2 Volume: 12 Year: 2006 Keywords: Liquidity, EMU, government bonds, price impact, cross-country analysis, X-DOI: 10.1080/13518470500146041 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500146041 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:2:p:153-169 Template-Type: ReDIF-Article 1.0 Author-Name: Ercan Balaban Author-X-Name-First: Ercan Author-X-Name-Last: Balaban Author-Name: Asli Bayar Author-X-Name-First: Asli Author-X-Name-Last: Bayar Author-Name: Robert Faff Author-X-Name-First: Robert Author-X-Name-Last: Faff Title: Forecasting stock market volatility: Further international evidence Abstract: This paper evaluates the out-of-sample forecasting accuracy of eleven models for monthly volatility in fifteen stock markets. Volatility is defined as within-month standard deviation of continuously compounded daily returns on the stock market index of each country for the ten-year period 1988 to 1997. The first half of the sample is retained for the estimation of parameters while the second half is for the forecast period. The following models are employed: a random walk model, a historical mean model, moving average models, weighted moving average models, exponentially weighted moving average models, an exponential smoothing model, a regression model, an ARCH model, a GARCH model, a GJR-GARCH model, and an EGARCH model. First, standard (symmetric) loss functions are used to evaluate the performance of the competing models: mean absolute error, root mean squared error, and mean absolute percentage error. According to all of these standard loss functions, the exponential smoothing model provides superior forecasts of volatility. On the other hand, ARCH-based models generally prove to be the worst forecasting models. Asymmetric loss functions are employed to penalize under-/over-prediction. When under-predictions are penalized more heavily, ARCH-type models provide the best forecasts while the random walk is worst. However, when over-predictions of volatility are penalized more heavily, the exponential smoothing model performs best while the ARCH-type models are now universally found to be inferior forecasters. Journal: The European Journal of Finance Pages: 171-188 Issue: 2 Volume: 12 Year: 2006 Keywords: Stock market volatility, forecasting, forecast evaluation, X-DOI: 10.1080/13518470500146082 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500146082 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:2:p:171-188 Template-Type: ReDIF-Article 1.0 Author-Name: Martin Hess Author-X-Name-First: Martin Author-X-Name-Last: Hess Title: Timing and diversification: A state-dependent asset allocation approach Abstract: The influence of changing economic environment leads the distribution of stock market returns to be time-varying. A conditionally optimal investment hence requires a dynamic adjustment of asset allocation. In this context, this paper examines the improvement in portfolio performance by simulating portfolio strategies that are conditioned on the Markov regime switching behaviour of stock market returns. Including a memory effect eliminates the empirical shortcoming of discrete state models, namely that they produce a standard and an extreme state in stock returns. So far, this has prevented the regimes from being used as a valuable conditioning variable. Based on a discrete state indicator variable, is presented evidence of considerable performance improvement relative to the static model due to optimal shifting between aggressive and well diversified portfolio structures. Journal: The European Journal of Finance Pages: 189-204 Issue: 3 Volume: 12 Year: 2006 Keywords: Asymmetric stock return distribution, conditional asset pricing, dynamic diversification, Markov regime switching, timing, X-DOI: 10.1080/13518470500162741 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500162741 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:3:p:189-204 Template-Type: ReDIF-Article 1.0 Author-Name: Gregory Koutmos Author-X-Name-First: Gregory Author-X-Name-Last: Koutmos Author-Name: Andreas Pericli Author-X-Name-First: Andreas Author-X-Name-Last: Pericli Author-Name: Lenos Trigeorgis Author-X-Name-First: Lenos Author-X-Name-Last: Trigeorgis Title: Short-term Dynamics in the Cyprus Stock Exchange Abstract: This paper investigates the short-term dynamics of stock returns in an emerging stock market namely, the Cyprus Stock Exchange (CYSE). Stock returns are modelled as conditionally heteroscedastic processes with time-dependent serial correlation. The conditional variance follows an EGARCH process, while for the conditional mean three nonlinear specifications are tested, namely: (a) the LeBaron exponential autoregressive model; (b) the Sentana and Wadhwani positive feedback trading model; and finally (c) a model that nests both (a) and (b). There is an inverse relationship between volatility and autocorrelation consistent with the findings from several other stock markets, including the US. This pattern could be the manifestation of a certain form of noise trading namely positive feedback trading or, momentum trading strategies. There is little evidence that market declines are followed with higher volatility than market advances, the so-called 'leverage effect', that has been observed in almost all developed stock markets. In out of sample forecasts, the nonlinear specifications provide better results in terms of forecasting both first and second moments of the distribution of returns. Journal: The European Journal of Finance Pages: 205-216 Issue: 3 Volume: 12 Year: 2006 Keywords: Cyprus Stock Exchange, positive feedback trading, stock return dynamics, EGARCH, GED, exponential autoregression, forecasting, X-DOI: 10.1080/13518470500146074 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500146074 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:3:p:205-216 Template-Type: ReDIF-Article 1.0 Author-Name: Dick Davies Author-X-Name-First: Dick Author-X-Name-Last: Davies Author-Name: Christian Eckberg Author-X-Name-First: Christian Author-X-Name-Last: Eckberg Author-Name: Andrew Marshall Author-X-Name-First: Andrew Author-X-Name-Last: Marshall Title: The determinants of Norwegian exporters' foreign exchange risk management Abstract: This paper examines foreign exchange (FX) hedging by Norwegian exporting firms to provide empirical evidence on the determinants of the hedging decision. The paper contributes to prior studies by, first, focusing on exporters to ensure that the companies in the sample have FX exposure, thereby allowing a more rigorous test of the theoretical determinants of hedging, and, secondly, in contrast to most previous studies that have focused on FX external hedging instruments, the use of both internal and external instruments is examined. Univariate, multivariate and multinominal analyses all provide evidence consistent with the firm value maximization hypotheses of underinvestment and risk aversion. Also, the following characteristics of firms—size, extent of internationalization and liquidity—are found to be related to the decision to hedge FX risk. However, the evidence on the links between the firm characteristics and the decision to hedge is not consistent across internal and external FX hedgers, and also varies for individual hedging instruments. Therefore it is argued that the empirical evidence on the theoretical determinants cannot be generalized to cover the full range of FX hedging strategies (which includes internal hedging instruments). Unlike empirical studies for other countries the evidence for Norwegian firms does not support the hypothesis that the avoidance of financial distress and the need to resort to external capital markets is a significant determinant of the hedging decision. Whilst the evidence suggests that country-specific factors may play a role in determining the use of FX hedging, it does not imply that the different policies adopted are necessarily inconsistent with the firm value maximization hypothesis. Journal: The European Journal of Finance Pages: 217-240 Issue: 3 Volume: 12 Year: 2006 Keywords: Hedging, theoretical determinants, internal and external, exporters, firm value, X-DOI: 10.1080/13518470500249274 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500249274 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:3:p:217-240 Template-Type: ReDIF-Article 1.0 Author-Name: Ignacio Mauleon Author-X-Name-First: Ignacio Author-X-Name-Last: Mauleon Title: Modelling multivariate moments in European Stock Markets Abstract: This research extends the results of Mauleon and Perote, and derives analytically a general framework for the multivariate Edgeworth Sargan (ES) density. Its capability to account for multivariate moments beyond correlation is shown-mainly, co-skewness, co-kurtosis and co-volatility. The multivariate ES is then fitted to the residuals of a VAR model applied to three European stock market series of daily data (FTSE, DAX, CAC40), accounting for univariate as well as multivariate departures from normality. The complete model - with nearly 60 parameters - is set up and estimated jointly by maximum likelihood. Two alternative multivariate probability density functions, student's t and the normal skewed, are also estimated and compared to the ES. The empirical results show: (1) in spite of the high nonlinearity and complexity of the model, it is feasible to fit it to empirical data; (2) statistically significant multivariate effects, other than correlations, are found, and (3) the tail fit of the ES is significantly better. Journal: The European Journal of Finance Pages: 241-263 Issue: 3 Volume: 12 Year: 2006 Keywords: Multivariate ES density, co-skewness, co-kurtosis and co-volatility, European stock markets, X-DOI: 10.1080/13518470500249233 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500249233 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:3:p:241-263 Template-Type: ReDIF-Article 1.0 Author-Name: Luciana Mancinelli Author-X-Name-First: Luciana Author-X-Name-Last: Mancinelli Author-Name: Aydin Ozkan Author-X-Name-First: Aydin Author-X-Name-Last: Ozkan Title: Ownership structure and dividend policy: Evidence from Italian firms Abstract: This paper reports on empirical investigations into the relationship between dividend policy and ownership structure of firms, using a sample of 139 listed Italian companies. Ownership structure in Italy is highly concentrated and hence the relevant agency problem to analyse seems to be the one that arises from the conflicting interests of large shareholders and minority shareholders. This paper therefore attempts to test the rent extraction hypothesis by relating the firm's dividend payout ratio to various ownership variables, which measure the degree of concentration in terms of the voting rights of large shareholders. The hypothesis that other non-controlling large shareholders may have incentives to monitor the largest shareholder is also tested. The results of the empirical analysis reveal that firms make lower dividend payouts as the voting rights of the largest shareholder increase. Results also suggest that the presence of agreements among large shareholders might explain the limited monitoring power of other 'strong' non-controlling shareholders. Journal: The European Journal of Finance Pages: 265-282 Issue: 3 Volume: 12 Year: 2006 Keywords: Dividend policy, ownership structure, agency costs, X-DOI: 10.1080/13518470500249365 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500249365 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:3:p:265-282 Template-Type: ReDIF-Article 1.0 Author-Name: Roderick Bain Author-X-Name-First: Roderick Author-X-Name-Last: Bain Author-Name: Donald Hausch Author-X-Name-First: Donald Author-X-Name-Last: Hausch Author-Name: William Ziemba Author-X-Name-First: William Author-X-Name-Last: Ziemba Title: An application of expert information to win betting on the Kentucky Derby, 1981-2005 Abstract: The Kentucky Derby features top three-year-old thoroughbred horses. Run at [image omitted]  miles, it is typically at least 1/8 mile longer than any of the horses has raced before. This extra distance, usually combined with a large field, makes the race a difficult test of stamina for horses this young. Bettors, because there is no direct evidence of whether a horse has the stamina to compete effectively at [image omitted]  miles, are also challenged. The informational content of one publicly available, pedigree-based measure of stamina, the Dosage Index, is used with simple performance measures to identify a semi-strong-form inefficiency, and to create a betting scheme based on the optimal capital growth model that merges these criteria with the public's opinion. Statistically significant profits, net of transaction costs, could have been achieved during the period 1981 to 2005. Journal: The European Journal of Finance Pages: 283-301 Issue: 4 Volume: 12 Year: 2006 Keywords: Semi-strong market efficiency, capital growth theory, speculative investments, sports betting, X-DOI: 10.1080/13518470500531051 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500531051 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:283-301 Template-Type: ReDIF-Article 1.0 Author-Name: Hans Bystrom Author-X-Name-First: Hans Author-X-Name-Last: Bystrom Title: Using extreme value theory to estimate the likelihood of banking sector failure Abstract: The growing interest in management of credit risk and estimation of default probabilities has given rise to a range of more or less elaborate credit risk models. While these models work well for non-financial firms they are usually not very successful in capturing the financial strength of banks. As an answer to this, Hall and Miles suggest a simple approach of estimating bank failure probabilities based solely on their stock prices. This paper suggests an extension to the Hall and Miles model using extreme value theory and applies the extended model to the Swedish banking sector around the banking crisis of the early 1990s. The extended model captures very well the increased likelihood of a systemic banking sector failure around the peak of the crisis and it produces default probabilities that are more stable, more realistic and more consistent with Moody's and Fitch rating implied default rates than probabilities from the original Hall and Miles model. Journal: The European Journal of Finance Pages: 303-312 Issue: 4 Volume: 12 Year: 2006 Keywords: Banking sector failure, default risk, extreme value theory, X-DOI: 10.1080/13518470500146116 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500146116 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:303-312 Template-Type: ReDIF-Article 1.0 Author-Name: Shaun Bond Author-X-Name-First: Shaun Author-X-Name-Last: Bond Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Title: Asymmetry and downside risk in foreign exchange markets Abstract: This paper evaluates the double gamma distribution as a means of modelling asymmetry in the conditional distribution of financial data. To do this the model is applied to ten exchange rate series covering mature and emerging market countries. A second contribution of this paper is to highlight the link between the double gamma distribution and the measurement of the second lower partial moment (or semi-variance). The resulting empirical performance of the double gamma model is found to be mixed when compared to a symmetric GARCH-t model. Estimates of conditional downside risk based on the double gamma model are constructed for each series. The results for the Malaysian Riggit, Zimbabwe Dollar and the Korean Won demonstrate the extreme downside volatility experienced by these countries during the emerging markets currency crisis. Journal: The European Journal of Finance Pages: 313-332 Issue: 4 Volume: 12 Year: 2006 Keywords: Double-gamma, skewness, lower partial moments, GARCH, X-DOI: 10.1080/13518470500459808 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500459808 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:313-332 Template-Type: ReDIF-Article 1.0 Author-Name: Ansgar Wohlschlegel Author-X-Name-First: Ansgar Author-X-Name-Last: Wohlschlegel Title: Bankruptcy law and financial structure: The impact of managerial incentives Abstract: Providing the manager of a firm with suitable incentives to act in the investors' interest may be socially efficient, but not individually rational for the investors themselves. This paper specifies a second-best arrangement and shows how investors can be induced to implement it by means of an optimal bankruptcy code in the case where only standard financial contracts are available. It explains why bankruptcy law should, in some states of nature, let shareholders and senior creditors decide jointly, and provides a rationale for the existence of junior debt, which never enjoys any power of decision. Journal: The European Journal of Finance Pages: 333-345 Issue: 4 Volume: 12 Year: 2006 Keywords: Managers, incentives, investors, bankruptcy code, debt, X-DOI: 10.1080/13518470500248466 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500248466 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:333-345 Template-Type: ReDIF-Article 1.0 Author-Name: Andros Gregoriou Author-X-Name-First: Andros Author-X-Name-Last: Gregoriou Author-Name: Christos Ioannidis Author-X-Name-First: Christos Author-X-Name-Last: Ioannidis Title: Information costs and liquidity effects from changes in the FTSE 100 list Abstract: In this paper we examine the stock price effect of changes in the composition of the FTSE 100 over the time period of 1984-2001. Like the S&P 500 listing studies, we find that the price and trading volume of newly listed firms increases. The evidence is consistent with the information cost/liquidity explanation. This is because investors hold stocks with more available information, implying that they have lower trading costs. This explains the increase in the stock price and trading volume of newly listed stocks to the FTSE 100 List. We find the reverse effect for the deletions from the FTSE 100. Journal: The European Journal of Finance Pages: 347-360 Issue: 4 Volume: 12 Year: 2006 Keywords: Information costs, trading costs, bid-ask spreads, liquidity, X-DOI: 10.1080/13518470500249340 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500249340 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:347-360 Template-Type: ReDIF-Article 1.0 Author-Name: Constantin Mellios Author-X-Name-First: Constantin Author-X-Name-Last: Mellios Author-Name: Eric Paget-Blanc Author-X-Name-First: Eric Author-X-Name-Last: Paget-Blanc Title: Which factors determine sovereign credit ratings? Abstract: The purpose of this study is to examine the determinants of the sovereign credit ratings provided by the three major rating agencies: Fitch Ratings, Moody's and Standard and Poor. A principal component analysis is employed in order to identify the common factors affecting these ratings. The impact of the variables correlated with these factors on ratings is then assessed through an ordered logistic model. Results show that sovereign ratings are mostly influenced by per capita income, government income, real exchange rate changes, inflation rate and default history. The study also highlights the importance of corruption, as measured by Transparency International's Corruption Perceptions Index, which appears as a proxy for both economic development and the quality of the governance of a country. Journal: The European Journal of Finance Pages: 361-377 Issue: 4 Volume: 12 Year: 2006 Keywords: Credit ratings, sovereign debts, sovereign default, principal component analysis, logistic model, X-DOI: 10.1080/13518470500377406 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500377406 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:4:p:361-377 Template-Type: ReDIF-Article 1.0 Author-Name: Silvia Marchesi Author-X-Name-First: Silvia Author-X-Name-Last: Marchesi Title: Buybacks of domestic debt in public debt management Abstract: This paper shows how public debt repurchases can be used to reduce the costs of debt service under the hypothesis that the government could be of two types and that there is asymmetric information between the government and the private sector. For example, at the beginning of a fiscal stabilization a government typically does not enjoy full credibility among investors and high interest rates on longterm bonds may reflect credibility problem rather than term premia. In a two-period framework, this paper suggests that buybacks could be used to reduce the risk premia since they can signal government commitment to a previously-announced policy. Journal: The European Journal of Finance Pages: 379-400 Issue: 5 Volume: 12 Year: 2006 Keywords: Asymmetric information, signalling, public debt management, buybacks, X-DOI: 10.1080/13518470500459931 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500459931 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:5:p:379-400 Template-Type: ReDIF-Article 1.0 Author-Name: Leo De Haan Author-X-Name-First: Leo Author-X-Name-Last: De Haan Author-Name: Elmer Sterken Author-X-Name-First: Elmer Author-X-Name-Last: Sterken Title: The impact of monetary policy on the financing behaviour of firms in the Euro area and the UK Abstract: According to the 'broad credit view' bank-dependent firms are more strongly affected by monetary contractions than firms with access to non-bank forms of external finance. Within the credit view the bank lending channel focuses on the special role of bank loans, and predicts that monetary contractions reduce loan supply to firms facing information problems. However, the 'relationship lending channel' argues that, especially in bank-based economies, bank-dependent firms have close ties with banks, which may reduce the sensitivity of their use of bank debt to monetary shocks. The sensitivity of corporate debt structures to changes in the monetary policy stance is analysed using a sample of 22,000 firms in the Euro area and the UK. Evidence is found for the credit view, the relationship lending channel, but not for the bank lending channel. Journal: The European Journal of Finance Pages: 401-420 Issue: 5 Volume: 12 Year: 2006 Keywords: Broad credit view, bank lending channel, relationship lending, monetary policy, X-DOI: 10.1080/13518470500459840 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500459840 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:5:p:401-420 Template-Type: ReDIF-Article 1.0 Author-Name: Jose Guedes Author-X-Name-First: Jose Author-X-Name-Last: Guedes Author-Name: Gilberto Loureiro Author-X-Name-First: Gilberto Author-X-Name-Last: Loureiro Title: Estimating the expropriation of minority shareholders: Results from a new empirical approach Abstract: A novel methodological approach is proposed to estimate the effect of separation of ownership and control by dominant shareholders on firm value. The approach offers two major innovations. First, it frees the researcher from the necessity of having to make an ad hoc judgment call regarding which firms feature entrenched owners and which don't. Under this approach, the main shareholder becomes entrenched when the Shapley Value (SV) of his voting rights crosses an unknown threshold that is estimated jointly with the other model parameters. This approach allows one to perform a test on the joint hypotheses that the incentive to expropriate held by the dominant shareholder impacts negatively the market performance of the firm if the main shareholder is entrenched but produces no impact otherwise. Secondly, it generates a market-based estimate of the critical level of power at which the main shareholder becomes entrenched. The method is applied to a sample of European firms and a threshold equal to 0.34 is estimated. Most firms from the UK have a main shareholder with a SV below the estimated threshold; in contrast, about half of the continental firms in the sample feature main shareholders whose power index is above the estimated threshold. A negative relationship is found between the incentive to expropriate and corporate valuation above the threshold, that is both statistically and economically significant; below the threshold, we find no evidence of a relationship. Journal: The European Journal of Finance Pages: 421-448 Issue: 5 Volume: 12 Year: 2006 Keywords: Dominant shareholder, ownership, control, market performance, Shapley Value, X-DOI: 10.1080/13518470500459972 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500459972 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:5:p:421-448 Template-Type: ReDIF-Article 1.0 Author-Name: Ercan Balaban Author-X-Name-First: Ercan Author-X-Name-Last: Balaban Author-Name: Charalambos Th. Constantinou Author-X-Name-First: Charalambos Th. Author-X-Name-Last: Constantinou Title: Volatility clustering and event-induced volatility: Evidence from UK mergers and acquisitions Abstract: The paper describes simultaneous tests of the effects of announcements of UK mergers and acquisitions on both the mean and conditional volatility functions for UK bidder firms. Unlike previous research, the entire data set is utilized, thus avoiding researcher-chosen event periods. The cross-sectional test statistics for 745 firms show that the announcement day returns are significantly negative and the conditional volatility decreases. Results suggest that the event studies should incorporate firm-specific time-varying volatility into their abnormal return generating processes and into the tests calibrating the significance of both abnormal return and abnormal volatility around an event. Journal: The European Journal of Finance Pages: 449-453 Issue: 5 Volume: 12 Year: 2006 Keywords: Conditional heteroscedasticity, volatility clustering, event studies, mergers and acquisitions, announcement effects, abnormal performance, X-DOI: 10.1080/13518470500377430 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500377430 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:5:p:449-453 Template-Type: ReDIF-Article 1.0 Author-Name: Arie Preminger Author-X-Name-First: Arie Author-X-Name-Last: Preminger Author-Name: Uri Ben-Zion Author-X-Name-First: Uri Author-X-Name-Last: Ben-Zion Author-Name: David Wettstein Author-X-Name-First: David Author-X-Name-Last: Wettstein Title: Extended switching regression models with time-varying probabilities for combining forecasts Abstract: This paper introduces a new methodology, which extends the well-known switching regression model. The extension is via the introduction of several latent state variables, each one of which influencing a disjoint set of the model parameters. Furthermore, the probability distribution of the state variables is allowed to vary over time. This model is called the time varying extended switching regression (TV-ESR) model. The model is used to combine volatility forecasts of several currencies (JPY/USD, GBP/USD, and CHF/USD). A detailed comparison of the forecasts generated by the TV-ESR approach is made with those of traditional linear combining procedures and other methods for combining forecasts derived from the switching regression model. On the basis of out-of-sample forecast encompassing tests as well as other measures for forecasting accuracy, results indicate that the use of this new method yields overall better forecasts than those generated by competing models. Journal: The European Journal of Finance Pages: 455-472 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Forecast combining, TV-ESR models, volatility modelling, X-DOI: 10.1080/13518470500039360 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039360 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:455-472 Template-Type: ReDIF-Article 1.0 Author-Name: Soosung Hwang Author-X-Name-First: Soosung Author-X-Name-Last: Hwang Author-Name: Pedro L. Valls Pereira Author-X-Name-First: Pedro L. Valls Author-X-Name-Last: Pereira Title: Small sample properties of GARCH estimates and persistence Abstract: It is shown that the ML estimates of the popular GARCH(1,1) model are significantly negatively biased in small samples and that in many cases converged estimates are not possible with Bollerslev's non-negativity conditions. Results also indicate that a high level of persistence in GARCH(1,1) models obtained using a large number of observations has autocorrelations lower than these ML estimates suggest in small samples. Considering the size of biases and convergence errors, it is proposed that at least 250 observations are needed for ARCH(1) models and 500 observations for GARCH(1,1) models. A simple measure of how much GARCH conditional volatility explains squared returns is proposed. The measure indicates that for a typical index return volatility whose ARCH parameter is very small, the conditional volatility hardly explains squared returns. Journal: The European Journal of Finance Pages: 473-494 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Small sample, volatility, GARCH, persistence, X-DOI: 10.1080/13518470500039436 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500039436 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:473-494 Template-Type: ReDIF-Article 1.0 Author-Name: Svetlana Borovkova Author-X-Name-First: Svetlana Author-X-Name-Last: Borovkova Title: Detecting market transitions and energy futures risk management using principal components Abstract: An empirical approach to analysing the forward curve dynamics of energy futures is presented. For non-seasonal commodities—such as crude oil—the forward curve is well described by the first three principal components: the level, slope and curvature. A principal component indicator is described that detects transitions between the two fundamental market states remarkably well. For seasonal commodities—such as electricity and natural gas—it is shown how to extract the seasonal component from the forward curve. The principal component indicator can then be applied to the de-seasoned forward curve to detect significant price deviations that may support profitable trading strategies. A principal component approach to forward curve modelling is applied to computing portfolio value-at-risk. This approach is combined with a new two-step resampling procedure to improve value-at-risk estimates. Journal: The European Journal of Finance Pages: 495-512 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Commodity futures, forward curve, seasonality, principal component analysis, market transition forecasts, value-at-risk, X-DOI: 10.1080/13518470500377380 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500377380 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:495-512 Template-Type: ReDIF-Article 1.0 Author-Name: Nuno Cassola Author-X-Name-First: Nuno Author-X-Name-Last: Cassola Author-Name: Claudio Morana Author-X-Name-First: Claudio Author-X-Name-Last: Morana Title: Volatility of interest rates in the euro area: Evidence from high frequency data Abstract: The paper studies the euro area money market from a microstructure perspective. The focus is on the empirical estimation of the factors underlying the volatility of the overnight interest rate and its transmission along the money market yield curve. Two sources of volatility are separated out, one related to the institutional features of the operational framework and payments system, and the other, related to the impact of policy decisions. A novel data set is used composed of hourly observations and covering several short-term interest rates. The sample runs from 4/12/2000 to 31/05/2002. Two common long-memory factors are found to drive the volatility processes. The first explains the long-memory dynamics of the shortest maturity. The other explains the transmission of volatility to other maturities. It is shown that announcements of interest rate changes exercise the strongest impact on the volatility of the shortest maturities. Persistent effects of liquidity shortages that are transmitted along the money market yield curve are documented. However, these effects are not the rule and can be explained by exceptional circumstances. Journal: The European Journal of Finance Pages: 513-528 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Money market microstructure, stochastic volatility, fractional integration and cointegration, X-DOI: 10.1080/13518470500162758 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500162758 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:513-528 Template-Type: ReDIF-Article 1.0 Author-Name: Laurens Swinkels Author-X-Name-First: Laurens Author-X-Name-Last: Swinkels Author-Name: Pieter Van Der Sluis Author-X-Name-First: Pieter Author-X-Name-Last: Van Der Sluis Title: Return-based style analysis with time-varying exposures Abstract: This paper focuses on the estimation of mutual fund styles by return-based style analysis. Often the investment style is assumed to be constant through time. Alternatively, time variation is sometimes implicitly accounted for by using rolling regressions when estimating the style exposures. The former assumption is often contradicted empirically, and the latter is inefficient due to its ad hoc chosen window size. Here, the Kalman filter is used to model time-varying exposures of mutual funds explicitly. This leads to a testable model and more efficient use of the data, which reduces the influence of spurious correlation between mutual fund returns and style indices. Several stylized examples indicate that more reliable style estimates can be obtained by modelling the style exposure as a random walk, and estimating the coefficients with the Kalman filter. The differences with traditional techniques are substantial in these stylized examples. The results from the empirical analyses indicate that the structural model estimated by the Kalman filter improves style predictions and influences results on performance measurement. Journal: The European Journal of Finance Pages: 529-552 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Dynamic models, Kalman filter, Mutual funds, Style analysis, X-DOI: 10.1080/13518470500248508 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500248508 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:529-552 Template-Type: ReDIF-Article 1.0 Author-Name: John Cotter Author-X-Name-First: John Author-X-Name-Last: Cotter Title: Extreme Value Estimation of Boom and Crash Statistics Abstract: Extreme price movements associated with market crashes and booms have catastrophic repercussions for all investors and it is necessary to make accurate predictions of the frequency and severity of these events. This paper investigates the extreme behaviour of equity market returns and quantifies the possible losses experienced during financial crises. Extreme value theory using the block maxima method is applied to equity indices representing American, Asian and European markets. The empirical evidence shows that the tail indices are characterized by the fat-tailed Frechet distribution. Extreme return levels associated with market crashes are more severe than booms. Asian markets exhibit the largest propensity for experiencing crashes and booms. Journal: The European Journal of Finance Pages: 553-566 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Extreme value theory, market crashes and booms, X-DOI: 10.1080/13518470500460111 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500460111 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:553-566 Template-Type: ReDIF-Article 1.0 Author-Name: Rita D'Ecclesia Author-X-Name-First: Rita Author-X-Name-Last: D'Ecclesia Author-Name: Mauro Costantini Author-X-Name-First: Mauro Author-X-Name-Last: Costantini Title: Comovements and correlations in international stock markets Abstract: The interrelationship between international stock markets is a key issue in international portfolio management and risk measurement. The dynamics of security returns and their risk characteristics have a crucial role in the financial market theory. Recent empirical studies have tested market efficiency measuring the degree of integration of international financial markets. These studies have shown that international markets react quickly to news but they are volatile and difficult to predict, with a changing correlation structure of security returns among countries. In this paper the nature of the relationship between the major international stock markets in Canada, Japan, UK and the US, is analysed using the common trends and common cycles approach. The presence of co-movements is investigated to try to detect a long-term stationary component, the common trend, and a short-term stationary cyclical component, among international stock markets. The implications for international portfolio management are also discussed. Journal: The European Journal of Finance Pages: 567-582 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Common cycles, common trends, cointegration, VECM, market diversification, X-DOI: 10.1080/13518470500531135 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500531135 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:567-582 Template-Type: ReDIF-Article 1.0 Author-Name: Robert Tompkins Author-X-Name-First: Robert Author-X-Name-Last: Tompkins Title: Why Smiles Exist in Foreign Exchange Options Markets: Isolating Components of the Risk Neutral Process Abstract: Prices of foreign exchange options systematically diverge from those consistent with several previous option pricing models. This paper examines whether alternative models better explaining the empirical dynamics of the foreign exchange futures markets can yield implied volatility surfaces similar to those observed for options on Foreign Exchange futures. The most suitable alternative models include jumps and stochastic volatility. The inclusion of both these factors introduces unspanned sources of risk and therefore, the martingale measure will not necessarily be unique. However, it is not the objective of this research to propose which martingale measure is optimal; the aim, instead, is to gain a deeper understanding of the properties (and particularly the order of magnitude) of the risk premium. This is done by choosing a feasible martingale measure (based upon the no arbitrage condition), assuming no market price of jump or stochastic volatility risks, and price options under this measure. The implied volatility biases from model-based option prices are then compared to the actual implied volatility surfaces for options on these markets. The systematic and substantive differences that are found suggest a negative risk premium, which is a relatively more important (and universal) component in FX option pricing than previously reported. Furthermore, it appears that the relative risk premium across strike price and time is similar across four foreign exchange options markets. This may imply that some systematic mechanism causes the risk premium in these markets. Journal: The European Journal of Finance Pages: 583-603 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Stochastic volatility, normal inverse Gaussian distributions, methods of moments estimation, implied volatility smiles, X-DOI: 10.1080/13518470500531150 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500531150 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:583-603 Template-Type: ReDIF-Article 1.0 Author-Name: Alvaro Veiga Author-X-Name-First: Alvaro Author-X-Name-Last: Veiga Author-Name: Leonardo Souza Author-X-Name-First: Leonardo Author-X-Name-Last: Souza Title: Using Irregularly Spaced Returns to Estimate Multi-factor Models: Application to Brazilian Equity Data Abstract: Multi-factor models are useful tools to explain cross-sectional covariance in equities returns. In this paper a new estimation method is proposed that makes use of irregularly spaced returns and an empirical example is provided with the 389 most liquid equities in the Brazilian Market. The market index shows itself capable of explaining equity returns while the US$/Brazilian real exchange rate and the Brazilian short interest rate do not. The example shows the usefulness of the estimation method in further using the model to fill in missing values and to provide interval forecasts. Journal: The European Journal of Finance Pages: 605-626 Issue: 6-7 Volume: 12 Year: 2006 Keywords: Multi-factor model, missing data, irregularly spaced returns, X-DOI: 10.1080/13518470600763489 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600763489 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:605-626 Template-Type: ReDIF-Article 1.0 Author-Name: Kate Phylaktis Author-X-Name-First: Kate Author-X-Name-Last: Phylaktis Author-Name: Lichuan Xia Author-X-Name-First: Lichuan Author-X-Name-Last: Xia Title: The Changing Roles of Industry and Country Effects in the Global Equity Markets Abstract: This paper examines the roles of country and industry effects on international equity returns using a comprehensive database covering 50 industry groups and 34 countries over the period 1992 to 2001. The study focuses on the evolving process of those effects over time and on geographical differences. The main results are as follows: although the country effects still dominate the industry effects in the full sample period, there has been a major upward shift in industry effects since 1999. The degree of this shift varies across regions and is prominent in Europe and North America, while in Asia Pacific and Latin America, country effects still dominate. The increasing industry effects are not found to be confined to the Technology, Media and Telecommunications sectors and thus are not considered a temporary phenomenon. The above developments have implications for international portfolio diversification. Journal: The European Journal of Finance Pages: 627-648 Issue: 8 Volume: 12 Year: 2006 Keywords: Portfolio diversification, risk, international equity markets, industrial structure, X-DOI: 10.1080/13518470500460202 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500460202 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:8:p:627-648 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Breuer Author-X-Name-First: Wolfgang Author-X-Name-Last: Breuer Author-Name: Marc Gurtler Author-X-Name-First: Marc Author-X-Name-Last: Gurtler Title: Performance Evaluation, Portfolio Selection, and HARA Utility Abstract: The main goal of this work is the generalization of the approach of Jobson and Korkie for funds performance evaluation. Therefore, the paper considers the portfolio selection problem of an investor who faces short sales restrictions when choosing among F different investment funds and assumes the investor's utility function to be of the HARA type. A performance measure is developed and its relationship to previously proposed measures is discussed. Particular attention is given to the special case of cubic utility implying skewness preferences. Findings are illustrated by an empirical example. Journal: The European Journal of Finance Pages: 649-669 Issue: 8 Volume: 12 Year: 2006 Keywords: HARA utility, performance evaluation, portfolio selection, skewness, X-DOI: 10.1080/13518470500460228 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500460228 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:8:p:649-669 Template-Type: ReDIF-Article 1.0 Author-Name: Bruce Burton Author-X-Name-First: Bruce Author-X-Name-Last: Burton Author-Name: Christine Helliar Author-X-Name-First: Christine Author-X-Name-Last: Helliar Author-Name: David Power Author-X-Name-First: David Author-X-Name-Last: Power Title: Practitioners' Perspectives on the IPO Process and the Perils of Flotation Abstract: A substantive literature examines the short- and long-run performance of share returns following an Initial Public Offering (IPO). However, the related issue of why companies seek to raise money through an IPO, or the factors that are important in this equity-issuing process, have attracted very little academic attention. The current paper seeks to redress this imbalance by investigating attitudes to these issues in the UK using two research methods: (i) a detailed questionnaire survey of companies that have recently undertaken an IPO; and (ii) interviews with managers and advisers who have been involved in the IPO process. Journal: The European Journal of Finance Pages: 671-692 Issue: 8 Volume: 12 Year: 2006 Keywords: Share returns, Initial Public Offering, attitudes, survey, X-DOI: 10.1080/13518470500460038 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500460038 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:8:p:671-692 Template-Type: ReDIF-Article 1.0 Author-Name: Gabrielle Wanzenried Author-X-Name-First: Gabrielle Author-X-Name-Last: Wanzenried Title: Capital Structure Dynamics in the UK and Continental Europe Abstract: This paper investigates empirically the effects of institutions and market characteristics on corporate capital structure dynamics. Based on the fact that firms may temporarily deviate from their optimal capital structure due to the existence of adjustment costs, a partial adjustment model is used that links these transaction costs to country-specific characteristics such as the development of the financial markets, legal system, and macroeconomic environment. The sample comprises data from 873 firms in France, Germany, Italy and the UK over the period from 1982 to 2002. The results support the hypotheses that more developed financial markets, greater efficiency of the legal system and better protection of shareholders all have a positive effect on the speed at which firms adjust their capital structure towards the target. Similarly, higher economic growth and a higher inflation rate positively affect the speed of adjustment to the optimal capital structure as well. Journal: The European Journal of Finance Pages: 693-716 Issue: 8 Volume: 12 Year: 2006 Keywords: Capital structure, dynamic analysis, institutions and markets, X-DOI: 10.1080/13518470500460178 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500460178 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:8:p:693-716 Template-Type: ReDIF-Article 1.0 Author-Name: Snorre Lindset Author-X-Name-First: Snorre Author-X-Name-Last: Lindset Title: A Generalization of the Formulas for Options on the Maximum or the Minimum of Several Assets Abstract: This paper generalizes the option on the maximum or the minimum of two assets (several assets) within a stochastic interest rate framework. A Gaussian model is used to describe the interest rates. Closed-form solutions for the market values are presented. The use of the options is illustrated with numerical examples. Journal: The European Journal of Finance Pages: 717-730 Issue: 8 Volume: 12 Year: 2006 Keywords: Options on maximum or minimum of several assets, Heath, Jarrow, and Morton term structure of interest rates, multivariate probabilities, X-DOI: 10.1080/13518470500392876 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500392876 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:8:p:717-730 Template-Type: ReDIF-Article 1.0 Author-Name: Erik Liden Author-X-Name-First: Erik Author-X-Name-Last: Liden Title: Stock Recommendations in Swedish Printed Media: Leading or Misleading? Abstract: This paper analyses the initiated and changed recommendations published in six well-known Swedish newspapers and business magazines for the period 1996-2000 using a buy-and-hold abnormal returns (BHARs) approach. The results distinguish between recommendations from analysts and journalists. Buy recommendations were misleading investors, whereas sell recommendations were leading them correctly, overall yielding returns in line with the market. This asymmetry is due to positive information from the management of the company being more intricate to interpret than negative. Both good and bad information provided by the management is generally positively biased, a phenomenon influencing both analyst and journalist recommendations. Following buy and sell recommendations from analysts yielded BHARs in line with those from journalists, which in turn generates returns in line with their peers. Going short in the recommended stocks, irrespective of type and origin, would lead to a 24-month BHAR of 14%. Journal: The European Journal of Finance Pages: 731-748 Issue: 8 Volume: 12 Year: 2006 Keywords: Stock recommendations, EMH, printed media, initiations, information asymmetry, X-DOI: 10.1080/13518470500531093 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500531093 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:12:y:2006:i:8:p:731-748 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Pierdzioch Author-X-Name-First: Christian Author-X-Name-Last: Pierdzioch Author-Name: Andrea Schertler Author-X-Name-First: Andrea Author-X-Name-Last: Schertler Title: Sources of Predictability of European Stock Markets for High-technology Firms Abstract: The paper reports on studies of return predictability of stock indexes of blue-chip firms and high-technology firms in Germany, France and the UK during the second half of the 1990s. Return predictability was measured in terms of first-order autocorrelation coefficients, and evidence was found for the return predictability of stock indexes of high-technology firms, but not for the return predictability of stock indexes of blue-chip firms. These findings suggest that a candidate for explaining the economic sources of the return predictability of these stock indexes of high-technology firms is transaction costs in the form of the costs of gathering and processing information in new technological fields. Journal: The European Journal of Finance Pages: 1-27 Issue: 1 Volume: 13 Year: 2007 Keywords: Stock markets, return predictability, high-technology firms, X-DOI: 10.1080/13518470600762408 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600762408 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:1:p:1-27 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Bessler Author-X-Name-First: Wolfgang Author-X-Name-Last: Bessler Author-Name: Andreas Kurth Author-X-Name-First: Andreas Author-X-Name-Last: Kurth Title: Agency Problems and the Performance of Venture-backed IPOs in Germany: Exit Strategies, Lock-up Periods, and Bank Ownership Abstract: The agency problems for initial public offerings are well documented in the literature. The objective of this research is to investigate the potential conflicts of interest for the 'Neuer Markt' in Germany. Of special interest are venture-backed IPOs and those in which banks acted as venture capitalist, underwriter, and provided analyst recommendations. High initial returns and outperformance are observed over the first 6 months of trading, which decreases significantly over the subsequent 18 months. The individual performance depends on the VC's underwriter and bank affiliation, exit behaviour, and lock-up commitment. Venture capitalists, and especially banks, timed their exit well. This indicates some serious agency problems in the German IPO market. Journal: The European Journal of Finance Pages: 29-63 Issue: 1 Volume: 13 Year: 2007 Keywords: Initial public offerings, venture capital, agency problems, bank equity ownership, X-DOI: 10.1080/13518470600763661 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600763661 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:1:p:29-63 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Bauer Author-X-Name-First: Christian Author-X-Name-Last: Bauer Title: A Better Asymmetric Model of Changing Volatility in Stock and Exchange Rate Returns: Trend-GARCH Abstract: The impact of short run price trending on the conditional volatility is tested empirically. A new family of conditionally heteroscedastic models with a trend-dependent conditional variance equation: The Trend-GARCH model is described. Modern microeconomic theory often suggests the connection between the past behaviour of time series, the subsequent reaction of market individuals, and thereon changes in the future characteristics of the time series. Results reveal important properties of these models, which are consistent with stylized facts found in financial data sets. They can also be employed for model identification, estimation, and testing. The empirical analysis supports the existence of trend effects. The Trend-GARCH model proves to be superior to alternative models such as EGARCH, AGARCH, TGARCH OR GARCH-in-Mean in replicating the leverage effect in the conditional variance, in fitting the news impact curve and in fitting the volatility estimates from high frequency data. In addition, we show that the leverage effect is dependent on the current trend, i.e. it differentiates between bullish and bearish markets. Furthermore, trend effects can account for a significant part of the long memory property of asset price volatilities. Journal: The European Journal of Finance Pages: 65-87 Issue: 1 Volume: 13 Year: 2007 Keywords: GARCH, trend, volatility, news impact curve, leverage effect, persistence, X-DOI: 10.1080/13518470600763752 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600763752 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:1:p:65-87 Template-Type: ReDIF-Article 1.0 Author-Name: Dominic Gasbarro Author-X-Name-First: Dominic Author-X-Name-Last: Gasbarro Author-Name: Wing-Keung Wong Author-X-Name-First: Wing-Keung Author-X-Name-Last: Wong Author-Name: J. Kenton Zumwalt Author-X-Name-First: J. Kenton Author-X-Name-Last: Zumwalt Title: Stochastic Dominance Analysis of iShares Abstract: Country indices as represented by iShares exhibit non-normal return distributions with both skewness and kurtosis. Earlier studies provide procedures for determining the statistical significance of stochastic dominance measures and the Sharpe Ratio. This present study uses these refinements to compare the performance of 18 country market indices. The iShares are indistinguishable when using the Sharpe Ratio as no significant differences are found. In contrast, stochastic dominance procedures identify dominant iShares. Although the results vary over time, stochastic dominance appears to be both more robust and discriminating than the CAPM in the ranking of the iShares. Journal: The European Journal of Finance Pages: 89-101 Issue: 1 Volume: 13 Year: 2007 Keywords: Stochastic dominance, Sharpe ratio, skewness, country index funds, X-DOI: 10.1080/13518470601025243 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601025243 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:1:p:89-101 Template-Type: ReDIF-Article 1.0 Author-Name: Michele Bagella Author-X-Name-First: Michele Author-X-Name-Last: Bagella Author-Name: Leonardo Becchetti Author-X-Name-First: Leonardo Author-X-Name-Last: Becchetti Author-Name: Rocco Ciciretti Author-X-Name-First: Rocco Author-X-Name-Last: Ciciretti Title: Earning Forecast Error in US and European Stock Markets Abstract: The paper investigates the dynamics and determinants of the earning forecast bias in two (US and Eurozone) stock samples matched by size and industry affiliation. Evidence is found that the European bias is significantly higher in absolute terms, irrespective of the year and the distance from the release date, with the exception of the 1997-2000 period in which US stocks are more optimistically valued. Cross-market differences persist when they are regressed, in a panel GMM estimate, on various controls such as the number of individual forecasts and their standard deviation for any considered stock, with the latter being significantly lower in the US market. Finally, it is observed that a convergence process is at work in both markets, with the bias becoming progressively lower as the release date gets closer. Journal: The European Journal of Finance Pages: 105-122 Issue: 2 Volume: 13 Year: 2007 Keywords: Earnings forecast bias, comparative financial systems, corporate governance, X-DOI: 10.1080/13518470600762507 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600762507 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:2:p:105-122 Template-Type: ReDIF-Article 1.0 Author-Name: H. Semih Yildirim Author-X-Name-First: H. Semih Author-X-Name-Last: Yildirim Author-Name: George Philippatos Author-X-Name-First: George Author-X-Name-Last: Philippatos Title: Efficiency of Banks: Recent Evidence from the Transition Economies of Europe, 1993-2000 Abstract: This study examines the cost and profit efficiency of banking sectors in twelve transition economies of Central and Eastern Europe (CEE) over the period 1993-2000, using the stochastic frontier approach (SFA) and the distribution-free approach (DFA). The managerial inefficiencies in CEE banking markets were found to be significant, with average cost efficiency level for 12 countries of 72% and 77% by the DFA and the SFA, respectively. The alternative profit efficiency levels are found to be significantly lower relative to cost efficiency. According to the SFA, approximately one-third of banks' profits are lost to inefficiency, and almost one-half according to the DFA. The results of the second-stage regression analyses suggest that higher efficiency levels are associated with large and well-capitalized banks. The degree of competition has a positive influence on cost efficiency and a negative one on profit efficiency, while market concentration is negatively linked to efficiency. Finally, foreign banks are found to be more cost efficient but less profit efficient relative to domestically owned private banks and state-owned banks. Journal: The European Journal of Finance Pages: 123-143 Issue: 2 Volume: 13 Year: 2007 Keywords: Banking, efficiency, transition economies, stochastic cost frontier, X-DOI: 10.1080/13518470600763687 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600763687 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:2:p:123-143 Template-Type: ReDIF-Article 1.0 Author-Name: Souad Lajili-Jarjir Author-X-Name-First: Souad Author-X-Name-Last: Lajili-Jarjir Title: Explaining the Cross-section of Stock Returns in France: Characteristics or Risk Factors? Abstract: In this study, the three-factor model of Fama and French and the 'characteristic model' of Daniel and Titman are tested using the French Stock Market. Stocks are ranked by size and book to market ratio and then by ex-ante β, HML or SMB loadings. Based on average returns, results reject the factor model with 'characteristic balanced' portfolios. In contrast, in time-series regressions, results are consistent with the factor pricing model and inconsistent with the characteristic-based pricing model. Because the value premium is small, conclusions must be interpreted carefully. However, size and market premiums allow more powerful tests of the two models. Journal: The European Journal of Finance Pages: 145-158 Issue: 2 Volume: 13 Year: 2007 Keywords: Asset pricing, anomalies, risk factors, Fama and French model, X-DOI: 10.1080/13518470600813557 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600813557 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:2:p:145-158 Template-Type: ReDIF-Article 1.0 Author-Name: David Lovatt Author-X-Name-First: David Author-X-Name-Last: Lovatt Author-Name: Andrew Boswell Author-X-Name-First: Andrew Author-X-Name-Last: Boswell Author-Name: Reza Noor Author-X-Name-First: Reza Author-X-Name-Last: Noor Title: A Note on the Predictability of UK Stock Returns Abstract: This note presents evidence on the predictability of UK stock returns using a database of companies in the FTSE-Allshare Index newly constructed towards the beginning of 1998. The tests used are autocorrelations at various lags and variance ratios for several aggregations of base observations. The evidence is consistent with that published for US stock returns, namely that daily stock returns contain a strong element of predictability. Journal: The European Journal of Finance Pages: 159-164 Issue: 2 Volume: 13 Year: 2007 Keywords: UK daily stock returns, autocorrelations, variance ratios, X-DOI: 10.1080/13518470500378107 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500378107 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:2:p:159-164 Template-Type: ReDIF-Article 1.0 Author-Name: Valentyn Panchenko Author-X-Name-First: Valentyn Author-X-Name-Last: Panchenko Title: Impact of Analysts' Recommendations on Stock Performance Abstract: This paper examines the effect of analysts' recommendations on stock return, volume and volatility. The study covers a sample of 36 large cap stocks traded on the US stock market over the period June 1997-May 2003. The empirical evidence suggests a significant impact of analysts' recommendations on the stock market. The research considers market microstructure and looks at the motivation and behaviour of analysts. Journal: The European Journal of Finance Pages: 165-179 Issue: 2 Volume: 13 Year: 2007 Keywords: Analysts' recommendations, stock returns, volume, volatility, X-DOI: 10.1080/13518470500459782 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470500459782 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:2:p:165-179 Template-Type: ReDIF-Article 1.0 Author-Name: Candida Ferreira Author-X-Name-First: Candida Author-X-Name-Last: Ferreira Title: The Bank Lending Channel Transmission of Monetary Policy in the EMU: A Case Study of Portugal Abstract: This paper confirms the importance of bank performance to the credit-lending channel of monetary policy in the countries of the EMU and particularly in Portugal during recent years. The paper's main innovations are (1) its use of macro and microeconomic statistical data; (2) the introduction of three calculated bank-performance indicators—asset structure, conversion of clients' resources into credits and financial margins—into an adaptation of the Bernanke and Binder model; and (3) the use of panel data estimations not only to demonstrate the importance of the bank lending channel, but also to analyse the effects of the calculated indicators in bank-lending growth. Journal: The European Journal of Finance Pages: 181-193 Issue: 2 Volume: 13 Year: 2007 Keywords: Bank lending, monetary policy transmission, panel estimates, Portuguese economy, X-DOI: 10.1080/13518470601025128 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601025128 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:2:p:181-193 Template-Type: ReDIF-Article 1.0 Author-Name: Leonardo Becchetti Author-X-Name-First: Leonardo Author-X-Name-Last: Becchetti Author-Name: Stefania Di Giacomo Author-X-Name-First: Stefania Author-X-Name-Last: Di Giacomo Title: Deviations from Fundamentals in US and EU Stock Markets: A Comparative Analysis Abstract: A 'two-stage growth' discounted cash flow (DCF) model is built to test whether changes in the underlying market fundamentals help to explain movements in stock prices. Empirical results on two samples of US and EU stocks show that the 'fundamental' earning price ratio (E/P) explains a significant share of cross-sectional variation of the observed E/P, this impact being stronger in the US market. It is also found that: (i) the fundamental component of the E/P has superior explanatory power than simpler measures of expected earnings growth; (ii) 'non-fundamental' components, interpreted as signals reducing asymmetric information (such as firm size, the number of forecasts and the chartist momentum), mitigate the role of the fundamentals; (iii) current deviations from the fundamentals are affected by ex post adjustment of publicly available information in the EU sample. It is argued that differences in regulatory environments and in the composition of investors between the US and EU financial systems may help to explain these comparative findings. Results appear consistent with the 'market integrity hypothesis' postulating that reliance on publicly observable fundamentals is higher when insider trading is lower. Journal: The European Journal of Finance Pages: 195-226 Issue: 3 Volume: 13 Year: 2007 Keywords: DCF fundamental value, price earning ratio, non-fundamental components, asymmetric information, insider trading, X-DOI: 10.1080/13518470600880150 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600880150 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:3:p:195-226 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Bartholdy Author-X-Name-First: Jan Author-X-Name-Last: Bartholdy Author-Name: Dennis Olson Author-X-Name-First: Dennis Author-X-Name-Last: Olson Author-Name: Paula Peare Author-X-Name-First: Paula Author-X-Name-Last: Peare Title: Conducting Event Studies on a Small Stock Exchange Abstract: This paper analyses whether it is possible to perform an event study on a small stock exchange with thinly trade stocks. The main conclusion is that event studies can be performed provided that certain adjustments are made. First, a minimum of 25 events appears necessary to obtain acceptable size and power in statistical tests. Second, trade to trade returns should be used. Third, one should not expect to consistently detect abnormal performance of less than about 1% (or perhaps even 2%), unless the sample contains primarily thickly traded stocks. Fourth, nonparametric tests are generally preferable to parametric tests of abnormal performance. Fifth, researchers should present separate results for thickly and thinly traded stock groups. Finally, when nonnormality, event induced variance, unknown event day, and problems of very thin trading are all considered simultaneously, no one test statistic or type of test statistic dominates the others. Journal: The European Journal of Finance Pages: 227-252 Issue: 3 Volume: 13 Year: 2007 Keywords: Event studies, thin trading, X-DOI: 10.1080/13518470600880176 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600880176 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:3:p:227-252 Template-Type: ReDIF-Article 1.0 Author-Name: Amer Demirovic Author-X-Name-First: Amer Author-X-Name-Last: Demirovic Author-Name: Dylan Thomas Author-X-Name-First: Dylan Author-X-Name-Last: Thomas Title: The Relevance of Accounting Data in the Measurement of Credit Risk Abstract: Option pricing theory provides a robust and theoretically sound framework for the measurement of credit risk. Assuming perfect market conditions, information relevant to the measurement of a firm's credit risk is reflected in its equity price, with no role for accounting data. This hypothesis is tested using UK data and credit ratings as a proxy for credit risk. It is found that Merton's distance-to-default measure is the most significant variable in the measurement of credit risk. However, it is also found that accounting variables are incrementally informative when added to a model that contains only the distance-to-default measure. The incremental informativeness of accounting data varies across industries and depends on firm size. Although it is found that the general level of credit risk depends on the state of the economy, there is no evidence to suggest that the incremental informativeness of the accounting variables depends upon macroeconomic conditions. Journal: The European Journal of Finance Pages: 253-268 Issue: 3 Volume: 13 Year: 2007 X-DOI: 10.1080/13518470601025177 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601025177 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:3:p:253-268 Template-Type: ReDIF-Article 1.0 Author-Name: Frank Fabozzi Author-X-Name-First: Frank Author-X-Name-Last: Fabozzi Author-Name: Omar Masood Author-X-Name-First: Omar Author-X-Name-Last: Masood Author-Name: Radu Tunaru Author-X-Name-First: Radu Author-X-Name-Last: Tunaru Title: Discrete Variable Chain Graphical Modelling for Assessing the Effects of Fund Managers' Characteristics on Incentives Satisfaction and Size of Returns Abstract: The relevance of a fund manager's educational and experience profile to the size of investment portfolio return has been the subject of recurrent research in the last decade. While previous research considered an external reference point of view analysing industry-wide aggregated data, little research, if any, has been directed at revealing the inside story of what influences the subjective perception of the risk framework the managers at a financial institution have to work under or whether managers consider incentives they receive to be satisfactory. This survey-based study analyses the answers of 120 fund managers from one of the world's largest banks to a set of questions designed to unveil the links between the objective and more subjective factors that contribute to the investment activity in the banking industry. This context is different from previous studies because information has been collected not only on objective characteristics such as age, size of portfolio, and size of incentives but also on whether investment decisions are based on subjective judgment or analytic tools and on the level of satisfaction with incentives and the bank's risk management system. This paper provides a methodology capable of exploring the links among the variables obtained from the interviews, graphical chain modelling, which offers an elegant solution to the problem caused by the sparsity of the data, testing with categorical ordinal variables, and model selection. The results may help senior management of financial institutions identify possible linkages that determine a stable and encouraging working environment for fund managers. Journal: The European Journal of Finance Pages: 269-282 Issue: 3 Volume: 13 Year: 2007 Keywords: Fund managers, ROI, contingency tables, graphical chain models, X-DOI: 10.1080/13518470600813581 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600813581 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:3:p:269-282 Template-Type: ReDIF-Article 1.0 Author-Name: Peter Casson Author-X-Name-First: Peter Author-X-Name-Last: Casson Author-Name: George Mckenzie Author-X-Name-First: George Author-X-Name-Last: Mckenzie Title: A Comparison of Measures of Earnings Per Share Abstract: This paper explores alternative methods for computing earnings per share (EPS) for a company whose capital structure consists of ordinary shares and warrants. The methods for computing EPS identified by the FASB (1996) are critically evaluated and an alternative measure, the holding period approach,is developed within the framework of contingent claims analysis. Two types of errors are shown to characterize the accounting measures of EPS. One arises from failure of accounting measures to fully recognize the contingent nature of the warrant. The other arises from the practice of not recognizing instances of anti-dilution. A further factor is the treatment of any difference between the proceeds from the issue of the warrants and their fair value at that time. This is ignored in existing measures and yet may have a significant effect on the value of the claims of ordinary shareholders on the company's earnings. Using a simulation method it is shown that the imputed earnings method of computing EPS is a very close approximation to the holding period method and is considerably more accurate than treasury stock measures favoured by accounting standards bodies. Journal: The European Journal of Finance Pages: 283-298 Issue: 3 Volume: 13 Year: 2007 Keywords: Accounting standards, dilution, earnings per share, contingent claims, warrants, X-DOI: 10.1080/13518470601024865 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601024865 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:3:p:283-298 Template-Type: ReDIF-Article 1.0 Author-Name: Johan Parmler Author-X-Name-First: Johan Author-X-Name-Last: Parmler Author-Name: Andres Gonzalez Author-X-Name-First: Andres Author-X-Name-Last: Gonzalez Title: Is Momentum Due to Data-snooping? Abstract: This paper explores the profitability of momentum strategies, by investigating if a momentum strategy is superior to a benchmark model once the effects of data-snooping have been accounted for. Two data sets are considered. The first set of data consists of US stocks and the second one consists of Swedish stocks. For the US data strong evidence is found of a momentum effect and hence the hypothesis of weak market efficiency is rejected. Splitting the sample in two parts, it is found that the overall significance is driven by events in the earlier part of the sample. The results for the Swedish data indicate that momentum strategies based on individual stocks generate significant profits. A very weak or no momentum effect can be found when stocks are sorted into portfolios. Finally, and perhaps most importantly, results show that data-snooping bias can be very substantial. Neglecting the problem would lead to very different conclusions. Journal: The European Journal of Finance Pages: 301-318 Issue: 4 Volume: 13 Year: 2007 Keywords: Momentum strategies, data-snooping, benchmark model, market efficiency, X-DOI: 10.1080/13518470600880127 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600880127 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:4:p:301-318 Template-Type: ReDIF-Article 1.0 Author-Name: Ovidiu V. Precup Author-X-Name-First: Ovidiu V. Author-X-Name-Last: Precup Author-Name: Giulia Iori Author-X-Name-First: Giulia Author-X-Name-Last: Iori Title: Cross-correlation Measures in the High-frequency Domain Abstract: On a high-frequency scale the time series are not homogeneous, therefore standard correlation measures cannot be directly applied to the raw data. To deal with this problem the time series have to be either homogenized through interpolation, or methods that can handle raw non-synchronous time series need to be employed. This paper compares two traditional methods that use interpolation with an alternative method applied directly to the actual time series. The three methods are tested on simulated data and actual trades time series. Journal: The European Journal of Finance Pages: 319-331 Issue: 4 Volume: 13 Year: 2007 Keywords: High-frequency correlation, Fourier method, co-volatility weighting, Epps effect, X-DOI: 10.1080/13518470600813565 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600813565 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:4:p:319-331 Template-Type: ReDIF-Article 1.0 Author-Name: Christian L. Dunis Author-X-Name-First: Christian L. Author-X-Name-Last: Dunis Author-Name: Vincent Morrison Author-X-Name-First: Vincent Author-X-Name-Last: Morrison Title: The Economic Value of Advanced Time Series Methods for Modelling and Trading 10-year Government Bonds Abstract: The motivation for this paper is to determine the potential economic value of advanced modelling methods for devising trading decision tools for 10-year Government bonds. Two advanced methods are used: time-varying parameter models with the implementation of state space modelling using a Kalman filter and nonparametric nonlinear models with Neural Network Regression (NNR). These are benchmarked against more traditional forecasting techniques to ascertain their potential as a forecasting tool and their economic value as a base for a trading decision tool. The models were developed using data from the UK Gilt market, US T-Bond market and German Bund market. Using in-sample data from April 2001to January 2003to develop the models, their results were assessed using the out-of-sample period of January 2003 to June 2003. Performance evaluation was based upon forecasting accuracy measures and financial criteria using a simulated trading strategy incorporating realistic trading costs. It is concluded that for the time series studied and for the period under investigation, the performance of the advanced models is mixed. While the NNR models have the ability to forecast the 10-year Government bond yield and add economic value as a trading decision tool, the Kalman filter models' performance is not as conclusive. The Kalman filter models outperformed the traditional techniques using forecasting accuracy measures, however they did not perform as well in the simulated trading strategy. Journal: The European Journal of Finance Pages: 333-352 Issue: 4 Volume: 13 Year: 2007 Keywords: ARMA models, forecasting accuracy, Kalman filter, logistic regression, MACD technical models, neural network regression, technical trading models, trading efficiency, X-DOI: 10.1080/13518470600880010 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600880010 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:4:p:333-352 Template-Type: ReDIF-Article 1.0 Author-Name: Peter Carr Author-X-Name-First: Peter Author-X-Name-Last: Carr Author-Name: Anita Mayo Author-X-Name-First: Anita Author-X-Name-Last: Mayo Title: On the Numerical Evaluation of Option Prices in Jump Diffusion Processes Abstract: The fair price of a financial option on an asset that follows a Poisson jump diffusion process satisfies a partial integro-differential equation. When numerical methods are used to solve such equations the integrals are usually evaluated using either quadrature methods or fast Fourier methods. Quadrature methods are expensive since the integrals must be evaluated at every point of the mesh. Though less so, Fourier methods are also computationally intensive since in order to avoid wrap around effects they require enlargement of the computational domain. They are also slow to converge when the parameters of the jump process are not smooth, and for efficiency require uniform meshes. We present a different and more efficient class of methods which are based on the fact that the integrals often satisfy differential equations. Depending on the process the asset follows, the equations are either ordinary differential equations or parabolic partial differential equations. Both types of equations can be accurately solved very rapidly. We discuss the methods and present results of numerical experiments. Journal: The European Journal of Finance Pages: 353-372 Issue: 4 Volume: 13 Year: 2007 Keywords: Jump diffusion process, option pricing, differential equations, X-DOI: 10.1080/13518470701201512 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701201512 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:4:p:353-372 Template-Type: ReDIF-Article 1.0 Author-Name: Konstantinos Tolikas Author-X-Name-First: Konstantinos Author-X-Name-Last: Tolikas Author-Name: Athanasios Koulakiotis Author-X-Name-First: Athanasios Author-X-Name-Last: Koulakiotis Author-Name: Richard A. Brown Author-X-Name-First: Richard A. Author-X-Name-Last: Brown Title: Extreme Risk and Value-at-Risk in the German Stock Market Abstract: Extreme Value Theory methods are used to investigate the distribution of the extreme minima in the German stock market over the period 1973 to 2001. Innovative aspects of this paper include (i) a wide set of distributions considered, (ii) L-moment diagrams employed to identify the most appropriate distribution/s, (iii) 'probability weighted moments' used to estimate the parameters of these distribution/s and (iv) the Anderson-Darling goodness of fit test employed to test the adequacy of fit. The 'generalized logistic' distribution is found to provide adequate descriptions of the extreme minima of the German stock market over the period studied. VaR analysis results show that the EVT methods used in this study can be particularly useful for market risk measurement since they produce estimates that outperform those derived by traditional methods at high confidence levels. Journal: The European Journal of Finance Pages: 373-395 Issue: 4 Volume: 13 Year: 2007 Keywords: Extreme value theory, value-at-risk, L-moments, probability weighted moments, Anderson-Darling goodness of fit test, generalized extreme value distribution, generalized logistic distribution, X-DOI: 10.1080/13518470600763737 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470600763737 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:4:p:373-395 Template-Type: ReDIF-Article 1.0 Author-Name: Kais Dachraoui Author-X-Name-First: Kais Author-X-Name-Last: Dachraoui Author-Name: Georges Dionne Author-X-Name-First: Georges Author-X-Name-Last: Dionne Title: Conditions Ensuring the Decomposition of Asset Demand for All Risk-Averse Investors Abstract: The paper explores how the demand for a risky asset can be decomposed into an investment effect and a hedging effect by all risk-averse investors. This question has been shown to be complex when considered outside of the mean-variance framework. Dependence among returns on the risky assets is restricted to quadrant dependence and it is found that the demand for one risky asset can be decomposed into an investment component based on the risk premium offered by the asset and a hedging component used against the fluctuations in the return on the other risky asset. The paper also discusses how the class of quadrant-dependent distributions is related to that of two-fund separating distributions. This contribution opens up the search for broader distributional hypotheses suitable to asset demand models. Examples are discussed. Journal: The European Journal of Finance Pages: 397-404 Issue: 5 Volume: 13 Year: 2007 Keywords: Portfolio choice, investment effect, hedging effect, quadrant dependence, two-fund separation, Asset demand model, X-DOI: 10.1080/13518470601025326 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601025326 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:5:p:397-404 Template-Type: ReDIF-Article 1.0 Author-Name: Lawrence Kryzanowski Author-X-Name-First: Lawrence Author-X-Name-Last: Kryzanowski Author-Name: Skander Lazrak Author-X-Name-First: Skander Author-X-Name-Last: Lazrak Title: Trading Activity, Trade Costs and Informed Trading for Acquisition Targets and Acquirers Abstract: Microstructure effects of tender offer acquisitions on targets and acquirers differentiated by listing venue and payment method are examined. Trading activity increases more for targets than for acquirers upon offer announcement. Investors are more likely to sell targets upon announcement using direct market orders against ask limit orders for cash payment offers. While target liquidity improves as spread costs fall and quoted depths increase, acquirer liquidity falls continuously to successful offer completion. Due to increased trading differences, temporary trade costs fall more for targets than for acquirers. Permanent trade costs decline over the tender offer cycle for both parties, and especially for targets for cash tender offers and for acquirers for shares tender offers. The probability of informed trading declines (remains constant) for targets (acquirers) because increased trading intensity is greater (the same) for uninformed versus informed traders. As expected, abnormal returns and changes in own-firm permanent return volatility are negatively (but weakly) and positively (and strongly) related, respectively, to changes in information asymmetry upon announcement. Journal: The European Journal of Finance Pages: 405-439 Issue: 5 Volume: 13 Year: 2007 Keywords: Tender offers, microstructure, trade behaviour, liquidity, informed trading, asymmetric information, volatility, X-DOI: 10.1080/13518470601137709 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601137709 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:5:p:405-439 Template-Type: ReDIF-Article 1.0 Author-Name: Vasyl Golosnoy Author-X-Name-First: Vasyl Author-X-Name-Last: Golosnoy Author-Name: Yarema Okhrin Author-X-Name-First: Yarema Author-X-Name-Last: Okhrin Title: Multivariate Shrinkage for Optimal Portfolio Weights Abstract: This paper proposes a multivariate shrinkage estimator for the optimal portfolio weights. The estimated classical Markowitz weights are shrunk to the deterministic target portfolio weights. Assuming log asset returns to be i.i.d. Gaussian, explicit solutions are derived for the optimal shrinkage factors. The properties of the estimated shrinkage weights are investigated both analytically and using Monte Carlo simulations. The empirical study compares the competing portfolio selection approaches. Both simulation and empirical studies show that the proposed shrinkage estimator is robust and provides significant gains to the investor compared to benchmark procedures. Journal: The European Journal of Finance Pages: 441-458 Issue: 5 Volume: 13 Year: 2007 Keywords: Portfolio selection, shrinkage estimation, multivariate shrinkage, estimation risk, X-DOI: 10.1080/13518470601137592 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601137592 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:5:p:441-458 Template-Type: ReDIF-Article 1.0 Author-Name: Francisco J. Callado Munoz Author-X-Name-First: Francisco J. Callado Author-X-Name-Last: Munoz Title: The Use of Collateral in Gross and Net Payment Systems Abstract: The purpose of this paper is to make a comparative analysis of modern gross and net payment systems, emphasizing the implications of the availability of intraday liquidity in the former, and of collateral requirements in the latter. In contrast to previous models, an economy with two assets is described: eligible as collateral and not eligible, with the aim of being able to determine the implications of the requirement of these guarantees on banks' portfolio decisions—which affects their return—and on the probability and the consequences of a systemic crisis. This allows for comparison of the effects on social welfare of each of the two systems for different sets of parameters that characterize social risk aversion, opportunity set of banks, and the functioning of each settlement model. In a calibration exercise, it is shown how it would be legitimate for a benevolent authority to have a preference for a gross system, like TARGET, over a net system, like EURO1, for relatively high values, although plausible, of risk aversion. Journal: The European Journal of Finance Pages: 459-481 Issue: 5 Volume: 13 Year: 2007 Keywords: Payment systems, intraday liquidity, collateral, contagion, systemic risk, European Union, gross payment system, net payment system, TARGET, EURO1, X-DOI: 10.1080/13518470601137634 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601137634 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:5:p:459-481 Template-Type: ReDIF-Article 1.0 Author-Name: Dawood Ashraf Author-X-Name-First: Dawood Author-X-Name-Last: Ashraf Author-Name: Yener Altunbas Author-X-Name-First: Yener Author-X-Name-Last: Altunbas Author-Name: John Goddard Author-X-Name-First: John Author-X-Name-Last: Goddard Title: Who Transfers Credit Risk? Determinants of the Use of Credit Derivatives by Large US Banks Abstract: Credit derivatives enable banks to transfer selected credit risks to third parties. An empirical model is developed for the motivation for bank participation in credit derivative markets and, conditional on participation, the factors that determine the volume of business transacted. Participation appears to be closely related to bank size, but there is only limited evidence that entry barriers related to franchise value or past experience in dealing in derivatives are important. There is evidence that banks use credit derivatives as part of their overall risk management strategy. However, the use of credit derivatives does not appear to be influenced by the extent of managerial share ownership. Journal: The European Journal of Finance Pages: 483-500 Issue: 5 Volume: 13 Year: 2007 Keywords: Banking, financial innovation, credit derivatives, X-DOI: 10.1080/13518470601137840 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601137840 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:5:p:483-500 Template-Type: ReDIF-Article 1.0 Author-Name: Maik Eisenbeiss Author-X-Name-First: Maik Author-X-Name-Last: Eisenbeiss Author-Name: Goran Kauermann Author-X-Name-First: Goran Author-X-Name-Last: Kauermann Author-Name: Willi Semmler Author-X-Name-First: Willi Author-X-Name-Last: Semmler Title: Estimating Beta-Coefficients of German Stock Data: A Non-Parametric Approach Abstract: Although the consumption based asset pricing theory appears to be theoretically superior and more elegant than the beta pricing model, in practice the beta pricing model is more widely applied. Indeed, beta pricing models are one of the most widely adopted tools in financial analysis. They readily allow handling systematic risk as priced in financial assets. However, accurately estimating beta-coefficients is not as straightforward as implicitly suggested by Sharpe's standard market model, i.e. simply using the ordinary least-squares (OLS) regression. This is primarily because beta-coefficients cannot generally be assumed to be stable over time. In order to overcome this deficiency, we present and apply a non-parametric estimation technique that allows capturing this time effect and promises both more reliable estimates than obtained with an OLS regression as well as better manageability compared with the existing time-series approaches dealing with time-varying beta-coefficients. Estimation results for constant and time-varying betas are presented for portfolios of German industries. Journal: The European Journal of Finance Pages: 503-522 Issue: 6 Volume: 13 Year: 2007 Keywords: Systematic risk, time-varying beta-coefficients, non-parametric estimation, spline smoothing, varying-coefficient model, X-DOI: 10.1080/13518470701201405 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701201405 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:6:p:503-522 Template-Type: ReDIF-Article 1.0 Author-Name: T. R. A. Corns Author-X-Name-First: T. R. A. Author-X-Name-Last: Corns Author-Name: S. E. Satchell Author-X-Name-First: S. E. Author-X-Name-Last: Satchell Title: Skew Brownian Motion and Pricing European Options Abstract: The volatility smile and systematic mispricing of the Black-Scholes option pricing model are the typical motivation for examining stochastic processes other than geometric Brownian motion to describe the underlying stock price. In this paper a new stochastic process is presented, which is a special case of the skew-Brownian motion of Ito and McKean. The process in question is the sum of a standard Brownian motion and an independent reflecting Brownian motion that is similar in construction to the stochastic representation of a skew-normal random variable. This stochastic process is taken in its exponential form to price European options. The derived option price nests the Black-Scholes equation as a special case and is flexible enough to accommodate stochastic volatility as well as stochastic skewness. Journal: The European Journal of Finance Pages: 523-544 Issue: 6 Volume: 13 Year: 2007 Keywords: Options, skew Brownian motion, skew-normal, skew-symmetric, hedging, non-Gaussian, X-DOI: 10.1080/13518470701201488 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701201488 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:6:p:523-544 Template-Type: ReDIF-Article 1.0 Author-Name: Snorre Lindset Author-X-Name-First: Snorre Author-X-Name-Last: Lindset Author-Name: Arne-Christian Lund Author-X-Name-First: Arne-Christian Author-X-Name-Last: Lund Title: A Technique for Reducing Discretization Bias from Monte Carlo Simulations: Option Pricing under Stochastic Interest Rates Abstract: Control variates are often used to reduce variability in Monte Carlo estimates and their effectiveness is traditionally measured by the so-called speed-up factor. The main objective of this paper is to demonstrate that a control variate can also be applied to reduce the bias stemming from the discretization of the state variable dynamics. This is particularly valuable when stochastic interest rate models are discretized, since bias reduction through more grid points is computationally expensive. Journal: The European Journal of Finance Pages: 545-564 Issue: 6 Volume: 13 Year: 2007 Keywords: Monte Carlo simulation, control variate, discretization bias, variance reduction, compound options, stochastic interest rates, X-DOI: 10.1080/13518470701198791 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701198791 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:6:p:545-564 Template-Type: ReDIF-Article 1.0 Author-Name: Abe De Jong Author-X-Name-First: Abe Author-X-Name-Last: De Jong Author-Name: Ronald Van Dijk Author-X-Name-First: Ronald Author-X-Name-Last: Van Dijk Title: Determinants of Leverage and Agency Problems: A Regression Approach with Survey Data Abstract: This paper reports on empirical investigations of the determinants of leverage and agency problems. Use is made of private data obtained through questionnaires, and a regression model is estimated in which leverage and four agency problems are explained, i.e. direct wealth transfer, asset substitution, underinvestment and overinvestment. The application of regression analysis on survey data is novel in finance. Therefore, this paper contains an in-depth description of the research methods. Results for a sample of Dutch firms confirm that the trade-off between tax advantages and bankruptcy costs determines leverage. Free cash flow and corporate governance characteristics appear to be determinants of overinvestment. Despite finding that agency problems are present, no evidence is found for direct relations between leverage and the agency problems. Journal: The European Journal of Finance Pages: 565-593 Issue: 6 Volume: 13 Year: 2007 Keywords: Survey research, capital structure, the Netherlands, agency problems, corporate governance, X-DOI: 10.1080/13518470701198734 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701198734 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:6:p:565-593 Template-Type: ReDIF-Article 1.0 Author-Name: Peter Løchte Jørgensen Author-X-Name-First: Peter Løchte Author-X-Name-Last: Jørgensen Title: Lognormal Approximation of Complex Path-Dependent Pension Scheme Payoffs Abstract: This paper analyzes an explicit return smoothing mechanism which has recently been introduced as part of a new type of pension savings contract that has been offered by Danish life insurers. We establish the payoff function implied by the return smoothing mechanism and show that its probabilistic properties are accurately approximated by a suitably adapted lognormal distribution. The quality of the lognormal approximation is explored via a range of simulation-based numerical experiments, and we point to several other potential practical applications of the paper's theoretical results. Journal: The European Journal of Finance Pages: 595-619 Issue: 7 Volume: 13 Year: 2007 Keywords: Account-based pension schemes, return smoothing, payoff distributions, density approximation, Monte Carlo simulation, Asian options, X-DOI: 10.1080/13518470701201645 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701201645 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:7:p:595-619 Template-Type: ReDIF-Article 1.0 Author-Name: Reinhold Hafner Author-X-Name-First: Reinhold Author-X-Name-Last: Hafner Author-Name: Martin Wallmeier Author-X-Name-First: Martin Author-X-Name-Last: Wallmeier Title: Volatility as an Asset Class: European Evidence Abstract: Volatility movements are known to be negatively correlated with stock index returns. Hence, investing in volatility appears to be attractive for investors seeking risk diversification. The most common instruments for investing in pure volatility are variance swaps, which now enjoy an active over-the-counter (OTC) market. This paper investigates the risk-return tradeoff of variance swaps on the Deutscher Aktienindex and Euro STOXX 50 index over the time period from 1995 to 2004. We synthetically derive variance swap rates from the smile in option prices. Using quotes from two large investment banks over two months, we validate that the synthetic values are close to OTC market prices. We find that variance swap returns exhibit an option-like profile compared to returns of the underlying index. Given this pattern, it is crucial to account for the non-normality of returns in measuring the performance of variance swap investments. As in the US, the average returns of selling variance swaps are found to be strongly positive and too large to be compatible with standard equilibrium models. The magnitude of the estimated risk premium is related to variance uncertainty and past index returns. This indicates that the variance swap rate does not seem to incorporate all past information relevant for forecasting future realized variance. Journal: The European Journal of Finance Pages: 621-644 Issue: 7 Volume: 13 Year: 2007 Keywords: Implied volatility, smile, variance swap, volatility risk premium, X-DOI: 10.1080/13518470701380142 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701380142 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:7:p:621-644 Template-Type: ReDIF-Article 1.0 Author-Name: T. R. J. Goodworth Author-X-Name-First: T. R. J. Author-X-Name-Last: Goodworth Author-Name: C. M. Jones Author-X-Name-First: C. M. Author-X-Name-Last: Jones Title: Factor-based, Non-parametric Risk Measurement Framework for Hedge Funds and Fund-of-Funds Abstract: A factor-decomposition based framework is presented that facilitates non-parametric risk analysis for complex hedge fund portfolios in the absence of portfolio level transparency. This approach has been designed specifically for use within the hedge fund-of-funds environment, but is equally relevant to those who seek to construct risk-managed portfolios of hedge funds under less than perfect underlying portfolio transparency. Using dynamic multivariate regression analysis coupled with a qualitative understanding of hedge fund return drivers, one is able to perform a robust factor decomposition to attribute risk within any hedge fund portfolio with an identifiable strategy. Furthermore, through use of Monte Carlo simulation techniques, these factors can be employed to generate implied risk profiles at either the constituent fund or aggregate fund-of-funds level. As well as being pertinent to risk forecasting and monitoring, such methods also have application to style analysis, profit attribution, portfolio stress testing and diversification studies. This paper outlines such a framework and presents sample results in each of these areas. Journal: The European Journal of Finance Pages: 645-655 Issue: 7 Volume: 13 Year: 2007 Keywords: Hedge fund, fund-of-funds, risk, non-parametric, value-at-risk, multi-factor, Monte Carlo, X-DOI: 10.1080/13518470701322284 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701322284 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:7:p:645-655 Template-Type: ReDIF-Article 1.0 Author-Name: Sven-Olov Daunfeldt Author-X-Name-First: Sven-Olov Author-X-Name-Last: Daunfeldt Title: Tax-Induced Trading and the Identity of the Marginal Investor: Evidence from Sweden Abstract: Changes in the Swedish tax code during the 1990s were structured in a way that offers an opportunity to test whether ex-dividend prices were determined by the taxation of domestic individual investors. The results presented in this paper indicate that ex-dividend prices were not influenced by the relatively large tax changes for domestic individual investors. In addition, there was no evidence that the taxation of domestic individual investors influenced ex-dividend prices for any specific dividend yield group. Journal: The European Journal of Finance Pages: 657-667 Issue: 7 Volume: 13 Year: 2007 Keywords: Ex-dividend, capital gains, taxation, dividend yields, X-DOI: 10.1080/13518470701380290 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701380290 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:7:p:657-667 Template-Type: ReDIF-Article 1.0 Author-Name: Hong Bo Author-X-Name-First: Hong Author-X-Name-Last: Bo Title: Nonlinear Effects of Debt on Investment: Evidence from Dutch Listed Firms Abstract: Nonlinear effects of debt on investment are investigated using an unbalanced panel of 94 Dutch listed nonfinancial firms during the period 1985-2000. Evidence shows that the nonlinear relation between debt and investment can be represented by a U curve, which contradicts the financial constraints theory. One possible explanation of the U curve relation between debt and investment may be the debt capital gain in the presence of inflation. Journal: The European Journal of Finance Pages: 669-687 Issue: 7 Volume: 13 Year: 2007 Keywords: Investment-debt relation, debt borrowing constraint, agency costs, debt capital gain in the presence of inflation, X-DOI: 10.1080/13518470701322300 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701322300 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:7:p:669-687 Template-Type: ReDIF-Article 1.0 Author-Name: Markku Lanne Author-X-Name-First: Markku Author-X-Name-Last: Lanne Author-Name: Saikkonen Pentti Author-X-Name-First: Saikkonen Author-X-Name-Last: Pentti Title: Modeling Conditional Skewness in Stock Returns Abstract: In this paper, we propose a new GARCH-in-Mean (GARCH-M) model allowing for conditional skewness. The model is based on the so-called z distribution capable of modeling skewness and kurtosis of the size typically encountered in stock return series. The need to allow for skewness can also be readily tested. The model is consistent with the volatility feedback effect in that conditional skewness is dependent on conditional variance. Compared to previously presented GARCH models allowing for conditional skewness, the model is analytically tractable, parsimonious and facilitates straightforward interpretation.Our empirical results indicate the presence of conditional skewness in the monthly postwar US stock returns. Small positive news is also found to have a smaller impact on conditional variance than no news at all. Moreover, the symmetric GARCH-M model not allowing for conditional skewness is found to systematically overpredict conditional variance and average excess returns. Journal: The European Journal of Finance Pages: 691-704 Issue: 8 Volume: 13 Year: 2007 Keywords: GARCH, conditional skewness, asset pricing, X-DOI: 10.1080/13518470701538608 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701538608 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:8:p:691-704 Template-Type: ReDIF-Article 1.0 Author-Name: Simon Stevenson Author-X-Name-First: Simon Author-X-Name-Last: Stevenson Author-Name: Patrick Wilson Author-X-Name-First: Patrick Author-X-Name-Last: Wilson Author-Name: Ralf Zurbruegg Author-X-Name-First: Ralf Author-X-Name-Last: Zurbruegg Title: Assessing the Time-Varying Interest Rate Sensitivity of Real Estate Securities Abstract: This paper examines the sensitivity of real estate securities to changes in both market and central bank interest rates. It is commonly viewed that the traded real estate market is one of the industry sectors most susceptible to interest rate movements. This is due to traditional high levels of borrowing, the impact of rate changes on property yields and indirectly upon occupational demand and thus rental income. The results which are the first to examine the UK sector, highlight the impact of interest rates on UK property companies, in relation to both returns and volatility. The paper also illustrates that this sensitivity is not confined to periods of high and volatile interest rates as the sample period under examination is characterized by historically low and stable rates. Journal: The European Journal of Finance Pages: 705-715 Issue: 8 Volume: 13 Year: 2007 Keywords: Real estate securities, Interest rate sensitivity, GARCH model, X-DOI: 10.1080/13518470701705678 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705678 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:8:p:705-715 Template-Type: ReDIF-Article 1.0 Author-Name: Johannes Prix Author-X-Name-First: Johannes Author-X-Name-Last: Prix Author-Name: Otto Loistl Author-X-Name-First: Otto Author-X-Name-Last: Loistl Author-Name: Michael Huetl Author-X-Name-First: Michael Author-X-Name-Last: Huetl Title: Algorithmic Trading Patterns in Xetra Orders Abstract: Computerized trading controlled by algorithms - “Algorithmic Trading” - has become a fashionable term in investment banking. We investigate a set of Xetra order data to find traces of algorithmic trading by studying the lifetimes of cancelled orders. Even though it is widely agreed that an algorithm must randomize its order activities to avoid exploitation by other traders, we still find systematic patterns in the submission and cancellation of certain Xetra orders, indicating the activity of algorithmic trading. The trading patterns observed might be interpreted as fishing for profitable roundtrips. Journal: The European Journal of Finance Pages: 717-739 Issue: 8 Volume: 13 Year: 2007 Keywords: Market microstructure, algorithmic trading, cancellations, order lifetime, Xetra, X-DOI: 10.1080/13518470701705538 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705538 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:8:p:717-739 Template-Type: ReDIF-Article 1.0 Author-Name: Gregory Koutmos Author-X-Name-First: Gregory Author-X-Name-Last: Koutmos Author-Name: George Philippatos Author-X-Name-First: George Author-X-Name-Last: Philippatos Title: Asymmetric Mean Reversion in European Interest Rates: A Two-factor Model Abstract: This paper tests for asymmetric mean reversion in European short-term interest rates using a combination of the interest rate models introduced by Longstaff and Schwartz (Longstaff, F.A., Schwarts, E.S. (1992) Interest rate volatility and the ferm structure: A two factor general equilibrium model, Journal of Finance, 48, pp. 1259-1282.) and Bali (Bali, T. (2000) Testing the empirical performance of stochastic volatility models of the short-term interest rates, Journal of Financial and Quantitative Analysis, 35, pp. 191-215.). Using weekly rates for France, Germany and the United Kingdom, it is found that short-term rates follow in all instances asymmetric mean reverting processes. Specifically, interest rates exhibit non-stationary behavior following rate increases, but they are strongly mean reverting following rate decreases. The mean reverting component is statistically and economically stronger thus offsetting non-stationarity. Volatility depends on past innovations past volatility and the level of interest rates. With respect to past innovations volatility is asymmetric rising more in response to positive innovations. This is exactly opposite to the asymmetry found in stock returns. Journal: The European Journal of Finance Pages: 741-750 Issue: 8 Volume: 13 Year: 2007 Keywords: Interest rates, asymmetric mean reversion, two-factor model, X-DOI: 10.1080/13518470701705728 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705728 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:8:p:741-750 Template-Type: ReDIF-Article 1.0 Author-Name: David Forrest Author-X-Name-First: David Author-X-Name-Last: Forrest Author-Name: Ian Mchale Author-X-Name-First: Ian Author-X-Name-Last: Mchale Title: Anyone for Tennis (Betting)? Abstract: The most robust anomaly noted in the literature on wagering markets is (positive) longshot bias: over a period of 50 years, it has been well documented in horse betting that higher expected returns accrue to short- than to long-odds bets. However, a few examples of betting markets with zero or negative bias have been found, for example in certain American sports. The understanding of longshot bias is likely to be informed by comparing and contrasting conditions in markets displaying positive, zero, and negative bias but, to date, relatively few markets have been examined. This paper employs a large data set on professional men's tennis matches and a new econometric approach to the estimation of the relationship between returns and odds. It finds positive bias throughout the range of odds. It discusses this finding in the context of the debate on why biases exist and persist in wagering markets, focusing particularly on bettors' attitudes towards risk and skewness. Journal: The European Journal of Finance Pages: 751-768 Issue: 8 Volume: 13 Year: 2007 Keywords: Sports betting, longshot bias, risk preference, X-DOI: 10.1080/13518470701705736 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705736 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:8:p:751-768 Template-Type: ReDIF-Article 1.0 Author-Name: Ron Bird Author-X-Name-First: Ron Author-X-Name-Last: Bird Author-Name: Lorenzo Casavecchia Author-X-Name-First: Lorenzo Author-X-Name-Last: Casavecchia Title: Sentiment and Financial Health Indicators for Value and Growth Stocks: The European Experience Abstract: The well-documented market underperformance of the majority of value and growth stocks over a 12-month holding period reflects that traditional valuation metrics might tell us whether a stock is potentially cheap or expensive but little about when, or even if, it will experience a market correction. Two indicators have come to the fore in recent years that provide useful insights: sentiment/momentum and accounting fundamentals/financial health. We examine their single and combined impact on value and growth stocks and find that (i) they are effective in introducing a timing element into the selection of both value and growth stocks, (ii) the sentiment indicator completely dominates the financial health indicator and, (iii) both indictors contribute to the performance of the good and bad growth stocks. The size and significance of the investment profits that potentially can be generated using the two indicators in combination questions of the efficiency of the European equity markets. We conclude that our findings are consistent with the pricing cycle for a stock proposed by Lee and Swaminathan (Lee, C., Swaminathan, B. (2000) Price momentum and trading volume, Journal of Finance, 55, pp. 2017-2069.) and the under- and over-reaction in pricing inherent in models proposed by Barberis et al. (Barberis, N., Shleifer A., and Vishny, R. (1998) A model of investor sentiment, Journal of Financial Economics, 49, pp. 307-343.) and Hong and Stein (Hong, H., Stein, J.C. (1999) A unified theory of underreaction, momentum trading and overreaction in asset markets, Journal of Finance, 54, pp. 2143-2184.). Journal: The European Journal of Finance Pages: 769-793 Issue: 8 Volume: 13 Year: 2007 Keywords: Sentiment, financial health, market efficiency, asset pricing anomalies, X-DOI: 10.1080/13518470701705777 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705777 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:13:y:2007:i:8:p:769-793 Template-Type: ReDIF-Article 1.0 Author-Name: Karl Felixson Author-X-Name-First: Karl Author-X-Name-Last: Felixson Author-Name: Eva Liljeblom Author-X-Name-First: Eva Author-X-Name-Last: Liljeblom Title: Evidence of ex-dividend trading by investor tax category Abstract: This paper investigates the identity of the ex-dividend date traders using the Finnish unique database that records the trades of all investors on the market. We find evidence of two investor groups trading around the ex-dividend date: domestic non-financial investors doing dividend capturing arbitrage and foreign investors together with domestic financial institutions doing mainly the opposite. We report significant deviations from neutral buy probabilities for these investor groups around the ex-dividend date, deviations that are in line with their taxational characteristics. While a part of the trading can be characterized as dividend clientele trading, we also found arbitrage activity by some investors. Evidence of the arbitrage activity being more severe for high-yield stocks was also found. In terms of tax revenues lost, the economic importance of the short-term arbitrage activity seems to be minor. Journal: The European Journal of Finance Pages: 1-21 Issue: 1 Volume: 14 Year: 2008 Keywords: dividends, taxation, foreign owners, X-DOI: 10.1080/13518470701773460 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701773460 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:1:p:1-21 Template-Type: ReDIF-Article 1.0 Author-Name: Luis Gil-Alana Author-X-Name-First: Luis Author-X-Name-Last: Gil-Alana Author-Name: Juncal Cunado Author-X-Name-First: Juncal Author-X-Name-Last: Cunado Author-Name: Fernando Perez De Gracia Author-X-Name-First: Fernando Perez Author-X-Name-Last: De Gracia Title: Stochastic volatility in the Spanish stock market: a long memory model with a structural break Abstract: In this paper, we examine the stochastic volatility behaviour in the Spanish stock market returns over the time period 2 January 2001 - 12 May 2006. We use a long memory model that takes into account the existence of an endogenous structural break. When no breaks are taken into account the results show that the orders of integration of the absolute and squared return values (which are used as proxies of volatility) are higher than 0 but smaller than 0.5, implying that the stochastic volatility is stationary but long memory. If a break is considered, long memory is also found in the two sub-samples, with higher orders of integration before the break, which takes place at around 2003 for the IBEX, and at 2004 for the less liquid assets IGBM. Journal: The European Journal of Finance Pages: 23-31 Issue: 1 Volume: 14 Year: 2008 Keywords: stochastic volatility, absolute returns, squared returns, long memory, structural break, Spain, X-DOI: 10.1080/13518470701773650 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701773650 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:1:p:23-31 Template-Type: ReDIF-Article 1.0 Author-Name: S. D. Howell Author-X-Name-First: S. D. Author-X-Name-Last: Howell Title: What a delta hedge really does - a theoretical and pedagogical note Abstract: The Black-Scholes description of delta hedging makes the instantaneous value of the short sale negative, but the value should be zero by the principle of no arbitrage. This violation of no-arbitrage makes it impossible to illustrate the Black-Scholes delta hedging of an endowment of one call by an example containing only legally realizable transactions, and this causes confusion as to what delta hedging really does. Like Cox and Ross (1976), we model the short sale as having cash proceeds, and after including these, its instantaneous net value is zero. From this fact, delta hedging yields the risk-free rate of return on the option's opening value, for as long as required, in both discrete and continuous time. The terms of the Black-Scholes equation can be interpreted as inflows or outflows of cash, whose values are fixed at the time of hedging, and which risk-averse investors correctly price as risk-free even under the objective probability measure. The Cox and Ross model of no-arbitrage can be re-interpreted as a model of delta hedging, giving the same result, and we also use it to directly derive the Black-Scholes equation for risk neutral investors. Journal: The European Journal of Finance Pages: 33-47 Issue: 1 Volume: 14 Year: 2008 Keywords: delta hedging, CAPM, Black-Scholes equation, risk neutral world, X-DOI: 10.1080/13518470701773759 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701773759 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:1:p:33-47 Template-Type: ReDIF-Article 1.0 Author-Name: Sandra Deungoue Author-X-Name-First: Sandra Author-X-Name-Last: Deungoue Title: Will we pay in the same way? Abstract: The purpose of this study is to analyse the evolution of payment behaviours by emphasizing the role of the regulation and the financial opening. We test whether the convergence process of payment technologies and regulations is propagated from upstream to downstream through the channel of standardized products, leading to the convergence of the demand for payment services. A test of conditional beta-convergence, relating to the use of five payment instruments, is performed on a panel of European countries. In general, results show evidence for convergence for all means of payment. Journal: The European Journal of Finance Pages: 49-67 Issue: 1 Volume: 14 Year: 2008 Keywords: convergence, retail payment market, bank supply, X-DOI: 10.1080/13518470701773692 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701773692 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:1:p:49-67 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Abstract: Journal: The European Journal of Finance Pages: 71-71 Issue: 2 Volume: 14 Year: 2008 X-DOI: 10.1080/13518470801965784 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801965784 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:2:p:71-71 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Annaert Author-X-Name-First: Jan Author-X-Name-Last: Annaert Author-Name: Marc De Ceuster Author-X-Name-First: Marc Author-X-Name-Last: De Ceuster Title: Editorial Abstract: Journal: The European Journal of Finance Pages: 73-73 Issue: 2 Volume: 14 Year: 2008 X-DOI: 10.1080/13518470801965917 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801965917 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:2:p:73-73 Template-Type: ReDIF-Article 1.0 Author-Name: L. Vanessa Smith Author-X-Name-First: L. Vanessa Author-X-Name-Last: Smith Author-Name: Demosthenes Tambakis Author-X-Name-First: Demosthenes Author-X-Name-Last: Tambakis Title: Testing for changing persistence in US Treasury on/off spreads under weighted-symmetric estimation Abstract: The debt management policy changes of 1998-2001 and subsequent reversal of the US government's fiscal position have prompted research on the dynamics of the US Treasury bond market. The recursive break test procedure of Leybourne et al. (2003) is extended by using weighted-symmetric estimation to detect a single change in persistence in US Treasury on/off spreads. It is found that a significant change from I(0) to I(1) occurred in the late 1990s, which appears to be linked to changes in the US Treasury's debt management policy. Monte Carlo evidence shows that correcting for conditional heteroscedasticity in the data can successfully deal with the tests being oversized, albeit at a considerable loss in power for smaller sample sizes and large short-run variation in volatility. It is therefore advisable mainly for large sample sizes. Journal: The European Journal of Finance Pages: 75-89 Issue: 2 Volume: 14 Year: 2007 Keywords: persistence, unit root test, break point, Monte Carlo simulation, US Treasury bonds, liquidity, X-DOI: 10.1080/13518470601025276 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470601025276 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2007:i:2:p:75-89 Template-Type: ReDIF-Article 1.0 Author-Name: Jasper Anderluh Author-X-Name-First: Jasper Author-X-Name-Last: Anderluh Author-Name: Svetlana Borovkova Author-X-Name-First: Svetlana Author-X-Name-Last: Borovkova Title: Commodity volatility modelling and option pricing with a potential function approach Abstract: We consider a novel approach to modelling of commodity prices and apply it to commodity option pricing and volatility estimation. This approach is particularly suited for prices with multiple attraction regions, such as crude oil and other energy and agricultural commodities. The price is modelled as a diffusion process governed by a potential function with minima at the attraction points. When applied to crude oil prices, the method captures characteristic behaviour of the prices remarkably well. Pricing of European options on spot and futures commodity contracts is developed within the potential model, and compared to the Black-Scholes framework. The approach provides a new way of estimating the volatility, which is particularly useful when option prices (and hence implied volatilities) are not readily available; this is often the case for commodity markets. European options on physical commodities and commodity futures are priced using the volatility forecasts obtained from the model. The performance of the model is evaluated on the basis of the hedging costs of an option. For options on crude oil, the method outperforms - in terms of hedging costs—the Black-Scholes approach with historical volatility. Journal: The European Journal of Finance Pages: 91-113 Issue: 2 Volume: 14 Year: 2008 Keywords: commodity prices, multiple attraction regions, potential function, volatility esimation, option pricing, hedging costs, X-DOI: 10.1080/13518470701773593 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701773593 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:2:p:91-113 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Koetter Author-X-Name-First: Michael Author-X-Name-Last: Koetter Title: The stability of bank efficiency rankings when risk preferences and objectives are different Abstract: We analyze the stability of efficiency rankings of German universal banks between 1993 and 2004. First, we estimate traditional efficiency scores with stochastic cost and alternative profit frontier analysis. Then, we explicitly allow for different risk preferences and measure efficiency with a structural model based on utility maximization. Using the almost ideal demand system, we estimate input- and profit-demand functions to obtain proxies for expected return and risk. Efficiency is then measured in this risk-return space. Mean risk-return efficiency is somewhat higher than cost and considerably higher than profit efficiency (PE). More importantly, rank-order correlation between these measures are low or even negative. This suggests that best-practice institutes should not be identified on the basis of traditional efficiency measures alone. Apparently, low cost and/or PE may merely result from alternative yet efficiently chosen risk-return trade-offs. Journal: The European Journal of Finance Pages: 115-135 Issue: 2 Volume: 14 Year: 2008 Keywords: risk, efficiency, banks, Germany, X-DOI: 10.1080/13518470701380068 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701380068 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:2:p:115-135 Template-Type: ReDIF-Article 1.0 Author-Name: J. H. M. Anderluh Author-X-Name-First: J. H. M. Author-X-Name-Last: Anderluh Title: Pricing Parisians and barriers by hitting time simulation Abstract: Parisian options are not exchange traded, but there are various applications of Parisian optionality in the fields of real option theory, convertible bond valuation and credit risk. Especially the valuation of consecutive Parisian options is complicated and there exist no explicit formulas for these contracts. So far valuation can be done by numerically inverting Laplace transforms or by PDE methods. This paper develops a Monte Carlo method by exploiting the Markovian nature of the underlying value process. As a result, the Parisian option value can be written as an expression that can be solved by Monte Carlo integration, where the Parisian times are the random variables that need to be simulated. The Parisian times cannot be simulated directly as there exists no explicit distribution function. Therefore, these times are approximated by the simulation of hitting times in a special way. The quality of this approximation can be controlled and is a trade-off between accuracy and computation time. Journal: The European Journal of Finance Pages: 137-156 Issue: 2 Volume: 14 Year: 2008 Keywords: Monte Carlo, Parisian option, hitting time, barrier option, excursion, X-DOI: 10.1080/13518470701705595 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705595 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:2:p:137-156 Template-Type: ReDIF-Article 1.0 Author-Name: Hugues Pirotte Author-X-Name-First: Hugues Author-X-Name-Last: Pirotte Author-Name: Celine Vaessen Author-X-Name-First: Celine Author-X-Name-Last: Vaessen Title: Residual value risk in the leasing industry: A European case Abstract: This paper is dedicated to recovery and residual value risks' modelling issues of automotive lease portfolios. First, loss-given-default distributions are estimated and compared for different samples based on risk drivers. Second, the residual value risk is approached through a resampling technique to provide one of the first empirical analysis on residual value losses in the automotive lease sector. Probability density function of losses and Value-at-risk measures are estimated on the basis of a private database comprising a unique set of 4828 individual automotive lease contracts issued between 1990 and 2001 by a major European financial institution. Then, a discussion is led in relation to the capital requirements related to residual value risk stemming from the Basel II Accord. As the greatest part of recovery risk is diversifiable, our conclusion is that a wider recognition of physical collateral in capital adequacy regulations should allow us to better reflect the relatively low-risk profile of automotive lease exposures. Journal: The European Journal of Finance Pages: 157-177 Issue: 2 Volume: 14 Year: 2008 Keywords: leasing, residual value risk, loss given default (LGD), Basel II Accord, X-DOI: 10.1080/13518470701705637 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705637 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:2:p:157-177 Template-Type: ReDIF-Article 1.0 Author-Name: Bryan Mase Author-X-Name-First: Bryan Author-X-Name-Last: Mase Title: A change of focus: Stock market reclassification in the UK Abstract: This paper examines the impact of a change of focus by a firm, as signified by a firm's stock market reclassification. It distinguishes between a firm's sector reclassification motivated by information specific to that firm and one that results from the redefinition and reorganisation of a sector. The direction of the price effects following reclassification depends significantly upon this distinction. Furthermore, a stock's return comovement with the FTSE All-Share Index is affected by its reclassification into a new sector, consistent with the allocation of stocks into categories by investors. Reclassification can induce common factors in the returns to stocks in an index without there being any change in these stocks' fundamental cash flows. Journal: The European Journal of Finance Pages: 179-193 Issue: 3 Volume: 14 Year: 2008 Keywords: return comovement, restructuring, sector reclassification, X-DOI: 10.1080/13518470801892285 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801892285 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:3:p:179-193 Template-Type: ReDIF-Article 1.0 Author-Name: John Goddard Author-X-Name-First: John Author-X-Name-Last: Goddard Author-Name: David Mcmillan Author-X-Name-First: David Author-X-Name-Last: Mcmillan Author-Name: John Wilson Author-X-Name-First: John Author-X-Name-Last: Wilson Title: Dividends, prices and the present value model: firm-level evidence Abstract: Recent stock price movements have led to a re-examination of the present value model. Typically, empirical studies have employed a long span of US stock market index data, and have attributed a failure to detect cointegration to the presence of bubbles. This study considers UK firm-level data, and implements panel unit root and cointegration tests. Recent panel tests that allow for cross-sectional dependence control for factors such as bubbles that may result in temporary deviations from the long-run price-dividend relationship. The panel test results largely support the present value model, yielding evidence of cointegration between real prices and dividends. Journal: The European Journal of Finance Pages: 195-210 Issue: 3 Volume: 14 Year: 2008 Keywords: stock prices, present value model, firm-level data, X-DOI: 10.1080/13518470801890792 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890792 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:3:p:195-210 Template-Type: ReDIF-Article 1.0 Author-Name: Panayiotis Andreou Author-X-Name-First: Panayiotis Author-X-Name-Last: Andreou Author-Name: Yiannos Pierides Author-X-Name-First: Yiannos Author-X-Name-Last: Pierides Title: Empirical investigation of stock index futures market efficiency: the case of the Athens Derivatives Exchange Abstract: Pricing and trading practices in the Athens Derivatives Exchange, a newly established derivatives market, result in significant futures arbitrage profit opportunities for low-cost traders. We find that a large part of the mispricing is due to transaction costs, but additional factors, such as anticipated volatility and time to maturity, also contribute. Ex ante tests reveal significant arbitrage opportunities that could have been exploited up to 30 min after they had been identified. All different tests employed indicate that the derivatives market was inefficient during its early trading history because arbitrage opportunities persisted even after other market impact costs were taken into consideration. Journal: The European Journal of Finance Pages: 211-223 Issue: 3 Volume: 14 Year: 2008 Keywords: market efficiency, market frictions, cost of carry model, X-DOI: 10.1080/13518470801890768 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890768 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:3:p:211-223 Template-Type: ReDIF-Article 1.0 Author-Name: Ebenezer Asem Author-X-Name-First: Ebenezer Author-X-Name-Last: Asem Author-Name: Aditya Kaul Author-X-Name-First: Aditya Author-X-Name-Last: Kaul Title: Trading time and trading activity: evidence from extensions of the NYSE trading day Abstract: The New York Stock Exchange extended its trading hours by 30 min in 1974 and in 1985; the first extension resulting in a delayed close and the second in an early open. We find a shift in volume to the new period after each extension. Additionally, there is a larger increase in volume after the 1985 extension than after the 1974 extension. We argue that the second effect is explained by the first. The extension at the end of the day allows some investors to postpone their trades, which results in occasional information cancellation or discovery; this mutes the effect of the extension on volume. In contrast, the extension at the start of the day allows some investors to accelerate trades, which precludes information cancellation or discovery and its negative effect on volume. This explanation suggests that the effect of an extension on volume depends, at least in part, on its timing. Journal: The European Journal of Finance Pages: 225-242 Issue: 3 Volume: 14 Year: 2008 Keywords: trading hours, turnover, information, return variability, event study, X-DOI: 10.1080/13518470801892236 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801892236 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:3:p:225-242 Template-Type: ReDIF-Article 1.0 Author-Name: Manolis Kavussanos Author-X-Name-First: Manolis Author-X-Name-Last: Kavussanos Author-Name: Ilias Visvikis Author-X-Name-First: Ilias Author-X-Name-Last: Visvikis Title: Hedging effectiveness of the Athens stock index futures contracts Abstract: This paper examines the hedging effectiveness of the FTSE/ATHEX-20 and FTSE/ATHEX Mid-40 stock index futures contracts in the relatively new and fairly unresearched futures market of Greece. Both in-sample and out-of-sample hedging performances using weekly and daily data are examined, considering both constant and time-varying hedge ratios. Results indicate that time-varying hedging strategies provide incremental risk-reduction benefits in-sample, but under-perform simple constant hedging strategies out-of-sample. Moreover, futures contracts serve effectively their risk management role and compare favourably with results in other international stock index futures markets. Estimation of investor utility functions and corresponding optimal utility maximising hedge ratios yields similar results, in terms of model selection. For the FTSE/ATHEX Mid-40 contracts we identify the existence of speculative components, which lead to utility-maximising hedge ratios, that are different to the minimum variance hedge ratio solutions. Journal: The European Journal of Finance Pages: 243-270 Issue: 3 Volume: 14 Year: 2008 Keywords: hedging effectiveness, futures markets, constant and time-varying hedge ratios, utility functions, VECM-GARCH-X, X-DOI: 10.1080/13518470801890701 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890701 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:3:p:243-270 Template-Type: ReDIF-Article 1.0 Author-Name: Atreya Chakraborty Author-X-Name-First: Atreya Author-X-Name-Last: Chakraborty Author-Name: Abdikarim Farah Author-X-Name-First: Abdikarim Author-X-Name-Last: Farah Author-Name: John Barkoulas Author-X-Name-First: John Author-X-Name-Last: Barkoulas Title: Takeover defenses, golden parachutes, and bargaining over stochastic synergy gains: a note on optimal contracting Abstract: We incorporate managerial risk aversion and stochasticity of takeover synergy gains into Harris' (Harris, E.G. 1990. Antitakeover measures, golden parachutes, and target firm shareholder welfare. Rand Journal of Economics 21, no. 4: 614-25. bargaining model for the coexistence of antitakeover defenses and golden parachutes in corporate charters. We show that: (i) it is not always optimal that the target-firm shareholders adopt antitakeover defenses, (ii) the size of the golden parachute is proportional to the riskiness of the synergistic gains, and (iii) the target-firm shareholders are unequivocally better-off with golden parachutes than takeover-contingent stock options. Journal: The European Journal of Finance Pages: 273-280 Issue: 4 Volume: 14 Year: 2008 Keywords: golden parachutes, antitakeover defenses, tender offers, mergers and acquisitions, X-DOI: 10.1080/13518470802041684 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802041684 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:4:p:273-280 Template-Type: ReDIF-Article 1.0 Author-Name: Rainer Jankowitsch Author-X-Name-First: Rainer Author-X-Name-Last: Jankowitsch Author-Name: Michaela Nettekoven Author-X-Name-First: Michaela Author-X-Name-Last: Nettekoven Title: Trading strategies based on term structure model residuals Abstract: The term structure of interest rates is an important input for basically every pricing model and is mostly calibrated on coupon bond prices. Therefore, the estimated interest rates should accurately explain the market prices of these bonds. However, nearly all empirical papers on interest rate estimation, e.g. Svensson, L.E.O. 1994. Estimating and interpreting forward interest rates: Sweden 1992-1994, IMF Working Paper, International Monetary Fund, report significant pricing errors in their sample. So an important question is what drives these pricing errors of the bonds. One simple explanation would be different tax treatment or different liquidity, but most papers on this research topic, e.g. Elton, E., and T.C. Green. 1998. Tax and liquidity effects in pricing government bonds. Journal of Finance 53: 1533-62, cannot fully explain the observed pricing errors. Therefore, these errors must be at least partially caused by either model misspecification or by the deviation of particular bond prices from general market conditions, i.e. mispricing revealing insufficient market efficiency. We provide empirical evidence for the German government bond market that risk-adjusted trading strategies based on bond pricing errors can yield about 15 basis points p.a. abnormal return compared to benchmark portfolios. Furthermore, the abnormal returns are continuously achieved over the whole time period and not randomly on a few days and show a relation to changes in the level and the curvature of the term structure of interest rates. Therefore, pricing errors contain economic information about deviations of bond prices from general market conditions and are not exclusively caused by model misspecification and/or differences in liquidity and tax treatment of individual bonds. Journal: The European Journal of Finance Pages: 281-298 Issue: 4 Volume: 14 Year: 2008 Keywords: trading strategy, bond pricing errors, abnormal returns, government bonds, market efficiency, X-DOI: 10.1080/13518470802041783 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802041783 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:4:p:281-298 Template-Type: ReDIF-Article 1.0 Author-Name: Panagiotis Andrikopoulos Author-X-Name-First: Panagiotis Author-X-Name-Last: Andrikopoulos Author-Name: Arief Daynes Author-X-Name-First: Arief Author-X-Name-Last: Daynes Author-Name: David Latimer Author-X-Name-First: David Author-X-Name-Last: Latimer Author-Name: Paraskevas Pagas Author-X-Name-First: Paraskevas Author-X-Name-Last: Pagas Title: Size effect, methodological issues and 'risk-to-default': evidence from the UK stock market Abstract: This paper re-examines the small firm premium in the UK from December 1987 to December 2004 using a new survivorship bias-free and look-ahead bias-free database of the UK market covering stocks officially listed in the UK during this period. Prior research (Dimson, E., and P.R. Marsh. 1987. The Hoare Govett smaller companies index for the UK. Hoare Govett Limited, January; Dimson, E., and P.R. Marsh. 1999. Murphy's law and market anomalies. Journal of Portfolio Management 25, no. 2: 53-69) documented an annual small-size premium in the UK market of around 6% during the period 1955-1986 and an annual small-size discount of 6% during the years 1989-1997. Our results show a continuation of the small firm premium in the UK during 1988-2004 in excess of 7% per year. We conclude that the reversal of the small firm premium documented by Dimson and Marsh (1999. Murphy's law and market anomalies. Journal of Portfolio Management 25, no. 2: 53-69) is dependent on the data sample and methodology used. The main contribution to the 7%+geometric annual premium reported here comes mainly during the years 1993 and 1999. Furthermore, exploitation of the small firm premium depends on the strategy used and in particular on the length of the holding period before rolling over the strategy. Thus, while it can be argued that an economically significant small firm anomaly continues to exist, it appears to be sample-dependent, time-varying and unreliable, and difficult to exploit in practice. Journal: The European Journal of Finance Pages: 299-314 Issue: 4 Volume: 14 Year: 2008 Keywords: small-size effect, market efficiency, methodological issues, UK equity market, X-DOI: 10.1080/13518470802042070 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042070 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:4:p:299-314 Template-Type: ReDIF-Article 1.0 Author-Name: Giulio Cifarelli Author-X-Name-First: Giulio Author-X-Name-Last: Cifarelli Author-Name: Giovanna Paladino Author-X-Name-First: Giovanna Author-X-Name-Last: Paladino Title: Reserve overstocking in a highly integrated world. New evidence from Asia and Latin America Abstract: Monthly data are used to investigate reserves management in eight Asian and Latin American countries. Idiosyncratic explanatory variables enter into co-integration relationships based on a stochastic buffer stock model, where a reserve variability measure is obtained via conditional variance approaches. International factors influence the co-integration residuals (representing the excess demands for reserves), which tend to co-move within and across geographical areas. Principal components analysis is then implemented to associate their common drivers with the US fed fund effective interest rate and real-effective exchange rate. This two-step approach sheds light on some controversial aspects of reserves and exchange rate management, such as 'fear of floating' and mercantilist behavior. Our results suggest that the size of recent excess reserve holdings is probably overstated. Journal: The European Journal of Finance Pages: 315-336 Issue: 4 Volume: 14 Year: 2008 Keywords: emerging markets reserves, co-integration, PCA, X-DOI: 10.1080/13518470802041981 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802041981 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:4:p:315-336 Template-Type: ReDIF-Article 1.0 Author-Name: Andrei Kuznetsov Author-X-Name-First: Andrei Author-X-Name-Last: Kuznetsov Author-Name: Rostislav Kapelyushnikov Author-X-Name-First: Rostislav Author-X-Name-Last: Kapelyushnikov Author-Name: Natalya Dyomina Author-X-Name-First: Natalya Author-X-Name-Last: Dyomina Title: Performance of closely held firms in Russia: evidence from firm-level data* Abstract: This paper evaluates the impact of ownership concentration on firm performance in a weak institutional environment. Specifically, using new survey evidence, we seek to appraise quantitatively the performance of block-holder-controlled firms in Russia and to identify, within the domain of corporate governance theory, factors that may explain such performance. We find evidence of negative association between the size of the dominant owners' shareholding and performance parameters such as investment, capacity utilization, and profitability. At the same time, we establish that control structures with multiple, large shareholders increase efficiency. The ambiguity of the effects of ownership concentration suggests that country-specific factors play an important role. Journal: The European Journal of Finance Pages: 337-358 Issue: 4 Volume: 14 Year: 2008 Keywords: corporate governance, ownership structures, performance, Russia, X-DOI: 10.1080/13518470802041924 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802041924 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:4:p:337-358 Template-Type: ReDIF-Article 1.0 Author-Name: Stefan Truck Author-X-Name-First: Stefan Author-X-Name-Last: Truck Title: Forecasting credit migration matrices with business cycle effects—a model comparison Abstract: Migration matrices are considered a major determinant for credit risk management. They are widely used for credit value-at-risk determination, portfolio management or derivative pricing. It is well known that migration matrices show strong variations and cyclical behavior through time. We compare a factor model approach and numerical adjustment methods for estimation and forecasting of conditional migration matrices. Our findings show that the methods may lead to quite different forecasting results. Although the numerical adjustment methods fail to outperform the naive approach of taking previous year's migration matrix as an estimator, the one-factor model provides significantly better in-sample and out-of-sample results. Additionally, on the basis of a chosen risk-sensitive goodness-of-fit criteria, we are able to interpret the results in terms of risk. Journal: The European Journal of Finance Pages: 359-379 Issue: 5 Volume: 14 Year: 2008 Keywords: credit risk, transition matrices, forecasting, credit VaR, X-DOI: 10.1080/13518470701773635 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701773635 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:5:p:359-379 Template-Type: ReDIF-Article 1.0 Author-Name: Markus Ebner Author-X-Name-First: Markus Author-X-Name-Last: Ebner Author-Name: Thorsten Neumann Author-X-Name-First: Thorsten Author-X-Name-Last: Neumann Title: Time-varying factor models for equity portfolio construction Abstract: Most equity risk models applied in practice assume stable return correlations over time. However, there is considerable evidence suggesting that correlations among stock returns and hence, variance-covariance matrices (VCMs) become unstable over time. In this paper, we account for correlation instabilities in US stock returns and derive VCMs from time-varying factor model estimates. To do so, we use three different estimation approaches: (1) moving window least squares, (2) flexible least squares and (3) the random walk model. Our empirical results suggest that a time-varying estimation of return correlations fits the data considerably better than time-invariant estimation and thus, increases the efficiency of risk estimation and portfolio selection. Journal: The European Journal of Finance Pages: 381-395 Issue: 5 Volume: 14 Year: 2008 Keywords: portfolio construction, stock betas, time-varying estimation, X-DOI: 10.1080/13518470801892194 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801892194 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:5:p:381-395 Template-Type: ReDIF-Article 1.0 Author-Name: Stelios Bekiros Author-X-Name-First: Stelios Author-X-Name-Last: Bekiros Author-Name: Dimitris Georgoutsos Author-X-Name-First: Dimitris Author-X-Name-Last: Georgoutsos Title: Non-linear dynamics in financial asset returns: the predictive power of the CBOE volatility index Abstract: In this paper we attempt to predict the direction of change of the S&P500 index over the period 8 April 1998 to 5 February 2002 by means of a recurrent neural network (RNN). We demonstrate that the incorporation in the trading rule of the Chicago Board Options Exchange (CBOE) volatility index changes strongly enhances its profitability during 'bear' market periods. This improvement is measured in comparison with a RNN including changes of estimated conditional volatility measures, a linear autoregressive model as well as to a buy-and-hold strategy. We suggest a number of theories that are consistent with our findings. Journal: The European Journal of Finance Pages: 397-408 Issue: 5 Volume: 14 Year: 2008 Keywords: technical trading rules, recurrent neural networks, implied volatility, X-DOI: 10.1080/13518470802042203 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042203 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:5:p:397-408 Template-Type: ReDIF-Article 1.0 Author-Name: Lingjie Ma Author-X-Name-First: Lingjie Author-X-Name-Last: Ma Author-Name: Larry Pohlman Author-X-Name-First: Larry Author-X-Name-Last: Pohlman Title: Return forecasts and optimal portfolio construction: a quantile regression approach Abstract: In finance there is growing interest in quantile regression with the particular focus on value at risk and copula models. In this paper, we first present a general interpretation of quantile regression in the context of financial markets. We then explore the full distributional impact of factors on returns of securities and find that factor effects vary substantially across quantiles of returns. Utilizing distributional information from quantile regression models, we propose two general methods for return forecasting and portfolio construction. We show that under mild conditions these new methods provide more accurate forecasts and potentially higher value-added portfolios than the classical conditional mean method. Journal: The European Journal of Finance Pages: 409-425 Issue: 5 Volume: 14 Year: 2008 Keywords: return forecast, quantile regression, portfolio construction, X-DOI: 10.1080/13518470802042369 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042369 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:5:p:409-425 Template-Type: ReDIF-Article 1.0 Author-Name: Akifumi Isogai Author-X-Name-First: Akifumi Author-X-Name-Last: Isogai Author-Name: Satoru Kanoh Author-X-Name-First: Satoru Author-X-Name-Last: Kanoh Author-Name: Toshifumi Tokunaga Author-X-Name-First: Toshifumi Author-X-Name-Last: Tokunaga Title: A further extension of duration-dependent models Abstract: The duration dependence of stock market cycles has been investigated using the Markov switching model where the market conditions are unobservable. In conventional modeling, restrictions are imposed such that the transition probability is a monotonic function of duration, which is truncated at a certain value. This paper proposes a model that is free from these arbitrary restrictions and nests the conventional models. In the model, the parameters that characterize the transition probability are formulated in the state space. Empirical results from several stock markets show that the duration structures greatly differ depending on countries. These structures are not necessarily monotonic functions of duration and, therefore, cannot be described by the conventional models. Journal: The European Journal of Finance Pages: 427-449 Issue: 5 Volume: 14 Year: 2008 Keywords: duration, world stock markets, Markov switching model, non-parametric model, Gibbs sampling, marginal likelihood, X-DOI: 10.1080/13518470802042518 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042518 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:5:p:427-449 Template-Type: ReDIF-Article 1.0 Author-Name: M. E. Malliaris Author-X-Name-First: M. E. Author-X-Name-Last: Malliaris Author-Name: S. G. Malliaris Author-X-Name-First: S. G. Author-X-Name-Last: Malliaris Title: Forecasting inter-related energy product prices Abstract: Five inter-related energy products are forecasted one month into the future using both linear and nonlinear techniques. Both spot prices and data derived from those prices are used as input data in the models. The models are tested by running data from the following year through them. Results show that, even though all products are highly correlated, the prediction results are asymmetric. In forecasts for crude oil, heating oil, gasoline and natural gas, the nonlinear forecasts were best, while for propane, the linear model gave the lowest error. Journal: The European Journal of Finance Pages: 453-468 Issue: 6 Volume: 14 Year: 2008 Keywords: neural network, regression model, inter-related products, forecasting, X-DOI: 10.1080/13518470701705793 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705793 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:6:p:453-468 Template-Type: ReDIF-Article 1.0 Author-Name: Jahangir Sultan Author-X-Name-First: Jahangir Author-X-Name-Last: Sultan Author-Name: Mohammad Hasan Author-X-Name-First: Mohammad Author-X-Name-Last: Hasan Title: The effectiveness of dynamic hedging: evidence from selected European stock index futures Abstract: This paper estimates time-varying optimal hedge ratios (OHRs) using a bivariate generalized autoregressive conditional heteroscedastic (GARCH) error correction model. The GARCH specification accounts for time-varying distribution in asset returns while the error correction term preserves short-run deviations between two fundamentally linked assets. Using stock index and stock index futures from four European countries, we compare the hedging effectiveness of the GARCH error correction model with alternative hedging models that hold the OHR constant. Overall, in three out of four cases, the GARCH error correction model is shown to offer superior risk reduction compared with the competing models. Finally, we also estimate the OHRs using the GARCH-X model, which allows the error correction term to be a determinant of the time-varying volatility. The GARCH-X model performs similar to the GARCH error correction model. The results presented in this paper have important insights into the risk management of financial assets when returns distribution changes over time. Journal: The European Journal of Finance Pages: 469-488 Issue: 6 Volume: 14 Year: 2008 Keywords: stock index futures, bivariate GARCH-X, error correction term, time varying minimum variance hedge ratio, out of sample hedge effectiveness, X-DOI: 10.1080/13518470801890685 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890685 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:6:p:469-488 Template-Type: ReDIF-Article 1.0 Author-Name: Miroslav Misina Author-X-Name-First: Miroslav Author-X-Name-Last: Misina Title: Changing investors' risk appetite: Reality or fiction? Abstract: Changes in investors' risk appetite have been used to explain various phenomena in asset markets. And yet, the basis for their use is generally weak: popular indicators of changes in risk appetite typically have scant foundation in theory and give contradictory signals in practice. This has led to the views that it is a convenient ex post rationalization rather than a well-founded explanation of asset price movements. This paper starts from the premise that changing risk appetite might be a legitimate explanation, but that there is an identification problem, both theoretically and empirically. The solution offered here is based on the approach introduced by Kumar and Persaud (Kumar, M., and A. Persaud. 2002. Pure contagion and investors' shifting risk appetite: analytical issues and empirical evidence. International Finance 5: 401-36.), and on the work of Misina (Misina, M. 2003. What Does the Risk-Appetite Index Measure? Bank of Canada, Working Paper 2003-23.) who established the theoretical conditions under which that approach will correctly identify changes in risk appetite. We propose a method to implement these conditions and thus ensure that the resulting index is empirically sound. This index is then used to examine the presence of changes in risk appetite in the data, and, more generally, whether this explanation is appropriate in particular circumstances. The empirical illustration is based on a portfolio of foreign currencies, but the techniques are general and can be applied to any portfolio. Journal: The European Journal of Finance Pages: 489-501 Issue: 6 Volume: 14 Year: 2008 Keywords: risk appetite, risk-appetite indexes, asset prices, X-DOI: 10.1080/13518470801890784 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890784 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:6:p:489-501 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Ben Evans Author-X-Name-First: Ben Author-X-Name-Last: Evans Title: Trading futures spread portfolios: applications of higher order and recurrent networks Abstract: This paper investigates the modelling and trading of oil futures spreads in the context of a portfolio of contracts. A portfolio of six spreads is constructed and each spread forecasted using a variety of modelling techniques, namely, a cointegration fair value model and three different types of neural network (NN), such as multi-layer perceptron (MLP), recurrent, and higher order NN models. In addition, a number of trading filters are employed to further improve the trading statistics of the models. Three different filters are optimized on an in-sample measure of down side risk-adjusted return, and these are then fixed out-of-sample. The filters employed are the threshold filter, correlation filter, and the transitive filter. The results show that the best in-sample model is the MLP with a transitive filter. This model is the best performer out-of-sample and also returns good out-of-sample statistics. Journal: The European Journal of Finance Pages: 503-521 Issue: 6 Volume: 14 Year: 2008 Keywords: futures spreads, cointegration, trading filters, higher order networks, recurrent networks, X-DOI: 10.1080/13518470801890834 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890834 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:6:p:503-521 Template-Type: ReDIF-Article 1.0 Author-Name: Bart Frijns Author-X-Name-First: Bart Author-X-Name-Last: Frijns Author-Name: Dimitris Margaritis Author-X-Name-First: Dimitris Author-X-Name-Last: Margaritis Title: Forecasting daily volatility with intraday data Abstract: The aim of this paper is to assess to what extent intraday data can explain and predict end-of-the-day volatility. Using a realized volatility measure as proposed by Andersen, T., T. Bollerslev, F. Diebold, and P. Labys. 2001. The distribution of realized exchange rate volatility. Journal of the American Statistical Association 96: 42-55, we hypothesize that volatility generated at the start of the day is an important predictor of daily volatility either on its own accord or in conjunction with information about the seasonal pattern characterizing intraday volatility. We address the question of how much information needs to arrive to the market before a good predictor can be formed. Using data from a specialist market (NYSE), a dealer market (Nasdaq) and a continuous auction market (Paris Bourse), we investigate how different trading structures may affect intraday volatility formation. As a preview to our results, we find that the explanatory power of first-hour volatility for daily volatility is as high as 68%, whereas the average volatility generated during this first hour is <30%. Comparison to a standard GARCH model shows that the forecasts based on the intraday data are generally highly informative both on their own accord and in combination with the GARCH forecasts. Journal: The European Journal of Finance Pages: 523-540 Issue: 6 Volume: 14 Year: 2008 Keywords: intraday return volatility, volatility forecasting, realized volatility, quadratic variation, X-DOI: 10.1080/13518470802187644 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802187644 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:6:p:523-540 Template-Type: ReDIF-Article 1.0 Author-Name: Christopher Green Author-X-Name-First: Christopher Author-X-Name-Last: Green Title: Financial reform in emerging markets Abstract: Journal: The European Journal of Finance Pages: 541-544 Issue: 7 Volume: 14 Year: 2008 X-DOI: 10.1080/13518470802173537 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802173537 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:541-544 Template-Type: ReDIF-Article 1.0 Author-Name: Ilko Naaborg Author-X-Name-First: Ilko Author-X-Name-Last: Naaborg Author-Name: Robert Lensink Author-X-Name-First: Robert Author-X-Name-Last: Lensink Title: Banking in transition economies: does foreign ownership enhance profitability? Abstract: This paper studies the relationship between foreign ownership and bank performance. A cross-section of 216 banks in transition economies in Central and Eastern Europe and Central Asia is used. In the analyses a continuous foreign ownership variable is applied. The results are checked by using a foreign ownership dummy variable. A negative relationship is found between foreign ownership and banks' interest revenues and profitability, although overhead costs are negatively related to foreign bank ownership as well. The results are independent of countries' GDP per capita and concentration in the banking sector. Evidence is presented for the existence of a home field advantage for domestic banks. Journal: The European Journal of Finance Pages: 545-562 Issue: 7 Volume: 14 Year: 2008 Keywords: banking, foreign ownership, profitability, transition countries, X-DOI: 10.1080/13518470701322268 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701322268 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:545-562 Template-Type: ReDIF-Article 1.0 Author-Name: Roger Kelly Author-X-Name-First: Roger Author-X-Name-Last: Kelly Author-Name: George Mavrotas Author-X-Name-First: George Author-X-Name-Last: Mavrotas Title: Savings and financial sector development: panel cointegration evidence from Africa Abstract: The paper uses different measures of financial sector development (FSD) for a dynamic heterogeneous panel of 17 African countries to examine the impact of FSD on private savings. An innovative econometric methodology is also employed related to a series of cointegration tests within a panel. This is an important contribution, since traditional panel data analysis adopted in previous studies suffers from serious heterogeneity bias problems. The empirical results obtained vary considerably among countries in the panel, thus highlighting the importance of using different measures of FSD rather than a single indicator. The evidence is rather inconclusive, although in most of the countries in the sample, a positive relationship between FSD and private savings seems to hold. The empirical analysis also suggests that a change in government savings is offset by an opposite change in private savings in most of the countries in the panel, thus confirming the Ricardian equivalence hypothesis. Liquidity constraints do not seem to play a vital role in most of the African countries in the group, since the relevant coefficient is negative and significant in only a small group of countries. Journal: The European Journal of Finance Pages: 563-581 Issue: 7 Volume: 14 Year: 2008 Keywords: financial sector development, private savings, panel cointegration tests, Africa, X-DOI: 10.1080/13518470801890602 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890602 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:563-581 Template-Type: ReDIF-Article 1.0 Author-Name: Christopher Green Author-X-Name-First: Christopher Author-X-Name-Last: Green Author-Name: Victor Murinde Author-X-Name-First: Victor Author-X-Name-Last: Murinde Title: The impact of tax policy on corporate debt in a developing economy: a study of unquoted Indian companies Abstract: Taxation has potentially important implications for corporate behaviour. However, there have been few studies of the impact of taxation on companies in developing countries, and fewer still concerned with unquoted companies. In this paper, we study the impact of tax policy on the financial decisions of a sample of unquoted companies in India during the period 1989-99 when tax rates were generally reduced as part of a wider programme of financial liberalization. We examine the impact of the tax regime on company financing decisions, within the context of a model of company leverage, controlling for non-tax influences suggested by the theory of corporate finance. The analysis is carried out using a balanced panel consisting of the published accounts of 97 Indian unquoted companies, which reported continuously during 1989-99. The model is estimated using Generalized Methods of Moments (GMM). Estimates of the impact of the 1990s tax reforms are derived, and implications for policy are drawn. Journal: The European Journal of Finance Pages: 583-607 Issue: 7 Volume: 14 Year: 2008 Keywords: India, corporate finance, taxation, X-DOI: 10.1080/13518470701705702 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705702 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:583-607 Template-Type: ReDIF-Article 1.0 Author-Name: Rose Ngugi Author-X-Name-First: Rose Author-X-Name-Last: Ngugi Title: Capital financing behaviour: evidence from firms listed on the Nairobi Stock Exchange Abstract: This study investigates the determinants of capital structure for a sample of 22 firms listed on the Nairobi Stock Exchange during the period 1991-1999. Reduced form equations derived from the static trade-off model and the pecking order hypothesis are estimated and tested using panel data techniques. The results show that a pecking order model with an adjustment process cannot be rejected. Specifically, it is found that the main determinants of capital financing behaviour consist of information asymmetries, non-debt tax shields and local capital market infrastructure. Journal: The European Journal of Finance Pages: 609-624 Issue: 7 Volume: 14 Year: 2008 Keywords: Nairobi Stock Exchange, static trade-off model and pecking order hypothesis, X-DOI: 10.1080/13518470802042245 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042245 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:609-624 Template-Type: ReDIF-Article 1.0 Author-Name: C. Kirkpatrick Author-X-Name-First: C. Author-X-Name-Last: Kirkpatrick Author-Name: V. Murinde Author-X-Name-First: V. Author-X-Name-Last: Murinde Author-Name: M. Tefula Author-X-Name-First: M. Author-X-Name-Last: Tefula Title: The measurement and determinants of x-inefficiency in commercial banks in Sub-Saharan Africa Abstract: This paper uses the translog stochastic cost and profit frontier approach to measure the degree of x-inefficiency in a panel of 89 commercial banks drawn from nine Sub-Saharan African countries, covering the period 1992-99. The paper then models the determinants of x-inefficiency in terms of bank-specific factors and general macroeconomic variables. It is found that profit x-inefficiency is slightly higher than cost x-inefficiency, which suggests that revenue x-inefficiency is rather small. The evidence also shows that the degree of cost x-inefficiency is exacerbated by bad loans, high capital ratios and financial liberalisation. In contrast, it is shown that larger banks are more efficient and the level of foreign bank penetration reduces x-inefficiency. These findings have important implications for bank managers and regulators in Sub-Saharan Africa. Journal: The European Journal of Finance Pages: 625-639 Issue: 7 Volume: 14 Year: 2008 Keywords: x-inefficiency, commercial banks, Sub-Saharan Africa, X-DOI: 10.1080/13518470701705769 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705769 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:625-639 Template-Type: ReDIF-Article 1.0 Author-Name: Tomoe Moore Author-X-Name-First: Tomoe Author-X-Name-Last: Moore Author-Name: Christopher Green Author-X-Name-First: Christopher Author-X-Name-Last: Green Title: Flow of funds and the impact of financial controls on bank portfolio behaviour: a study of India Abstract: This paper studies the flow of funds and portfolio behaviour of Indian banks from 1951 to 1994. In this period, financial controls such as variable reserve ratios were important constraints on bank behaviour, especially before liberalization took place in the early 1990s. We estimate a system of demand functions which uses as framework the Almost Ideal Demand System and which incorporates the reserve ratio regulations. Attention is paid to cointegration and to structural breaks. The estimated model provides coherent and plausible parameter estimates for prices and other variables. We find that a standard portfolio model can usefully be applied to the study of financial behaviour in a developing economy such as India, and some interesting policy implications can be drawn. Journal: The European Journal of Finance Pages: 641-661 Issue: 7 Volume: 14 Year: 2008 Keywords: flow of funds, India, banking system, AIDS model, X-DOI: 10.1080/13518470801890800 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890800 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:641-661 Template-Type: ReDIF-Article 1.0 Author-Name: Michel Beine Author-X-Name-First: Michel Author-X-Name-Last: Beine Author-Name: Gunther Capelle-Blancard Author-X-Name-First: Gunther Author-X-Name-Last: Capelle-Blancard Author-Name: Helene Raymond Author-X-Name-First: Helene Author-X-Name-Last: Raymond Title: International nonlinear causality between stock markets Abstract: In this paper, we test for linear and nonlinear Granger causality between the French, German, Japanese, UK and US daily stock index returns from 1973 to 2003. We find a strong contemporaneous linear dependence between European countries and a directional linear dependence from the US towards the other markets. Besides, linear causality increases after 1987, a finding consistent with the expected effects of financial liberalization of the 1980s and the 1990s. Above all, we document the presence of bidirectional nonlinear causality between daily returns. To check for spurious nonlinear causality, we filter out heteroskedasticity using a FIGARCH model. The dramatic decrease in the number of significant nonlinear causality lags confirms that heteroskedasticity played a major part in the previous findings. We then check if a few structural breaks can explain the remaining nonlinear causality. We find that a large number of nonlinear relationships vanish when we control for structural breaks, whereas linear causality remains. Journal: The European Journal of Finance Pages: 663-686 Issue: 8 Volume: 14 Year: 2008 Keywords: international co-movements, linear and nonlinear causality, FIGARCH, multiple structural breaks, financial integration, X-DOI: 10.1080/13518470802042112 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042112 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:663-686 Template-Type: ReDIF-Article 1.0 Author-Name: Mohammad Hasan Author-X-Name-First: Mohammad Author-X-Name-Last: Hasan Title: Stock returns, inflation and interest rates in the United Kingdom Abstract: The Fisherian theory of interest asserts that a fully perceived change in inflation would be reflected in nominal interest rates and stock returns in the same direction in the long run. This paper examines the Fisherian hypothesis of asset returns using alternative techniques of linear regression, and vector error correction models to examine the nature of the relationship between stock returns and inflation in the UK. Consistent with the Fisherian hypothesis, empirical evidence in the linear regression model suggests a positive and statistically significant relationship between stock returns and inflation, which regards common stock as a good hedge against inflation. The results based on the unit root and cointegration tests indicate a long-run reliable relationship between price levels, share prices, and interest rates which could be interpreted as the long-run determinants of stock returns. The findings also suggest a bidirectional relationship between stock returns and inflation. The evidence of a significant Fisher effect is robust across model specifications. Journal: The European Journal of Finance Pages: 687-699 Issue: 8 Volume: 14 Year: 2008 Keywords: inflation, stock returns, Fisher effect, cointegration, X-DOI: 10.1080/13518470802042211 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042211 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:687-699 Template-Type: ReDIF-Article 1.0 Author-Name: Dieter Nautz Author-X-Name-First: Dieter Author-X-Name-Last: Nautz Author-Name: Karsten Ruth Author-X-Name-First: Karsten Author-X-Name-Last: Ruth Title: Monetary disequilibria and the euro/dollar exchange rate Abstract: Although stable money demand functions are crucial for the monetary model of the exchange rate, empirical research on exchange rates and money demand is more or less disconnected. This paper tries to fill the gap for the euro/dollar exchange rate. We investigate whether monetary disequilibria provided by the empirical literature on US and European money demand functions contain useful information about exchange rate movements. Our results suggest that the empirical performance of the monetary exchange rate model improves when insights from the money demand literature are explicitly taken into account. Journal: The European Journal of Finance Pages: 701-716 Issue: 8 Volume: 14 Year: 2008 Keywords: euro, dollar exchange rate, monetary model, money demand functions, X-DOI: 10.1080/13518470802042310 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042310 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:701-716 Template-Type: ReDIF-Article 1.0 Author-Name: Peter Laurence Author-X-Name-First: Peter Author-X-Name-Last: Laurence Author-Name: Tai-Ho Wang Author-X-Name-First: Tai-Ho Author-X-Name-Last: Wang Title: Distribution-free upper bounds for spread options and market-implied antimonotonicity gap Abstract: We derive in closed form distribution-free bounds and optimal hedging strategies for spread options. Upper bounds are obtained when the spread option's joint distribution is constrained by the prices of traded options with all available strikes of a given maturity. The difference between the upper bound and the market price is a useful new measure of codependence, which we refer to as the market implied antimonotonicity gap. Journal: The European Journal of Finance Pages: 717-734 Issue: 8 Volume: 14 Year: 2008 Keywords: antimonotonicity gap, arbitrage-free bounds, codependence, copula, spread options, super-replication, X-DOI: 10.1080/13518470802173164 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802173164 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:717-734 Template-Type: ReDIF-Article 1.0 Author-Name: Vassilios Babalos Author-X-Name-First: Vassilios Author-X-Name-Last: Babalos Author-Name: Guglielmo Maria Caporale Author-X-Name-First: Guglielmo Maria Author-X-Name-Last: Caporale Author-Name: Alexandros Kostakis Author-X-Name-First: Alexandros Author-X-Name-Last: Kostakis Author-Name: Nikolaos Philippas Author-X-Name-First: Nikolaos Author-X-Name-Last: Philippas Title: Testing for persistence in mutual fund performance and the ex-post verification problem: evidence from the Greek market Abstract: The present study examines a series of performance measures with the aim of solving the ex-post verification problem. These measures are employed to test the performance persistence hypothesis of domestic equity funds in Greece, during the period 1998-2004. Correctly adjusting for risk factors and documented portfolio strategies explains a significant part of the reported persistence. The intercept of the augmented Carhart regression is proposed as the most appropriate performance measure. Using this measure, weak evidence for persistence, only before 2001, is documented. The growth of the fund industry, the direction of flows to past winners and the integration in the international financial system are suggested to be the reasons for the absence of performance persistence. Journal: The European Journal of Finance Pages: 735-753 Issue: 8 Volume: 14 Year: 2008 Keywords: mutual funds, performance persistence, market efficiency, emerging markets, X-DOI: 10.1080/13518470802173248 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802173248 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:735-753 Template-Type: ReDIF-Article 1.0 Author-Name: Gavin Kretzschmar Author-X-Name-First: Gavin Author-X-Name-Last: Kretzschmar Author-Name: Axel Kirchner Author-X-Name-First: Axel Author-X-Name-Last: Kirchner Title: Recovery of hidden state participation effects on oil and gas asset values Abstract: Commodity price shocks are shown to cause shifts in both the quantity and timing of risk in natural resource assets. We provide evidence that static risk measures understate the periodicity of price risk implicit in depleting assets. Risk measurement is demonstrated to be asset specific and to vary heterogeneously in response to the combined effects of state participation and market factors. We use a global sample of oilfield assets to demonstrate that oilfield participation terms cause corporate asset cash flows, volatility horizons and minimum variance hedge ratios to vary in response to oil price. We provide additional insights into movements in the timing of physical oil and gas asset risk, a hidden effect not recoverable from market oil prices. Temporal variance for physical assets is shown to be a hidden dimensional outcome of the effects of market factors and state participation. Journal: The European Journal of Finance Pages: 755-769 Issue: 8 Volume: 14 Year: 2008 Keywords: oil and gas, volatility, ledging, X-DOI: 10.1080/13518470802173347 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802173347 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:755-769 Template-Type: ReDIF-Article 1.0 Author-Name: Sascha Mergner Author-X-Name-First: Sascha Author-X-Name-Last: Mergner Author-Name: Jan Bulla Author-X-Name-First: Jan Author-X-Name-Last: Bulla Title: Time-varying beta risk of Pan-European industry portfolios: A comparison of alternative modeling techniques Abstract: This paper investigates the time-varying behavior of systematic risk for 18 pan-European sectors. Using weekly data over the period 1987-2005, six different modeling techniques in addition to the standard constant coefficient model are employed: a bivariate t-GARCH(1,1) model, two Kalman filter (KF)-based approaches, a bivariate stochastic volatility model estimated via the efficient Monte Carlo likelihood technique as well as two Markov switching models. A comparison of ex-ante forecast performances of the different models indicate that the random walk process in connection with the KF is the preferred model to describe and forecast the time-varying behavior of sector betas in a European context. Journal: The European Journal of Finance Pages: 771-802 Issue: 8 Volume: 14 Year: 2008 Keywords: time-varying beta risk, Kalman filter, bivariate t-GARCH, stochastic volatility, efficient Monte Carlo likelihood, Markov switching, European industry portfolios, X-DOI: 10.1080/13518470802173396 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802173396 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:14:y:2008:i:8:p:771-802 Template-Type: ReDIF-Article 1.0 Author-Name: Helmut Herwartz Author-X-Name-First: Helmut Author-X-Name-Last: Herwartz Author-Name: Leonardo Morales-Arias Author-X-Name-First: Leonardo Author-X-Name-Last: Morales-Arias Title: In-sample and out-of-sample properties of international stock return dynamics conditional on equilibrium pricing factors Abstract: We conduct a comprehensive analysis of the in-sample and out-of-sample properties of stock return dynamics in 14 developed and 12 emerging markets. We start by formulating a theoretically founded asset-pricing model that decomposes log stock returns into equilibrium pricing factors (accounting and discount factors) and short-run (vector) autoregressive dynamics. Based on this model, we design both in-sample and out-of-sample panel modeling techniques to investigate international stock market returns at short and long horizons. Our findings show that (i) there is evidence of in-sample signaling from the equilibrium relations but this feature does not appear to translate into out-of-sample forecasting, (ii) a rolling window forecasting scheme can better approximate the distributional features of returns in comparison with a recursive method, (iii) forecasting with single-lagged equilibrium relationships does not play a uniformly significant role in anticipating returns, (iv) forecasting with a full model containing all lagged equilibrium relations can outperform both a random walk model and a VAR(1) model and (v) linear combinations of alternative forecasts reduce ex-ante uncertainty. Journal: The European Journal of Finance Pages: 1-28 Issue: 1 Volume: 15 Year: 2009 Keywords: international asset pricing, dynamic heterogenous panels, out-of-sample forecasting, forecast combination, X-DOI: 10.1080/13518470802423338 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802423338 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:1:p:1-28 Template-Type: ReDIF-Article 1.0 Author-Name: Abdullah Iqbal Author-X-Name-First: Abdullah Author-X-Name-Last: Iqbal Author-Name: Susanne Espenlaub Author-X-Name-First: Susanne Author-X-Name-Last: Espenlaub Author-Name: Norman Strong Author-X-Name-First: Norman Author-X-Name-Last: Strong Title: Earnings management around UK open offers Abstract: We examine the long run operating and stock price performance of UK open offer firms in the context of the earnings management hypothesis. We find that in the pre-offer period offer firms report significant improvements in their operating performance unrelated to cash flow performance. Results on return performance show that offer firms outperform various benchmarks in the pre-offer year but underperform up to four years after the offer. Regression results show that pre-offer discretionary current accruals predict the long-run post-offer return underperformance but do not predict the short-run reaction to SEO announcements. Our findings are more consistent with the earnings management hypothesis than with either the timing hypothesis or the managerial response hypothesis and suggest that investors do not take full account of the information available at the time of open offers. Journal: The European Journal of Finance Pages: 29-51 Issue: 1 Volume: 15 Year: 2009 Keywords: Earnings management, open offers, SEOs, return performance, operating performance, X-DOI: 10.1080/13518470701705652 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705652 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:1:p:29-51 Template-Type: ReDIF-Article 1.0 Author-Name: Seth Armitage Author-X-Name-First: Seth Author-X-Name-Last: Armitage Author-Name: John Capstaff Author-X-Name-First: John Author-X-Name-Last: Capstaff Title: Comment on 'earnings management around UK open offers' Abstract: This note discusses the result of Iqbal, A., S. Espenlaub, and N. Strong. 2008. Earnings management around UK open offers. European Journal of Finance, this issue, regarding long-run abnormal returns following open offers and announcement abnormal returns, compared with differing results in two previous studies based on similar samples. A survivorship bias explains some of the differences in the reported long-run abnormal returns. The difference in the announcement abnormal returns could be due to use of different data sources. Journal: The European Journal of Finance Pages: 53-60 Issue: 1 Volume: 15 Year: 2009 Keywords: seasoned equity offers, long-run abnormal returns, announcement abnormal returns, X-DOI: 10.1080/13518470801890735 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470801890735 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:1:p:53-60 Template-Type: ReDIF-Article 1.0 Author-Name: Susanne Espenlaub Author-X-Name-First: Susanne Author-X-Name-Last: Espenlaub Author-Name: Abdullah Iqbal Author-X-Name-First: Abdullah Author-X-Name-Last: Iqbal Author-Name: Norman Strong Author-X-Name-First: Norman Author-X-Name-Last: Strong Title: Datastream returns and UK open offers Abstract: We report a fundamental error in Datastream equity data for share prices and return indices relating to a failure to make any capital adjustments for UK open offers before February 2002. We re-examine the findings of Iqbal, Espenlaub, and Strong (2008), correcting for this error. We find that the short-run market reaction to open offers is now significantly positive. However, we confirm that long-run post-offer returns continue to be significantly negative up to a four-year horizon and, most importantly, that pre-issue discretionary current accruals predict the long-run underperformance, in support of the earnings management hypothesis. We continue to find no support for the timing hypothesis or the managerial response hypothesis. Journal: The European Journal of Finance Pages: 61-69 Issue: 1 Volume: 15 Year: 2009 Keywords: Datastream equity data, UK open offers, stock market reactions, earnings management hypothesis, X-DOI: 10.1080/13518470802560642 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802560642 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:1:p:61-69 Template-Type: ReDIF-Article 1.0 Author-Name: David Hillier Author-X-Name-First: David Author-X-Name-Last: Hillier Author-Name: Patrick McColgan Author-X-Name-First: Patrick Author-X-Name-Last: McColgan Author-Name: Samwel Werema Author-X-Name-First: Samwel Author-X-Name-Last: Werema Title: Asset sales and firm strategy: an analysis of divestitures by UK companies Abstract: This paper examines the financial causes and consequences of the decision to sell-off non-financial assets as part of a new or ongoing restructuring programme by UK non-financial companies between 1993 and 2000. We report that asset sales follow a period of declining operating returns and tend to occur in diversified companies with high levels of financial leverage. Stock prices respond positively to asset sale announcements. This arises due to improvements in operating returns and a decline in financial leverage and corporate diversification subsequent to the disposal. Our findings suggest that asset sales represent an effective operational response to a firm's poor financial condition. However, we also find that a manager's decision to sell assets is strongly influenced by the explicit threats to their control from lenders and competition from product, labour and takeover markets. Journal: The European Journal of Finance Pages: 71-87 Issue: 1 Volume: 15 Year: 2009 Keywords: asset sales, corporate restructuring, firm strategy, managerial discipline, operating performance, X-DOI: 10.1080/13518470802173438 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802173438 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:1:p:71-87 Template-Type: ReDIF-Article 1.0 Author-Name: Owain ap Gwilym Author-X-Name-First: Owain ap Author-X-Name-Last: Gwilym Author-Name: Samir Aguenaou Author-X-Name-First: Samir Author-X-Name-Last: Aguenaou Author-Name: Mark Rhodes Author-X-Name-First: Mark Author-X-Name-Last: Rhodes Title: The determinants of trading volume for cross-listed Euribor futures contracts Abstract: This article investigates the determinants of trading volume for the Euribor futures contract traded at both Euronext-LIFFE and Eurex. Granger causality tests suggest that volumes on the two exchanges are interdependent. Hausman tests demonstrate that the volumes are determined simultaneously. Such results are consistent with a scenario of competition for volume between the exchanges. A model of the determinants of volume is then specified to reflect the cross-exchange influences. The study is the first investigation of this type for Euribor and contributes new findings to the literature on cross-listed futures. The article applies an innovative selection of explanatory variables. An illiquidity ratio is found to have a significant inverse relationship with LIFFE volume, but is not significantly related to Eurex volume. Other determinants have very similar effects across the exchanges. Volumes at both exchanges are significantly lower on Mondays and Fridays. There is a significant negative relationship between days to maturity and volume, and volumes are significantly higher on the expiration days of futures contracts. European Central Bank announcements lead to significantly elevated trading volumes. Journal: The European Journal of Finance Pages: 89-102 Issue: 1 Volume: 15 Year: 2009 Keywords: trading volume, cross-listing, interest rate futures, X-DOI: 10.1080/13518470802423148 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802423148 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:1:p:89-102 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Abstract: Journal: The European Journal of Finance Pages: 103-103 Issue: 2 Volume: 15 Year: 2009 X-DOI: 10.1080/13518470902784043 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902784043 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:103-103 Template-Type: ReDIF-Article 1.0 Author-Name: Helena Pinto Author-X-Name-First: Helena Author-X-Name-Last: Pinto Author-Name: Sydney Howell Author-X-Name-First: Sydney Author-X-Name-Last: Howell Author-Name: Dean Paxson Author-X-Name-First: Dean Author-X-Name-Last: Paxson Title: Modelling the number of customers as a birth and death process Abstract: Birth and death may be a better model than Brownian motion for many physical processes, which real options models will increasingly need to deal with. In this paper, we value a perpetual American call option, which gives the monopoly right to invest in a market in which the number of active customers (and hence the sales rate) follows a birth and death process. The problem contains a singular point, and we develop a mixed analytic/numeric method for handling this singular point, based on the method of Frobenius. The method may be useful for other cases of singular points. The birth and death model gives lower option values than the geometric Brownian motion model, except at very low volatilities, so that if a firm incorrectly assumes a geometric Brownian motion process in place of a birth and death process, it will invest too seldom and too late. Journal: The European Journal of Finance Pages: 105-118 Issue: 2 Volume: 15 Year: 2009 Keywords: real options, birth and death processes and Frobenius method, X-DOI: 10.1080/13518470802042021 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802042021 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:105-118 Template-Type: ReDIF-Article 1.0 Author-Name: Pedro Martinez-Solano Author-X-Name-First: Pedro Author-X-Name-Last: Martinez-Solano Author-Name: Jose Yague-Guirao Author-X-Name-First: Jose Author-X-Name-Last: Yague-Guirao Author-Name: Fulgencio Lopez-Martinez Author-X-Name-First: Fulgencio Author-X-Name-Last: Lopez-Martinez Title: Asset securitization: effects on value of banking institutions Abstract: This paper examines the reaction of the Spanish stock market to the announcement of securitization operations by listed banks in the period 1993-2004. Results indicate the existence of positive and significant abnormal returns on the day immediately following the announcement date. The average cumulative abnormal returns over windows of varying lengths around the announcement date are also positive and significant. The market's reaction is stronger when the bank has a higher proportion of equity in its capital structure, when it is less profitable, and when it has previously undertaken securitization transactions. Journal: The European Journal of Finance Pages: 119-136 Issue: 2 Volume: 15 Year: 2009 Keywords: securitization, banking, profitability, efficiency, event study, X-DOI: 10.1080/13518470802466188 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802466188 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:119-136 Template-Type: ReDIF-Article 1.0 Author-Name: Carlos Alegria Author-X-Name-First: Carlos Author-X-Name-Last: Alegria Author-Name: George McKenzie Author-X-Name-First: George Author-X-Name-Last: McKenzie Author-Name: Simon Wolfe Author-X-Name-First: Simon Author-X-Name-Last: Wolfe Title: Earnings announcements by UK companies: Evidence of extreme events? Abstract: This paper investigates the abnormal share return dispersion occurring when companies announce their interim or final earnings. Whereas, prior research has focused on abnormal returns, little attention has been given to investigating the dispersion of the abnormal returns. We find strong empirical evidence supporting an abnormal dispersion of share returns on event dates. Moreover, we find that these public announcements are sources of extreme share price movements. Our study provides a step forward in identifying factors underlying the leptokurtosis that is traditionally found in time series stock market returns. Our data sample is comprised of interim and full year results for mid-to-large capitalisation UK companies for the period 1984-2005. Consistent with the extant literature on this subject, we find no evidence of market inefficiency around the event date, or straightforward arbitrage opportunities on the event date. However, we find using Paretian statistics that the abnormal return dispersion on the event date is three times higher than on normal non-event days. Journal: The European Journal of Finance Pages: 137-156 Issue: 2 Volume: 15 Year: 2009 Keywords: event studies, extreme events, abnormal returns, information events, market efficiency, X-DOI: 10.1080/13518470802466261 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802466261 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:137-156 Template-Type: ReDIF-Article 1.0 Author-Name: Jose Carlos Dias Author-X-Name-First: Jose Carlos Author-X-Name-Last: Dias Author-Name: Mark Shackleton Author-X-Name-First: Mark Author-X-Name-Last: Shackleton Title: Durable vs. disposable equipment choice under interest rate uncertainty Abstract: This article analyzes present value costs under stochastic interest rates and investigates the effect of interest rate uncertainty on the replacement investment decision that a firm must make when a piece of equipment becomes obsolete and needs replacement with either short- or long-lived equipment. We consider the replacement problem under stochastic interest rates in a CIR economy (Cox, Ingersoll, and Ross 1985a,b). Depending on the interest rate levels, interest rate volatility and the optionality to switch between durable and expendable assets at each renewal time, managers may prefer to invest in long-lived but more expensive assets instead of short-lived but less costly assets and vice versa. Journal: The European Journal of Finance Pages: 157-167 Issue: 2 Volume: 15 Year: 2009 Keywords: real options, interest rate uncertainty, replacement investment decisions, interest rate policy, X-DOI: 10.1080/13518470802560790 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802560790 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:157-167 Template-Type: ReDIF-Article 1.0 Author-Name: Jorge Farinha Author-X-Name-First: Jorge Author-X-Name-Last: Farinha Author-Name: Oscar Lopez-de-Foronda Author-X-Name-First: Oscar Author-X-Name-Last: Lopez-de-Foronda Title: The relation between dividends and insider ownership in different legal systems: international evidence Abstract: This paper provides new international evidence on the relationship between dividend policy and insider ownership by analysing a sample of USA, UK and Irish firms characterized by an Anglo-Saxon tradition and a matching sample of other EU companies from Civil Law legal systems. We hypothesize that, due to the different characteristics of both the legal system and the nature of agency conflicts in firms from those countries, the relation between dividend policies and ownership by insiders will be considerably distinct between the two sets of companies. We find that while in firms with an Anglo-Saxon tradition the relation between dividends and insider ownership follows the pattern negative-positive-negative, in Civil Law countries the relation is positive-negative-positive. These results are consistent with our hypotheses and breed new insights into the role of the dividend policy as a disciplining mechanism in countries with different legal systems and distinct agency problems. Journal: The European Journal of Finance Pages: 169-189 Issue: 2 Volume: 15 Year: 2009 Keywords: dividend policy, corporate governance, insider ownership, international financial markets, dynamic panel data and GMM estimation, X-DOI: 10.1080/13518470802588718 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802588718 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:169-189 Template-Type: ReDIF-Article 1.0 Author-Name: Leif Holger Dietze Author-X-Name-First: Leif Holger Author-X-Name-Last: Dietze Author-Name: Oliver Entrop Author-X-Name-First: Oliver Author-X-Name-Last: Entrop Author-Name: Marco Wilkens Author-X-Name-First: Marco Author-X-Name-Last: Wilkens Title: The performance of investment grade corporate bond funds: evidence from the European market Abstract: This paper examines the risk-adjusted performance of mutual funds offered in Germany which exclusively invest in the 'rather new' capital market segment of euro-denominated investment grade corporate bonds. The funds are evaluated employing a single-index model and several multi-index and asset-class-factor models. In contrast to earlier studies dealing with (government) bond funds, we account for the specific risk and return characteristics of investment grade corporate bonds and use both rating-based indices and maturity-based indices, respectively, in our multi-factor models. In line with earlier studies, we find evidence that corporate bond funds, on average, under-perform the benchmark portfolios. Moreover, there is not a single fund exhibiting a significantly positive performance. These results are robust to the different models. Finally, we examine the driving factors behind fund performance. As well as examining the influence of several fund characteristics, particularly fund age, asset value under management and management fee, we investigate the impact of investment style on the funds' risk-adjusted performance. We find indications that funds showing lower exposure to BBB-rated bonds, older funds, and funds charging lower fees attain higher risk-adjusted performance. Journal: The European Journal of Finance Pages: 191-209 Issue: 2 Volume: 15 Year: 2009 Keywords: performance measurement, European corporate bond market, investment grade corporate bond mutual funds, multi-index model, asset-class-factor model, generalized Treynor ratio, X-DOI: 10.1080/13518470802588841 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802588841 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:191-209 Template-Type: ReDIF-Article 1.0 Author-Name: Julia Sawicki Author-X-Name-First: Julia Author-X-Name-Last: Sawicki Title: Corporate governance and dividend policy in Southeast Asia pre- and post-crisis Abstract: The relationship between dividends and corporate governance in five East Asian countries over the period 1994-2003, comparing the outcome and substitute models, is investigated. Evidence of a pre-crisis negative relationship between dividends and governance indicates that dividends act as a substitute for other corporate governance mechanisms during this exuberant period. A strong positive relationship between governance and dividends emerges post-crisis, consistent with substantial improvements in governance empowering shareholders. The relationship is incremental to the effect of the legal regime, confirming that shareholder protection at the firm level is important to forcing firms to disgorge cash in an outcome model of dividends. Journal: The European Journal of Finance Pages: 211-230 Issue: 2 Volume: 15 Year: 2009 Keywords: corporate governance, financial crisis, dividends, emerging markets, X-DOI: 10.1080/13518470802604440 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802604440 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:211-230 Template-Type: ReDIF-Article 1.0 Author-Name: Sofia Ramos Author-X-Name-First: Sofia Author-X-Name-Last: Ramos Title: Competition and stock market development Abstract: Previous research has found great disparity in growth rates of stock markets supporting the idea that the ranking in financial development is volatile. This paper analyzes the development of stock markets in the last decades and attempts to explain why countries change their ranking in financial development. For that purpose, I analyze 101 stock markets from 1975 to 2003. I find that the divergence is mainly explained by changes in law and regulation enhancing competition. In addition, the general level of competition is positively related with stock market development. Competition causes a decrease in the transaction costs and the cost of capital, driving more firms to list and more traders to trade. Results are consistent through time. Journal: The European Journal of Finance Pages: 231-247 Issue: 2 Volume: 15 Year: 2009 Keywords: financial development, stock markets, regulation, competition, X-DOI: 10.1080/13518470802697311 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802697311 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:2:p:231-247 Template-Type: ReDIF-Article 1.0 Author-Name: Graham Smith Author-X-Name-First: Graham Author-X-Name-Last: Smith Title: Martingales in European emerging stock markets: Size, liquidity and market quality Abstract: The hypothesis that stock index returns form a martingale difference sequence (MDS) is tested for 10 European emerging stock markets: the Czech Republic, Estonia, Hungary, Malta, Poland, Russia, the Slovak Republic, Slovenia, Turkey and the Ukraine, using joint variance ratio tests based on signs and the wild bootstrap, for the period beginning in January 1998 and ending in September 2007. For comparative purposes, the same tests are carried out with data for the United Kingdom and the United States. In two of the emerging markets, Poland and Turkey, and the two developed markets, none of the tests rejects the martingale hypothesis. For the stock markets in Malta, the Slovak Republic and Slovenia, all of the evidence finds that stock index returns do not form a martingale difference sequence. The results are discussed in light of stock market characteristics: size, liquidity and the quality of the market are important for MDS returns. Journal: The European Journal of Finance Pages: 249-262 Issue: 3 Volume: 15 Year: 2009 Keywords: European stock markets, capitalisation, conditional heteroscedasticity, liquidity, market quality, martingale, variance ratio test, wild bootstrap, X-DOI: 10.1080/13518470802423262 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802423262 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:3:p:249-262 Template-Type: ReDIF-Article 1.0 Author-Name: Yuming Li Author-X-Name-First: Yuming Author-X-Name-Last: Li Author-Name: Maosen Zhong Author-X-Name-First: Maosen Author-X-Name-Last: Zhong Title: International asset returns and exchange rates Abstract: We present a consumption-based international asset-pricing model to study global equity premiums, the US riskfree rate and the cross section of international asset returns. The model entails idiosyncratic, country-specific consumption risk, which helps explain the magnitude of global equity premiums. It also features country-specific habit formation, which helps explain the level of the interest rate on the US short-term Treasury bills traded by domestic and international investors. We find that the model explains approximately 40-50% of the cross section of currency and equity premiums as well as expected returns from value and growth portfolios of at least a dozen countries. Changes in real exchange rates are responsible for explaining approximately half of the cross section of international asset returns. Journal: The European Journal of Finance Pages: 263-285 Issue: 3 Volume: 15 Year: 2009 Keywords: international asset pricing, consumption-based model, habit formation, idiosyncratic risks, equity premiums, currency premiums, exchange rates, inflation rates, X-DOI: 10.1080/13518470802423429 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802423429 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:3:p:263-285 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Bessler Author-X-Name-First: Wolfgang Author-X-Name-Last: Bessler Author-Name: Wolfgang Drobetz Author-X-Name-First: Wolfgang Author-X-Name-Last: Drobetz Author-Name: Heinz Zimmermann Author-X-Name-First: Heinz Author-X-Name-Last: Zimmermann Title: Conditional performance evaluation for German equity mutual funds Abstract: We investigate the conditional performance of a sample of German equity mutual funds over the period from 1994 to 2003 using both the beta-pricing approach and the stochastic discount factor (SDF) framework. On average, mutual funds cannot generate excess returns relative to their benchmark that are large enough to cover their total expenses. Compared to unconditional alphas, fund performance sharply deteriorates when we measure conditional alphas. Given that stock returns are to some extent predictable based on publicly available information, conditional performance evaluation raises the benchmark for active fund managers because it gives them no credit for exploiting readily available information. Underperformance is more pronounced in the SDF framework than in beta-pricing models. The fund performance measures derived from alternative model specifications differ depending on the number of primitive assets taken to calibrate the SDF as well as the number of instrument variables used to scale assets and/or factors. Journal: The European Journal of Finance Pages: 287-316 Issue: 3 Volume: 15 Year: 2009 Keywords: mutual funds, stock return predictability, conditional performance measurement, stochastic discount factor, X-DOI: 10.1080/13518470802423445 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802423445 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:3:p:287-316 Template-Type: ReDIF-Article 1.0 Author-Name: Taras Bodnar Author-X-Name-First: Taras Author-X-Name-Last: Bodnar Author-Name: Wolfgang Schmid Author-X-Name-First: Wolfgang Author-X-Name-Last: Schmid Title: Econometrical analysis of the sample efficient frontier Abstract: The efficient frontier is a parabola in the mean-variance space which is uniquely determined by three characteristics. Assuming that the portfolio asset returns are independent and multivariate normally distributed, we derive tests and confidence sets for all possible arrangements of these characteristics. Note that all of our results are based on the exact distributions for a finite sample size. Moreover, we determine a confidence region of the whole efficient frontier in the mean-variance space. It is shown that this set is bordered by five parabolas. Journal: The European Journal of Finance Pages: 317-335 Issue: 3 Volume: 15 Year: 2009 Keywords: asset allocation, efficient frontier, portfolio analysis, mean-variance portfolio, parameter uncertainty, interval estimation, X-DOI: 10.1080/13518470802423478 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802423478 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:3:p:317-335 Template-Type: ReDIF-Article 1.0 Author-Name: Anders Johansson Author-X-Name-First: Anders Author-X-Name-Last: Johansson Title: Stochastic volatility and time-varying country risk in emerging markets Abstract: This study suggests an alternative method to estimate time-varying country risk. We first apply a new multivariate stochastic volatility (SV) model to a set of emerging stock markets. To estimate the SV model, we use a Bayesian Markov chain Monte Carlo simulation procedure. By applying the deviance information criterion, we show that the new model performs well relative to alternative multivariate SV models. We then compute the conditional betas for the different markets and compare the results with an often-used procedure based on multivariate GARCH models. We show that the new multivariate SV model more accurately captures the time-varying nature of country risk. The conditional betas show signs of large variations, indicating the importance of taking time-varying country risk into consideration when managing emerging market portfolios. Journal: The European Journal of Finance Pages: 337-363 Issue: 3 Volume: 15 Year: 2009 Keywords: conditional beta, multivariate stochastic volatility, Markov chain Monte Carlo, emerging markets, X-DOI: 10.1080/13518470802466006 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802466006 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:3:p:337-363 Template-Type: ReDIF-Article 1.0 Author-Name: Pierre Giot Author-X-Name-First: Pierre Author-X-Name-Last: Giot Author-Name: Mikael Petitjean Author-X-Name-First: Mikael Author-X-Name-Last: Petitjean Title: Short-term market timing using the bond-equity yield ratio Abstract: This paper takes a new look at the market-timing ability of the bond-equity yield ratio (BEYR). We compare the short-term profitability of a naive strategy based on the extreme values of the BEYR to the short-term profitability of a sophisticated strategy relying on regime switches. In contrast to previous studies, we do not document any major international evidence that these dynamic strategies deliver significantly higher risk-adjusted returns than the buy-and-hold portfolios. Moreover, the profitability of these active strategies is not improved when the equity yield, instead of the BEYR, is used as a criterion to time the market. Journal: The European Journal of Finance Pages: 365-384 Issue: 4 Volume: 15 Year: 2009 Keywords: valuation ratio, switching, regime, market timing, X-DOI: 10.1080/13518470802466097 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802466097 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:4:p:365-384 Template-Type: ReDIF-Article 1.0 Author-Name: Paul Guest Author-X-Name-First: Paul Author-X-Name-Last: Guest Title: The impact of board size on firm performance: evidence from the UK Abstract: We examine the impact of board size on firm performance for a large sample of 2746 UK listed firms over 1981-2002. The UK provides an interesting institutional setting, because UK boards play a weak monitoring role and therefore any negative effect of large board size is likely to reflect the malfunction of the board's advisory rather than monitoring role. We find that board size has a strong negative impact on profitability, Tobin's Q and share returns. This result is robust across econometric models that control for different types of endogeneity. We find no evidence that firm characteristics that determine board size in the UK lead to a more positive board size-firm performance relation. In contrast, we find that the negative relation is strongest for large firms, which tend to have larger boards. Overall, our evidence supports the argument that problems of poor communication and decision-making undermine the effectiveness of large boards. Journal: The European Journal of Finance Pages: 385-404 Issue: 4 Volume: 15 Year: 2009 Keywords: corporate governance, board size, firm performance, endogeneity, UK, X-DOI: 10.1080/13518470802466121 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802466121 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:4:p:385-404 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Ewerhart Author-X-Name-First: Christian Author-X-Name-Last: Ewerhart Author-Name: Nuno Cassola Author-X-Name-First: Nuno Author-X-Name-Last: Cassola Author-Name: Steen Ejerskov Author-X-Name-First: Steen Author-X-Name-Last: Ejerskov Author-Name: Natacha Valla Author-X-Name-First: Natacha Author-X-Name-Last: Valla Title: Optimal allotment policy in central bank open market operations Abstract: This article derives a central bank's optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect of liquidity on market rates is not too small, and the monetary authority is concerned with both interest rates and liquidity conditions, then the optimal allotment policy may entail a 'discontinuous' reaction to initial conditions. In particular, the model predicts a threshold level of liquidity below which the central bank will not bail out the banking system. An estimation of the liquidity effect for the euro area suggests that the discontinuity might have contributed to the Eurosystem's tight response to occurrences of underbidding during the period June 2000 through March 2004. Journal: The European Journal of Finance Pages: 405-420 Issue: 4 Volume: 15 Year: 2009 Keywords: open market operations, liquidity effect, standing facilities, underbidding, X-DOI: 10.1080/13518470802560857 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802560857 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:4:p:405-420 Template-Type: ReDIF-Article 1.0 Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Leon Hadass Author-X-Name-First: Leon Author-X-Name-Last: Hadass Author-Name: Andrew Wood Author-X-Name-First: Andrew Author-X-Name-Last: Wood Title: UK IPO underpricing and venture capitalists Abstract: We analyze the nature and causes of short-run underpricing for a unique sample of 591 Initial Public Offers (IPOs) issued on the London Stock Exchange for the period 1985-2003. We find significant differences between the 1998-2000 bubble years and the rest of the sample. Venture capitalists and reputable underwriters played a certification role in the latter period but not during the bubble years. These years featured significant increases in underpricing, money left on the table, and a decline in operating quality. The combination of venture capitalists and prestigious underwriters was increasingly associated with the highest underpricing witnessed during 1998-2000, which provides indirect support for the spinning hypothesis. Journal: The European Journal of Finance Pages: 421-435 Issue: 4 Volume: 15 Year: 2009 Keywords: IPO underpricing, venture capital, certification hypothesis, spinning, X-DOI: 10.1080/13518470802560915 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802560915 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:4:p:421-435 Template-Type: ReDIF-Article 1.0 Author-Name: Taufiq Choudhry Author-X-Name-First: Taufiq Author-X-Name-Last: Choudhry Author-Name: Hao Wu Author-X-Name-First: Hao Author-X-Name-Last: Wu Title: Forecasting the weekly time-varying beta of UK firms: GARCH models vs. Kalman filter method Abstract: This paper investigates the forecasting ability of three different Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models and the Kalman filter method. The three GARCH models applied are: bivariate GARCH, BEKK GARCH, and GARCH-GJR. Forecast errors based on 20 UK company's weekly stock return (based on time-varying beta) forecasts are employed to evaluate the out-of-sample forecasting ability of both the GARCH models and the Kalman method. Measures of forecast errors overwhelmingly support the Kalman filter approach. Among the GARCH models, GJR appears to provide somewhat more accurate forecasts than the two other GARCH models. Journal: The European Journal of Finance Pages: 437-444 Issue: 4 Volume: 15 Year: 2009 Keywords: forecasting, Kalman filter, GARCH, volatility, X-DOI: 10.1080/13518470802604499 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802604499 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:4:p:437-444 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Abstract: Journal: The European Journal of Finance Pages: 445-445 Issue: 5-6 Volume: 15 Year: 2009 X-DOI: 10.1080/13518470903194788 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903194788 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:445-445 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Bessler Author-X-Name-First: Wolfgang Author-X-Name-Last: Bessler Author-Name: Wolfgang Drobetz Author-X-Name-First: Wolfgang Author-X-Name-Last: Drobetz Title: Editorial Abstract: Journal: The European Journal of Finance Pages: 447-449 Issue: 5-6 Volume: 15 Year: 2009 X-DOI: 10.1080/13518470903037466 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903037466 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:447-449 Template-Type: ReDIF-Article 1.0 Author-Name: Gordon Alexander Author-X-Name-First: Gordon Author-X-Name-Last: Alexander Title: From Markowitz to modern risk management Abstract: Nobel Laureate Harry Markowitz is often referred to as the 'founder of Modern portfolio theory' and deservedly so given his enormous influence on the money management industry.1 However, it is my contention that he should also be referred to as the 'founder of Modern Risk Management' since his contributions to portfolio theory formed the basis for how risk is currently viewed and managed. More specifically, Markowitz argued that a portfolio of securities should be viewed through the lens of statistics where the probability distribution of its rate of return is evaluated in terms of its expected value and standard deviation. Since the ultimate selection of a portfolio involves the evaluation and management of risk as measured by standard deviation, it is clear that Markowitz's process of portfolio selection represents the birth of modern risk management whereby risk is quantified and controlled. In this paper, I will first, introduce value-at-risk as a measure of risk and how it relates to standard deviation, the risk measure at the heart of the model of Markowitz. Second, I will similarly introduce conditional value-at-risk (also known as expected shortfall) as a measure of risk and compare it with VaR. Third, I will briefly introduce stress testing as a supplemental means of controlling risk and will then present my conclusions.2 Journal: The European Journal of Finance Pages: 451-461 Issue: 5-6 Volume: 15 Year: 2009 Keywords: risk management, value-at-risk, conditional value-at-risk, stress testing, X-DOI: 10.1080/13518470902853566 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853566 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:451-461 Template-Type: ReDIF-Article 1.0 Author-Name: Alexandros Kostakis Author-X-Name-First: Alexandros Author-X-Name-Last: Kostakis Title: Performance measures and incentives: loading negative coskewness to outperform the CAPM Abstract: This study examines the incentives in fund management due to the adoption of specific performance measures. A mean-variance measure such as Jensen's alpha incentivizes fund managers to load negative coskewness risk. This risk is shown to be priced in the UK stock market during the period January 1991- December 2005, bearing a premium of 2.09% p.a. Hence, a new performance measure, the intercept of the Harvey-Siddique two-factor asset pricing model is proposed to be more appropriate for prudent investors. Using this model, the performance of UK equity unit trusts is examined for the same period. Though most of the managers significantly underperformed their benchmark, they correctly responded to their incentives, loading negative coskewness and reaping part of the corresponding premium. Journal: The European Journal of Finance Pages: 463-486 Issue: 5-6 Volume: 15 Year: 2009 Keywords: performance measures, negative coskewness, mutual funds, managerial incentives, X-DOI: 10.1080/13518470902872327 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902872327 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:463-486 Template-Type: ReDIF-Article 1.0 Author-Name: Aymen Karoui Author-X-Name-First: Aymen Author-X-Name-Last: Karoui Author-Name: Iwan Meier Author-X-Name-First: Iwan Author-X-Name-Last: Meier Title: Performance and characteristics of mutual fund starts Abstract: We study the performance and portfolio characteristics of 828 newly launched US equity mutual funds over the period 1991-2005. These fund starts initially earn, on average, higher excess returns and higher abnormal returns. Their risk-adjusted performance is also superior to existing funds. Furthermore, we provide evidence for short-term persistence among top-performing fund starts, however, a substantial fraction of funds drop from the top to the bottom decile over two subsequent periods. Analyzing portfolio characteristics, we find that returns of fund starts exhibit higher ratios of unsystematic to total risk. Portfolios of new funds are typically also less diversified in terms of number of stocks and industry concentration and are invested in smaller and less liquid stocks. Journal: The European Journal of Finance Pages: 487-509 Issue: 5-6 Volume: 15 Year: 2009 Keywords: mutual funds, fund starts, performance evaluation, performance persistence, X-DOI: 10.1080/13518470902872319 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902872319 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:487-509 Template-Type: ReDIF-Article 1.0 Author-Name: Joachim Grammig Author-X-Name-First: Joachim Author-X-Name-Last: Grammig Author-Name: Andreas Schrimpf Author-X-Name-First: Andreas Author-X-Name-Last: Schrimpf Author-Name: Michael Schuppli Author-X-Name-First: Michael Author-X-Name-Last: Schuppli Title: Long-horizon consumption risk and the cross-section of returns: new tests and international evidence Abstract: This paper investigates whether measuring consumption risk over long horizons can improve the empirical performance of the consumption-based capital asset pricing model (CCAPM) for size and value premia in international stock markets (USA, UK, and Germany). In order to account for commonalities in size and book-to-market sorted portfolios, we also include industry portfolios in our set of test assets. Our results show that, contrary to the findings of Parker and Julliard [2005. Consumption risk and the cross- section of expected returns. Journal of Political Economy 113, no. 1: 185-222], the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. At the same time, however, measuring consumption risk over longer horizons typically yields lower risk-aversion estimates. Thus, our results suggest that more plausible parameter estimates - as opposed to lower pricing errors - can be regarded as the main achievement of the long-horizon CCAPM. Journal: The European Journal of Finance Pages: 511-532 Issue: 5-6 Volume: 15 Year: 2009 Keywords: consumption-based asset pricing, long-run consumption risk, value puzzle, international stock markets, X-DOI: 10.1080/13518470902872285 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902872285 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:511-532 Template-Type: ReDIF-Article 1.0 Author-Name: Wassim Dbouk Author-X-Name-First: Wassim Author-X-Name-Last: Dbouk Author-Name: Lawrence Kryzanowski Author-X-Name-First: Lawrence Author-X-Name-Last: Kryzanowski Title: Diversification benefits for bond portfolios Abstract: Finance research has focused primarily on the diversification of stock portfolios. Various metrics are used herein to assess the diversification benefits, and the optimal bond portfolio sizes (PSs) for investment opportunity (IO) sets differentiated by issuer type, credit ratings and term-to-maturity. While PSs of 25-40 bonds appear optimal for the marginal reduction of dispersion with increasing PS, larger (smaller) PSs are optimal if the investor is concerned about left tail weight (positive skewness or reward-to-downside risk). Although the marginal reduction of dispersion is less than 1% beyond these optimal PSs, much potential diversification benefits still remain unrealized for many of the IO sets studied herein. Journal: The European Journal of Finance Pages: 533-553 Issue: 5-6 Volume: 15 Year: 2009 Keywords: diversification benefits, portfolio size, derived and realized dispersion, skewness, Sortino ratio, tail shape, X-DOI: 10.1080/13518470902890758 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902890758 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:533-553 Template-Type: ReDIF-Article 1.0 Author-Name: Mats Hansson Author-X-Name-First: Mats Author-X-Name-Last: Hansson Author-Name: Eva Liljeblom Author-X-Name-First: Eva Author-X-Name-Last: Liljeblom Author-Name: Anders Loflund Author-X-Name-First: Anders Author-X-Name-Last: Loflund Title: International bond diversification strategies: the impact of currency, country, and credit risk Abstract: We investigate the incremental role of emerging market debt and corporate bonds in internationally diversified government bond portfolios. Contrary to earlier results, we find that international diversification among government bonds does not yield significant diversification benefits. This result is obtained using mean-variance spanning and intersection tests, with restrictions for short sales, both for currency unhedged and hedged internationally developed market government bonds. Currency hedged international corporate bonds in turn do offer some diversification benefits, and emerging market debt, in particular, significantly shifts the mean-variance frontier for a developed market investor. Since especially unconstrained mean-variance spanning and intersection tests can indicate significant diversification benefits, but lead to frontier portfolios with extreme weights, we also consider some ex-ante global government bond portfolio strategies. We find that passive global benchmarks such as GDP-weighed government bond portfolios perform quite well within developed countries. Journal: The European Journal of Finance Pages: 555-583 Issue: 5-6 Volume: 15 Year: 2009 Keywords: international bond diversification, mean-variance spanning and intersection, emerging market debt, corporate bond, X-DOI: 10.1080/13518470902872376 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902872376 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:555-583 Template-Type: ReDIF-Article 1.0 Author-Name: Paulo Armada Leite Author-X-Name-First: Paulo Armada Author-X-Name-Last: Leite Author-Name: Maria Ceu Cortez Author-X-Name-First: Maria Ceu Author-X-Name-Last: Cortez Title: Conditioning information in mutual fund performance evaluation: Portuguese evidence Abstract: We estimate and compare the performance of Portuguese-based mutual funds that invest in the domestic market and in the European market using unconditional and conditional models of performance evaluation. Besides applying both partial and full conditional models, we use European information variables, instead of the most common local ones, and consider stochastically detrended conditional variables in order to avoid spurious regressions. The results suggest that mutual fund managers are not able to outperform the market, presenting negative or neutral performance. The incorporation of conditioning information in performance evaluation models is supported by our findings, as it improves the explanatory power of the models and there is evidence of both time-varying betas and alphas related to the public information variables. It is also shown that the number of lags to be used in the stochastic detrending procedure is a critical choice, as it will impact the significance of the conditioning information. In addition, we observe a distance effect, since managers who invest locally seem to outperform those who invest in the European market. However, after controlling for public information, this effect is slightly reduced. Furthermore, the results suggest that survivorship bias has a small impact on performance estimates. Journal: The European Journal of Finance Pages: 585-605 Issue: 5-6 Volume: 15 Year: 2009 Keywords: mutual funds, conditional performance evaluation, spurious regressions, survivorship bias, distance effect, X-DOI: 10.1080/13518470802697378 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802697378 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:585-605 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Abstract: Journal: The European Journal of Finance Pages: 607-607 Issue: 7-8 Volume: 15 Year: 2009 X-DOI: 10.1080/13518470903492430 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903492430 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:607-607 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Genest Author-X-Name-First: Christian Author-X-Name-Last: Genest Author-Name: Michel Gendron Author-X-Name-First: Michel Author-X-Name-Last: Gendron Author-Name: Michaël Bourdeau-Brien Author-X-Name-First: Michaël Author-X-Name-Last: Bourdeau-Brien Title: The Advent of Copulas in Finance Abstract: The authors provide bibliometric evidence to illustrate the development of copula theory in mathematics, statistics, actuarial science and finance. They identify the main contributors to the field, and the most important areas of application in finance. They also describe some of the remaining methodological challenges. Journal: The European Journal of Finance Pages: 609-618 Issue: 7-8 Volume: 15 Year: 2009 Keywords: bibliometry, copula, derivative pricing, portfolio management, risk management, X-DOI: 10.1080/13518470802604457 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802604457 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:609-618 Template-Type: ReDIF-Article 1.0 Author-Name: Alexandra Dias Author-X-Name-First: Alexandra Author-X-Name-Last: Dias Author-Name: Paul Embrechts Author-X-Name-First: Paul Author-X-Name-Last: Embrechts Title: Testing for structural changes in exchange rates' dependence beyond linear correlation Abstract: In this paper, we test for structural changes in the conditional dependence of two-dimensional foreign exchange data. We show that by modeling the conditional dependence structure using copulae, we can detect changes in the dependence beyond linear correlation, such as changes in the tail of the joint distribution. This methodology is relevant for estimating risk-management measures, such as portfolio value-at-risk, pricing multi-name financial instruments, and portfolio asset allocation. Our results include evidence of the existence of changes in the correlation as well as in the fatness of the tail of the dependence between Deutsche mark and Japanese yen. Journal: The European Journal of Finance Pages: 619-637 Issue: 7-8 Volume: 15 Year: 2009 Keywords: Change-point tests, conditional dependence, copula, GARCH, risk management, X-DOI: 10.1080/13518470701705579 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470701705579 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:619-637 Template-Type: ReDIF-Article 1.0 Author-Name: Kjersti Aas Author-X-Name-First: Kjersti Author-X-Name-Last: Aas Author-Name: Daniel Berg Author-X-Name-First: Daniel Author-X-Name-Last: Berg Title: Models for construction of multivariate dependence - a comparison study Abstract: A multivariate data set, which exhibit complex patterns of dependence, particularly in the tails, can be modelled using a cascade of lower-dimensional copulae. In this paper, we compare two such models that differ in their representation of the dependency structure, namely the nested Archimedean construction (NAC) and the pair-copula construction (PCC). The NAC is much more restrictive than the PCC in two respects. There are strong limitations on the degree of dependence in each level of the NAC, and all the bivariate copulas in this construction has to be Archimedean. Based on an empirical study with two different four-dimensional data sets; precipitation values and equity returns, we show that the PCC provides a better fit than the NAC and that it is computationally more efficient. Hence, we claim that the PCC is more suitable than the NAC for hich-dimensional modelling. Journal: The European Journal of Finance Pages: 639-659 Issue: 7-8 Volume: 15 Year: 2009 Keywords: nested Archimedean copulas, pair-copula constructions, equity returns, precipitation values, goodness-of-fit, out-of-sample validation, X-DOI: 10.1080/13518470802588767 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802588767 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:639-659 Template-Type: ReDIF-Article 1.0 Author-Name: William Shaw Author-X-Name-First: William Author-X-Name-Last: Shaw Author-Name: Asad Munir Author-X-Name-First: Asad Author-X-Name-Last: Munir Title: Dependency without copulas or ellipticity Abstract: The generation of multivariate probability distributions follows several approaches. Within financial applications the emphasis has mostly been on two methodologies. The first is the elliptical methodology, where the leap from univariate to multivariate has taken place by constructing density functions that are functions of quadratic forms of the marginals. The second is the copula philosophy, where the dependency structure is treated entirely separately from marginals. In financial applications one often needs to work with combinations of marginals of various distributional types, and the copula philosophy is very attractive as it copes well with heterogeneous marginals. However, with some notable exceptions, the copula approach does not normally correspond to any natural or canonical multivariate structure arising from some underlying dynamic. This paper presents an approach to multivariate distribution theory that allows for heterogeneous marginals but without the limitations of the elliptical ansatz or the arbitrariness of the copula approach. The approach is to consider multivariate distributions as arising naturally from coupled stochastic differential equations (SDEs), and in this paper we consider a first step based on the equilibrium situation. The scope of this paper is where the marginals are one of the classic Pearson family of distributions, allowing for great diversity among the marginals. For simplicity we present details for the bivariate case. Using a recently developed quantile form of the Fokker-Planck equation it is first shown how the members of the Pearson family are associated with various types of one-dimensional SDE in a transparent manner. Then appropriate two-dimensional SDEs and the associated Fokker-Planck equations are considered. In the equilibrium limit these give solutions that are natural bivariate structures. Some examples with marginals drawn from Gaussian, Student and one-sided exponential are explored. Some possible generalizations are outlined. Journal: The European Journal of Finance Pages: 661-674 Issue: 7-8 Volume: 15 Year: 2009 Keywords: copula, elliptic, dependency, Stochastic Differential Equation, Pearson distribution, Fokker-Planck equation, quantile mechanics, normal, Gaussian, student, exponential, bivariate, multivariate, student-normal, exponential-normal, X-DOI: 10.1080/13518470802697402 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802697402 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:661-674 Template-Type: ReDIF-Article 1.0 Author-Name: Daniel Berg Author-X-Name-First: Daniel Author-X-Name-Last: Berg Title: Copula goodness-of-fit testing: an overview and power comparison Abstract: Several copula goodness-of-fit approaches are examined, three of which are proposed in this paper. Results are presented from an extensive Monte Carlo study, where we examine the effect of dimension, sample size and strength of dependence on the nominal level and power of the different approaches. While no approach is always the best, some stand out and conclusions and recommendations are made. A novel study of p-value variation due to permutation order, for approaches based on Rosenblatt's transformation is also carried out. Results show significant variation due to permutation order for some of the approaches based on this transform. However, when approaching rejection regions, the additional variation is negligible. Journal: The European Journal of Finance Pages: 675-701 Issue: 7-8 Volume: 15 Year: 2009 Keywords: copula, cramer-von Mises statistic, empirical copula, goodness-of-fit, parametric bootstrap, pseudo-samples, Rosenblatt's transformation, X-DOI: 10.1080/13518470802697428 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802697428 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:675-701 Template-Type: ReDIF-Article 1.0 Author-Name: Manuel Ammann Author-X-Name-First: Manuel Author-X-Name-Last: Ammann Author-Name: Stephan Suss Author-X-Name-First: Stephan Author-X-Name-Last: Suss Title: Asymmetric dependence patterns in financial time series Abstract: This article proposes a new copula-based approach to test for asymmetries in the dependence structure of financial time series. Simply splitting observations into subsamples and comparing conditional correlations lead to spurious results due to the well-known conditioning bias. Our suggested framework is able to circumvent these problems. Applying our test to market data, we statistically confirm the widespread notion of significant asymmetric dependence structures between daily changes of the VIX, VXN, VDAXnew, and VSTOXX volatility indices and their corresponding equity index returns. A maximum likelihood method is used to perform a likelihood ratio test between the ordinary t-copula and its asymmetric extension. To the best of our knowledge, our study is the first empirical implementation of the skewed t-copula to generate meta-skewed Student's t-distributions. Its asymmetry leads to significant improvements in the description of the dependence structure between equity returns and implied volatility changes. Journal: The European Journal of Finance Pages: 703-719 Issue: 7-8 Volume: 15 Year: 2009 Keywords: copulae, asymmetric dependence concepts, X-DOI: 10.1080/13518470902853368 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853368 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:703-719 Template-Type: ReDIF-Article 1.0 Author-Name: Eric Bouye Author-X-Name-First: Eric Author-X-Name-Last: Bouye Author-Name: Mark Salmon Author-X-Name-First: Mark Author-X-Name-Last: Salmon Title: Dynamic copula quantile regressions and tail area dynamic dependence in Forex markets Abstract: We introduce a general approach to nonlinear quantile regression modelling based on the copula function that defines the dependency structure between the variables of interest. Hence, we extend Koenker and Bassett's (1978. Regression quantiles. Econometrica, 46, no. 1: 33-50.) original statement of the quantile regression problem by determining a distribution for the dependent variable Y conditional on the regressors X, and hence the specification of the quantile regression functions. The approach exploits the fact that the joint distribution function can be split into two parts: the marginals and the dependence function (or copula). We then deduce the form of the (invariably nonlinear) conditional quantile relationship implied by the copula. This can be achieved with arbitrary distributions assumed for the marginals. Some properties of the copula-based quantiles or c-quantiles are derived. Finally, we examine the conditional quantile dependency in the foreign exchange market and compare our quantile approach with standard tail area dependency measures. Journal: The European Journal of Finance Pages: 721-750 Issue: 7-8 Volume: 15 Year: 2009 Keywords: Copula, Quantile, Regression, dependence, foreign exchange markets, X-DOI: 10.1080/13518470902853491 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853491 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:721-750 Template-Type: ReDIF-Article 1.0 Author-Name: Martin Eling Author-X-Name-First: Martin Author-X-Name-Last: Eling Author-Name: Denis Toplek Author-X-Name-First: Denis Author-X-Name-Last: Toplek Title: Risk and return of reinsurance contracts under copula models Abstract: The aim of this article is to study the influence of nonlinear dependencies on the payoff of reinsurance contracts and the resulting effects on a non-life insurer's risk and return profile. To achieve this, we integrate several copula models and reinsurance contracts in a dynamic financial analysis framework and conduct numerical tests within a simulation study. Depending on the reinsurance contract and the copula concept employed, we find large differences in risk assessment for the ruin probability and for the expected policyholder deficit. This has important implications for management decisions, as well as for regulators and rating agencies that use these risk measures for deriving capital standards and ratings. Journal: The European Journal of Finance Pages: 751-775 Issue: 7-8 Volume: 15 Year: 2009 Keywords: enterprise risk management, asset liability management, dynamic risk modeling, dynamic financial analysis, solvency analysis, reinsurance, performance measurement, simulation, copulas, X-DOI: 10.1080/13518470902864092 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902864092 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:751-775 Template-Type: ReDIF-Article 1.0 Author-Name: Dominique Guegan Author-X-Name-First: Dominique Author-X-Name-Last: Guegan Author-Name: Jing Zang Author-X-Name-First: Jing Author-X-Name-Last: Zang Title: Pricing bivariate option under GARCH-GH model with dynamic copula: application for Chinese market Abstract: This paper develops the method for pricing bivariate contingent claims under general autoregressive conditionally heteroskedastic (GARCH) process. In order to provide a general framework being able to accommodate skewness, leptokurtosis, fat tails as well as the time-varying volatility that are often found in financial data, generalized hyperbolic (GH) distribution is used for innovations. As the association between the underlying assets may vary over time, the dynamic copula approach is considered. Therefore, the proposed method proves to play an important role in pricing bivariate option. The approach is illustrated for Chinese market with one type of better-of-two markets claims: call option on the better performer of Shanghai Stock Composite Index and Shenzhen Stock Composite Index. Results show that the option prices obtained by the GARCH-GH model with time-varying copula differ substantially from the prices implied by the GARCH-Gaussian dynamic copula model. Moreover, the empirical work displays the advantage of the suggested method. Journal: The European Journal of Finance Pages: 777-795 Issue: 7-8 Volume: 15 Year: 2009 Keywords: call-on-max option, GARCH process, generalized hyperbolic (GH) distribution, normal inverse Gaussian (NIG) distribution, copula, dynamic copula, X-DOI: 10.1080/13518470902895344 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902895344 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:15:y:2009:i:7-8:p:777-795 Template-Type: ReDIF-Article 1.0 Author-Name: Ken Bechmann Author-X-Name-First: Ken Author-X-Name-Last: Bechmann Author-Name: Johannes Raaballe Author-X-Name-First: Johannes Author-X-Name-Last: Raaballe Title: Taxable cash dividends - A money-burning signal Abstract: Firms pay out cash to shareholders using both dividends and share repurchases despite the fact that dividends are generally taxed more heavily than share repurchases. This paper provides a general explanation for this dividend puzzle by developing a class of signaling models where the most efficient signal for a firm of sufficiently high quality always involves payout of taxable cash dividends. If the high type is not of much higher quality than the low type, the cheapest way to deter imitation from the low type is to increase share repurchases financed by a cut in investments. However, when the high type is of much higher quality than the low type, the cut in investments on the margin becomes more costly to the high type than to the low type. Hence, the most efficient signal becomes a money-burning signal, which is equally costly for both types of firms. The crucial assumption leading to this result is that a marginal cut in investments eventually becomes more costly to the high-quality firm than to the low-quality imitator. Taxable cash dividends financed by the issuance of new shares/reduced share repurchases, which only gives rise to increased taxes, is the money-burning signal. Journal: The European Journal of Finance Pages: 1-26 Issue: 1 Volume: 16 Year: 2010 Keywords: dividends, share repurchases, signaling, single-crossing property, money burning, X-DOI: 10.1080/13518470802604432 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802604432 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:1:p:1-26 Template-Type: ReDIF-Article 1.0 Author-Name: Daniel Djupsjobacka Author-X-Name-First: Daniel Author-X-Name-Last: Djupsjobacka Title: Implications of market microstructure for realized variance measurement Abstract: Volatility measuring and estimation based on intra-day high-frequency data has grown in popularity during the last few years. A significant part of the research uses volatility and variance measures based on the sum of squared high-frequency returns. These volatility measures, introduced and mathematically justified in a series of papers by Andersen et al. [1999. (Understanding, optimizing, using and forecasting) realized volatility and correlation. Leonard N. Stern School Finance Department Working Paper Series, 99-061, New York University; 2000a. The distribution of realized exchange rate volatility. Journal of the American Statistical Association 96, no. 453: 42-55; 2000b. Exchange rate returns standardized by realized volatility are (nearly) Gaussian. Multinational Finance Journal 4, no. 3/4: 159-179; 2003. Modeling and forecasting realized volatility. NBER Working Paper Series 8160.] and Andersen et al. 2001a. Modeling and forecasting realized volatility. NBER Working Paper Series 8160., are referred to as 'realized variance'. From the theory of quadratic variations of diffusions, it is possible to show that realized variance measures, based on sufficiently frequently sampled returns, are error-free volatility estimates. Our objective here is to examine realized variance measures, where well-documented market microstructure effects, such as return autocorrelation and volatility clustering, are included in the return generating process. Our findings are that the use of squared returns as a measure for realized variance will lead to estimation errors on sampling frequencies adopted in the literature. In the case of return autocorrelation, there will be systematic biases. Further, we establish increased standard deviation in the error between measured and real variance as sampling frequency decreases and when volatility is non-constant. Journal: The European Journal of Finance Pages: 27-43 Issue: 1 Volume: 16 Year: 2010 Keywords: realized variance, realized volatility, high-frequency data, Monte Carlo simulation, market microstructure, autocorrelation, sampling frequency, X-DOI: 10.1080/13518470902853376 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853376 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:1:p:27-43 Template-Type: ReDIF-Article 1.0 Author-Name: Astrid Matthey Author-X-Name-First: Astrid Author-X-Name-Last: Matthey Title: Do public banks have a competitive advantage? Abstract: Public banks are often blamed to possess an unfair competitive advantage in the form of lower funding costs due to a state guarantee on their deposits. However, public and private banks tend to differ not only in their funding costs, but also in the way they deal with borrowers in financial distress. The model presented in this paper shows that if banks differ in these two characteristics, a separation of borrowers may result, with public banks lending to risky firms and private banks lending to safe firms. This separation can explain differences in the lending behavior and performance of public and private banks as observed in the market. Interestingly, the separation may persist even when funding costs are equal, implying that an abolition of state guarantees will not necessarily lead to identical performance of the two types of banks. Journal: The European Journal of Finance Pages: 45-55 Issue: 1 Volume: 16 Year: 2010 Keywords: public banks, state guarantee, self-selection, X-DOI: 10.1080/13518470902853475 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853475 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:1:p:45-55 Template-Type: ReDIF-Article 1.0 Author-Name: Luis Gonzalez Jimenez Author-X-Name-First: Luis Gonzalez Author-X-Name-Last: Jimenez Author-Name: Luis Blanco Pascual Author-X-Name-First: Luis Blanco Author-X-Name-Last: Pascual Title: Enterprise valuation with track-record ratios and rates of change Abstract: This paper proposes and tests a variant of the standard discounted cash-flow model for enterprise valuation. The cash-flow (C/F) stream to be discounted is projected as the product of the sales and the free C/F to the enterprise (FCFE)-to-sales ratio and their respective rates of change. The C/F timespan is divided into three intervals. In the first, sales and ratio change according to the company's track record. On the assumption that both industry and firm abnormal earnings disappear at a certain point, marking the beginning of the third interval, the ratio evolves over the second interval to reach the Industry's average and thereafter remains constant. On the same basis, sales grow in the third interval in accordance with the economy's long-term trend, i.e. at the long-term nominal GDP growth rate, and within the second at an average of the latter and the track-record year-on-year growth rate. The proposed variant is tested for the four largest telecommunications companies in continental Europe over a 2.5-year period. The results, together with those of the standard model, are then compared with enterprise market values to test relative performance. Examination of their respective bias (signed valuation errors) and inaccuracy (ditto unsigned) seems to indicate that the proposed variant outperforms the standard model from which it is derived, even for different assumptions about the valuation horizon and for alternative ways to estimate the values of the variables. Journal: The European Journal of Finance Pages: 57-78 Issue: 1 Volume: 16 Year: 2010 Keywords: company valuation, discounted cash flow, cash-flow forecasting, ratios, relative valuation, X-DOI: 10.1080/13518470902853343 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853343 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:1:p:57-78 Template-Type: ReDIF-Article 1.0 Author-Name: Michail Karoglou Author-X-Name-First: Michail Author-X-Name-Last: Karoglou Title: Breaking down the non-normality of stock returns Abstract: This paper investigates whether the non-normality typically observed in daily stock-market returns could arise because of the joint existence of breaks and GARCH effects. It proposes a data-driven procedure to credibly identify the number and timing of breaks and applies it on the benchmark stock-market indices of 27 OECD countries. The findings suggest that a substantial element of the observed deviations from normality might indeed be due to the co-existence of breaks and GARCH effects. However, the presence of structural changes is found to be the primary reason for the non-normality and not the GARCH effects. Also, there is still some remaining excess kurtosis that is unlikely to be linked to the specification of the conditional volatility or the presence of breaks. Finally, an interesting sideline result implies that GARCH models have limited capacity in forecasting stock-market volatility. Journal: The European Journal of Finance Pages: 79-95 Issue: 1 Volume: 16 Year: 2010 Keywords: stock returns, OECD countries, non-normality, breaks, GARCH, X-DOI: 10.1080/13518470902872343 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902872343 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:1:p:79-95 Template-Type: ReDIF-Article 1.0 Author-Name: R. J. Louth Author-X-Name-First: R. J. Author-X-Name-Last: Louth Author-Name: P. Joos Author-X-Name-First: P. Author-X-Name-Last: Joos Author-Name: S. E. Satchell Author-X-Name-First: S. E. Author-X-Name-Last: Satchell Author-Name: G. Weyns Author-X-Name-First: G. Author-X-Name-Last: Weyns Title: Understanding analysts forecasts Abstract: The purpose of this paper is to model analysts' forecasts. The paper differs from the previous research in that we do not focus on how accurate these predictions may be. Accuracy may indeed be an important quality but we argue instead that another equally important aspect of the analysts' job is to predict and describe the impact of jump events. In effect, the analysts' role is one of scenario prediction. Using a Bayesian-inspired generalised method of moments estimation procedure, we use this notion of scenario prediction combined with the structure of the Morgan Stanley analysts' forecasting database to model normal (base), optimistic (bull) and pessimistic (bear) forecast scenarios for a set of reports from Asia (excluding Japan) for 2007-2008. Since the estimation procedure is unique to this paper, a rigorous derivation of the asymptotic properties of the resulting estimator is also provided. Journal: The European Journal of Finance Pages: 97-118 Issue: 2 Volume: 16 Year: 2010 Keywords: analysts' reports, price forecasts, scenario prediction, jump diffusions, risk management, X-DOI: 10.1080/13518470902853582 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853582 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:97-118 Template-Type: ReDIF-Article 1.0 Author-Name: Hossein Asgharian Author-X-Name-First: Hossein Author-X-Name-Last: Asgharian Author-Name: Bjorn Hansson Author-X-Name-First: Bjorn Author-X-Name-Last: Hansson Title: Book-to-market and size effects: compensations for risks or outcomes of market inefficiencies? Abstract: We employ the optimal orthogonal portfolio approach to investigate if the size and book-to-market effects in US data are related to risk factors beside the market risk. This method enables us to estimate the upper limit of the risk premium, due to observed as well as all possible unobserved factors, which can be derived from a linear asset pricing model. As a corollary, it is possible to divide the observed average asset return into three parts: one explained by the market factor, one due to the unobserved factors, and finally the non-risk-based (NRB) component. Our empirical results confirm the existence of latent risk factors, which cannot be captured by the market index. In particular, the size effect is related to some other background risk factors than the market portfolio, but a large part of observed book-to-market effect has a NRB explanation. Journal: The European Journal of Finance Pages: 119-136 Issue: 2 Volume: 16 Year: 2010 Keywords: orthogonal portfolio, asset pricing, CAPM anomalies, size effect, value effect, X-DOI: 10.1080/13518470802697279 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470802697279 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:119-136 Template-Type: ReDIF-Article 1.0 Author-Name: Nicole Branger Author-X-Name-First: Nicole Author-X-Name-Last: Branger Author-Name: Beate Breuer Author-X-Name-First: Beate Author-X-Name-Last: Breuer Author-Name: Christian Schlag Author-X-Name-First: Christian Author-X-Name-Last: Schlag Title: Discrete-time implementation of continuous-time portfolio strategies Abstract: Optimal portfolio strategies are easy to compute in continuous-time models. In reality trading is discrete, so that these optimal strategies cannot be implemented properly. When the investor follows a naive discretization strategy, i.e. when he implements the optimal continuous-time strategy in discrete time, he will suffer a utility loss. For a variety of models, we analyze this discretization error in a simulation study. We find that time discreteness can be neglected when only the stock and the money market account are traded, even in models with stochastic volatility and jumps. On the other hand, when derivatives are traded the utility loss due to discrete trading can be much larger than the utility gain from having access to derivatives. To benefit from derivatives, the investor has to rebalance his portfolio at least daily. Journal: The European Journal of Finance Pages: 137-152 Issue: 2 Volume: 16 Year: 2010 Keywords: asset allocation, discrete trading, use of derivatives, X-DOI: 10.1080/13518470903075854 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903075854 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:137-152 Template-Type: ReDIF-Article 1.0 Author-Name: Rozalia Pal Author-X-Name-First: Rozalia Author-X-Name-Last: Pal Author-Name: Annalisa Ferrando Author-X-Name-First: Annalisa Author-X-Name-Last: Ferrando Title: Financing constraints and firms' cash policy in the euro area Abstract: This paper investigates the financing conditions of non-financial corporations in the euro area. We develop a new firm classification based on micro-data by distinguishing between three groups of firms: unconstrained, relatively and absolutely constrained firms. We also provide further evidence on the sources of the correlation between corporate cash flow and cash savings by conducting the analysis in a dynamic framework. Our results suggest that the propensity to save cash out of cash flows is significantly positive regardless of firms' financing conditions. This implies that even for firms with favourable external financing conditions, the internal cash flow is used in a systematic pattern for inter-temporal allocation of capital. The results also indicate that the cash flow sensitivity of cash holdings cannot be used for testing financing constraints of euro area firms. Journal: The European Journal of Finance Pages: 153-171 Issue: 2 Volume: 16 Year: 2010 Keywords: financing conditions, cash policy decisions, X-DOI: 10.1080/13518470903075748 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903075748 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:153-171 Template-Type: ReDIF-Article 1.0 Author-Name: Martin Bohl Author-X-Name-First: Martin Author-X-Name-Last: Bohl Author-Name: Christian Salm Author-X-Name-First: Christian Author-X-Name-Last: Salm Title: The Other January Effect: international evidence Abstract: This paper investigates the predictive power of stock market returns in January for the subsequent 11 months' returns across 19 countries, thereby contributing to the literature on stock market seasonalities. Only 2 out of 19 countries' stock markets exhibit a robust Other January Effect. In the light of this evidence, we conclude that the Other January Effect is not an international phenomenon. Journal: The European Journal of Finance Pages: 173-182 Issue: 2 Volume: 16 Year: 2010 Keywords: stock market efficiency, other January effect, stock market anomalies, X-DOI: 10.1080/13518470903037953 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903037953 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:2:p:173-182 Template-Type: ReDIF-Article 1.0 Author-Name: Ronan Gallagher Author-X-Name-First: Ronan Author-X-Name-Last: Gallagher Author-Name: Donal McKillop Author-X-Name-First: Donal Author-X-Name-Last: McKillop Title: Unfunded pension liabilities and sponsoring firm credit risk: an international analysis of corporate bond spreads Abstract: This paper tests empirically whether pension information derived by corporate pension accounting disclosures is priced in corporate bond spreads. The model represents a hybrid of more traditional accounting ratio-based models of credit risk and structural models of bond spreads initiated by Merton (1974). The model is fitted to 5 years of data from 2002 to 2006 featuring companies from the US and Europe. The paper finds that while unfunded pension liabilities are priced in the overall sample, they are not priced as aggressively as traditional leverage. Furthermore, an extended model shows that the pension-credit risk relation is most evident in the US and Germany, where unfunded pension liabilities are priced more aggressively than traditional forms of leverage. No pension-credit risk relation is found in the other countries sampled, notably the UK, Netherlands and France. Journal: The European Journal of Finance Pages: 183-200 Issue: 3 Volume: 16 Year: 2010 Keywords: defined benefit pension scheme, pension funding, credit risk, corporate bond spreads, X-DOI: 10.1080/13518470903211665 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903211665 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:3:p:183-200 Template-Type: ReDIF-Article 1.0 Author-Name: Bruce Burton Author-X-Name-First: Bruce Author-X-Name-Last: Burton Title: Corporate collaborative activity: exploratory evidence on the determinants of vehicle choice Abstract: This exploratory study analyses the factors that affect the selection of a contract, alliance or joint venture for collaborative activity. The findings, based on a sample of 441 announcements made by UK firms, reveal that although no unequivocal support exists for either the agency- or transaction cost economics-based explanations of vehicle choice, the decision does appear to have a strategic element. In addition, the results suggest that while the three forms of inter-firm arrangement are often viewed as points on a continuum, the key decision relates to whether or not to establish a joint venture. In the light of these initial findings, future research might most usefully investigate decision-making of this type on a case-by-case basis, rather than attempting to induce pervasive explanations of the process. Journal: The European Journal of Finance Pages: 201-225 Issue: 3 Volume: 16 Year: 2010 Keywords: joint venture, alliance, contract, collaboration, agency, transaction cost economics, X-DOI: 10.1080/13518470902872350 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902872350 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:3:p:201-225 Template-Type: ReDIF-Article 1.0 Author-Name: Michail Koubouros Author-X-Name-First: Michail Author-X-Name-Last: Koubouros Author-Name: Dimitrios Malliaropulos Author-X-Name-First: Dimitrios Author-X-Name-Last: Malliaropulos Author-Name: Ekaterini Panopoulou Author-X-Name-First: Ekaterini Author-X-Name-Last: Panopoulou Title: Long-run cash flow and discount-rate risks in the cross-section of US returns Abstract: This paper decomposes the overall market beta of common stocks into four parts reflecting uncertainty related to the long-run dynamics of stock-specific and market-wide cash flows and discount rates. We employ a discrete time version of Merton's intertemporal capital asset pricing model to test whether these four sources of risk command different risk prices. The model performs well in pricing average returns on single- and double-sorted portfolios according to size, book-to-market, dividend-price ratios and past risk. It generates high estimates for the explained cross-sectional variation in average returns, lower average pricing errors than the Fama-French three-factor model and economically and statistically acceptable estimates for the coefficient of relative risk aversion. Journal: The European Journal of Finance Pages: 227-244 Issue: 3 Volume: 16 Year: 2010 Keywords: CAPM, cash-flow risk, discount-rate risk, asset pricing, X-DOI: 10.1080/13518470903102419 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903102419 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:3:p:227-244 Template-Type: ReDIF-Article 1.0 Author-Name: Gil Cohen Author-X-Name-First: Gil Author-X-Name-Last: Cohen Author-Name: Joseph Yagil Author-X-Name-First: Joseph Author-X-Name-Last: Yagil Title: Sectorial differences in corporate financial behavior: an international survey Abstract: This survey-based research deals with sectorial differences in terms of three main corporate finance policies: investment, financing and dividend. We used a multinational survey that was distributed to the chief financial officers in five countries: the US, the UK, Germany, Canada and Japan. We found statistically significant differences between the nine sectors examined in terms of all the three major financial policies. These differences may be due to the following: (1) the unique financial needs and operating conditions of each sector and (2) the imitation effect according to which firms imitate the financial behavior of other firms in their sector. We found that the use of established investment appraisal techniques is most common in the construction sector and least common in the technology sector. The IRR is the most frequently used investment appraisal technique for the entire survey sample, especially in the communication sector; however, it is rarely used in the technology sector. The technology sector has the lowest level of financial leveraging, while the finance sector has the highest level. A constant sum per share is the most common dividend policy in the following sectors: retail and wholesale, services, manufacturing and transport. On the other hand, construction, energy, communication and technology sectors are characterized by a high percentage of firms that do not pay dividends at all. Journal: The European Journal of Finance Pages: 245-262 Issue: 3 Volume: 16 Year: 2010 Keywords: investment policy, financing policy, dividend policy, corporate finance, sectorial differences, multinational survey, X-DOI: 10.1080/13518470903211632 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903211632 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:3:p:245-262 Template-Type: ReDIF-Article 1.0 Author-Name: Vineet Agarwal Author-X-Name-First: Vineet Author-X-Name-Last: Agarwal Author-Name: Sunil Poshakwale Author-X-Name-First: Sunil Author-X-Name-Last: Poshakwale Title: Size and book-to-market anomalies and omitted leverage risk Abstract: Ferguson and Shockley (2003. Equilibrium 'anomalies'. Journal of Finance 58: 2549-2580) develop a theoretical model and argue that size and book-to-market (B/M) effects in stock returns derive their cross-sectional explanatory power because they proxy for leverage and financial distress. Using UK data from 1979 to 2006, we provide evidence that the size factor of Fama and French (1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33: 3-56) is indeed proxying for distress risk, while their distress factor is capturing leverage risk. However, anomalously low returns and higher exposure of small size and value stocks to the distress factor reduces the expected returns on these stocks and results in larger pricing errors. This leads to poor performance of the Ferguson and Shockley (2003. Equilibrium 'anomalies'. Journal of Finance 58: 2549-2580) model in the time series. Underperformance of distressed stocks casts doubt on the hypothesis that the explanatory power of size and B/M factors is due to the omitted debt claims in equity only proxy for market portfolio. Journal: The European Journal of Finance Pages: 263-279 Issue: 3 Volume: 16 Year: 2010 X-DOI: 10.1080/13518470903314402 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903314402 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:3:p:263-279 Template-Type: ReDIF-Article 1.0 Author-Name: Julia Henker Author-X-Name-First: Julia Author-X-Name-Last: Henker Author-Name: Thomas Henker Author-X-Name-First: Thomas Author-X-Name-Last: Henker Title: Are retail investors the culprits? Evidence from Australian individual stock price bubbles Abstract: We address the question of whether the trading of retail investors causes stock price anomalies. Our intent is to study settings in which retail investors are most likely to have influence on market prices. Previous research suggests that retail investors have more influence in small capitalization stocks, and argues that retail investors are most likely to be irrational. Most theories of stock price anomalies hypothesize the presence of irrational traders. Consequently, we focus on stock price anomalies in primarily small capitalization stocks. Our data are from the Australian Stock Exchange Clearinghouse. The Australian stock market is characterized by a high level of direct stock holdings by individual investors, further enhancing the likelihood of retail investors' influence. We investigate the Granger causality between investor category trading and stock prices, and display the relative trading volume of the investor categories. We conclude that retail investors are not responsible for stock mispricing. Since retail investors do not affect prices in this carefully selected environment, we infer that their trading is unlikely to influence stock market prices. Our conclusion has important implications for theories, particularly behavioral finance theories, that are dependent on the influence of retail investor trading in stock markets. Journal: The European Journal of Finance Pages: 281-304 Issue: 4 Volume: 16 Year: 2010 Keywords: retail investor, individual investor, asset pricing, behavioral finance, X-DOI: 10.1080/13518470902872335 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902872335 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:4:p:281-304 Template-Type: ReDIF-Article 1.0 Author-Name: Andreas Kolbe Author-X-Name-First: Andreas Author-X-Name-Last: Kolbe Author-Name: Rudi Zagst Author-X-Name-First: Rudi Author-X-Name-Last: Zagst Title: Valuation of reverse mortgages under (limited) default risk Abstract: In this paper, we develop a consistent valuation framework for reverse mortgages based on reduced-form intensity models as used in credit risk modelling. Within our modelling framework, we explicitly calculate the probability that the total loan amount exceeds the house value at termination of the contract and derive the maximum payment(s) which can be made to the homeowner under certain constraints. We apply our results to data from the German market and discuss implications for the design of reverse mortgages from a lender's perspective. Journal: The European Journal of Finance Pages: 305-327 Issue: 4 Volume: 16 Year: 2010 Keywords: reverse mortgage, reduced-form modelling, intensity, risk-neutral pricing, default risk, X-DOI: 10.1080/13518470903211640 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903211640 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:4:p:305-327 Template-Type: ReDIF-Article 1.0 Author-Name: Lars Norden Author-X-Name-First: Lars Author-X-Name-Last: Norden Title: Individual home bias, portfolio churning and performance Abstract: This study investigates economic consequences of individual investors' home bias and portfolio churning in their personal pension accounts. The empirical analysis is carried out within a Heckman style two-stage framework to account for selection bias with respect to individuals' investment activity, and to allow for an endogenously determined home bias, portfolio churning and performance. Results indicate that home bias induces a worse risk-adjusted performance. Home-biased individuals' relatively bad performance originates in insufficient risk-reduction, due to a lack of international diversification. A higher degree of portfolio churning also deteriorates performance, despite the fact that churning is not associated with any direct transaction costs. However, home-biased individuals do not churn portfolios as often as individuals with a larger share of international asset holdings, which diminishes the negative effects of home bias on performance. Overconfidence is driven by a return-chasing behavior, where overconfident individuals favor international assets with high historical returns. Individuals with actual skill are more often men than women, are not tempted by high historical returns, and use international assets for the right reason - diversification. Journal: The European Journal of Finance Pages: 329-351 Issue: 4 Volume: 16 Year: 2010 Keywords: home bias, individual investors, portfolio churning, performance, X-DOI: 10.1080/13518470903037813 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903037813 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:4:p:329-351 Template-Type: ReDIF-Article 1.0 Author-Name: Jose Luiz Barros Fernandes Author-X-Name-First: Jose Luiz Barros Author-X-Name-Last: Fernandes Author-Name: Juan Ignacio Pena Author-X-Name-First: Juan Ignacio Author-X-Name-Last: Pena Author-Name: Benjamin Miranda Tabak Author-X-Name-First: Benjamin Miranda Author-X-Name-Last: Tabak Title: Delegated portfolio management and risk-taking behavior Abstract: Standard models of moral hazard predict a negative relationship between risk and incentives; however, empirical studies on mutual funds present mixed results. In this article, we propose a behavioral principal-agent model in the context of professional managers, focusing on active and passive investment strategies. Using this general framework, we evaluate how incentives affect the risk-taking behavior of managers, considering the standard moral hazard model as a special case, and solve the previous contradiction. Empirical evidence, based on a comprehensive world sample of 4584 mutual funds, gives support to our theoretical model. Journal: The European Journal of Finance Pages: 353-372 Issue: 4 Volume: 16 Year: 2010 Keywords: agency model, prospect theory, mutual funds, X-DOI: 10.1080/13518470903314444 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903314444 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:4:p:353-372 Template-Type: ReDIF-Article 1.0 Author-Name: Nelson Areal Author-X-Name-First: Nelson Author-X-Name-Last: Areal Author-Name: Artur Rodrigues Author-X-Name-First: Artur Author-X-Name-Last: Rodrigues Title: On the dangers of a simplistic American option simulation valuation method Abstract: Chen and Shen [Chen, A.-S., and P.-F. Shen. 2003. Computational complexity analysis of least-squares Monte Carlo (LSM) for pricing US derivatives. Applied Economics Letters 10: 223-9] argue that we can improve the least squares Monte Carlo method (LSMC) to value American options by removing the least squares regression module. This would make it not only faster but also more accurate. We demonstrate, using a large sample of 2500 put options, that the proposed algorithm - the perfect foresight method (PFM) - is, as argued by the authors, faster than the LSMC algorithm but, contrary to what they state, it is not more accurate than the LSMC. In fact, the PFM algorithm incorrectly prices American options. We therefore, do not recommend the use of the PFM. Journal: The European Journal of Finance Pages: 373-379 Issue: 4 Volume: 16 Year: 2010 Keywords: American option valuation, numerical methods, X-DOI: 10.1080/13518470903314428 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903314428 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:4:p:373-379 Template-Type: ReDIF-Article 1.0 Author-Name: Stefano Caselli Author-X-Name-First: Stefano Author-X-Name-Last: Caselli Author-Name: Alberta Di Giuli Author-X-Name-First: Alberta Author-X-Name-Last: Di Giuli Title: Does the CFO matter in family firms? Evidence from Italy Abstract: Using data from 708 small and medium Italian firms during the period of 2002-2004, we find that in family firms (FFs) a nonfamily Chief Financial Officer (CFO) drives firm performance in a positive direction. FFs with a nonfamily CFO perform better than both FFs with a family CFO and nonfamily firms. The best performance is achieved when the Chief Executive Officer (CEO) is a family member and the CFO is an outsider (nonfamily). An examination of FFs across generations shows that a nonfamily CFO has always a positive effect on firm performance. Our study contributes to the literature on FFs by determining how the presence of a nonfamily CFO has an impact on firm performance. We also contribute to the literature on agency theory by showing that in small FFs: (a) having a family as majority shareholder is not detrimental to firm performance and (b) a nonfamily CFO might serve to mitigate any ineptness of descendant CEOs while retaining ownership and management in the hands of family heirs, thus avoiding the conflict of interest between family ownership and management. Journal: The European Journal of Finance Pages: 381-411 Issue: 5 Volume: 16 Year: 2010 Keywords: small business, family firm, CFO, CEO, Italy, X-DOI: 10.1080/13518470903211657 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903211657 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:5:p:381-411 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Theobald Author-X-Name-First: Michael Author-X-Name-Last: Theobald Author-Name: Peter Yallup Author-X-Name-First: Peter Author-X-Name-Last: Yallup Title: Liability-driven investment: multiple liabilities and the question of the number of moments Abstract: The selection of investments held in dedicated pension or insurance asset portfolios should be liability-driven. Techniques have been developed to hedge or immunize single liabilities from the effects of a variety of yield curve changes. In this paper, we extend these results to a more relevant practical problem, to immunize multiple liabilities occurring at different times in the future. This immunization approach can accommodate a variety of non-parallel yield curve behaviours. In a practical application, we demonstrate that our approach is effective in selecting index tracking portfolios in the UK Gilt (government bond) market. Journal: The European Journal of Finance Pages: 413-435 Issue: 5 Volume: 16 Year: 2010 Keywords: liability-driven investment, immunization, duration, multiple liabilities, index tracking, X-DOI: 10.1080/13518470903211681 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903211681 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:5:p:413-435 Template-Type: ReDIF-Article 1.0 Author-Name: Yener Altunbas Author-X-Name-First: Yener Author-X-Name-Last: Altunbas Author-Name: Alper Kara Author-X-Name-First: Alper Author-X-Name-Last: Kara Author-Name: David Marques-Ibanez Author-X-Name-First: David Author-X-Name-Last: Marques-Ibanez Title: Large debt financing: syndicated loans versus corporate bonds Abstract: Following the introduction of the euro, the markets for large debt financing experienced a historical expansion. We investigate the financial factors behind the issuance of syndicated loans for an extensive sample of euro area non-financial corporations. For the first time, we compare these factors to those of its major competitor: the corporate bond market. We find that large firms, with greater financial leverage, more (verifiable) profits and higher liquidation values tend to choose syndicated loans. In contrast, firms with more short-term debt and those perceived by markets as having more growth opportunities favour financing through corporate bonds. Syndicated loans are the preferred instrument at the extreme where firms are very large, profitable but have less growth opportunities. Journal: The European Journal of Finance Pages: 437-458 Issue: 5 Volume: 16 Year: 2010 Keywords: syndicated loans, corporate bonds, debt choice, the euro area, X-DOI: 10.1080/13518470903314394 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903314394 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:5:p:437-458 Template-Type: ReDIF-Article 1.0 Author-Name: Fabian Gleisner Author-X-Name-First: Fabian Author-X-Name-Last: Gleisner Author-Name: Andreas Hackethal Author-X-Name-First: Andreas Author-X-Name-Last: Hackethal Author-Name: Christian Rauch Author-X-Name-First: Christian Author-X-Name-Last: Rauch Title: Migration and the retail banking industry: an examination of immigrants' bank nationality choice in Germany Abstract: We study the choice of bank nationality by foreign-born retail banking customers in the context of bank globalization. We argue theoretically that banks enter foreign markets to follow their non-corporate customers and thereby are able to exploit competitive advantages over domestic banks. Using detailed survey data on more than 1000 Turkish immigrants in Germany, we find that product differentiation explains the choice of a home nation bank and that ethnic origin in itself provides the strongest comparative advantage for foreign banks. We find evidence for a persistent 'home-bias' of customers with an immigration background even with increasing integration into the host country's culture. This result may be surprising given that a systematic difference in the choice of bank nationality should not be observable with more integrated immigrants. Our results contribute to the existing economic research on multinational bank expansion by providing insights into bank globalization as an accompaniment to labor market internationalization. Journal: The European Journal of Finance Pages: 459-480 Issue: 5 Volume: 16 Year: 2010 Keywords: retail banking, bank globalization, migration, X-DOI: 10.1080/13518470903314410 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903314410 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:5:p:459-480 Template-Type: ReDIF-Article 1.0 Author-Name: Marianna Brunetti Author-X-Name-First: Marianna Author-X-Name-Last: Brunetti Author-Name: Costanza Torricelli Author-X-Name-First: Costanza Author-X-Name-Last: Torricelli Title: Population age structure and household portfolio choices in Italy Abstract: Based on the exceptional ageing of the Italian population, this paper aims to contribute to the current debate on population ageing and financial markets. To this end, we use the data taken by the Bank of Italy Survey of Household Income and Wealth over the period 1995-2006, and we analyse the average household portfolios in relation to age and net wealth (NW). Our analysis rests on a clustering of assets according to risk, which is different from the one used in Guiso and Jappelli (Guiso, L., and T. Jappelli. 2002. The portfolio of Italian households. In Household portfolios, eds. L. Guiso, M. Haliassos, and T. Jappelli. Cambridge: MIT Press). We find that age has affected financial choices of Italian households over the whole decade, but the portfolio age profile has significantly evolved over time with important differences across wealth quartiles. Overall, our analysis highlights a tendency towards a hump-shaped age profile of the allocation in risky assets for the most NW levels. Journal: The European Journal of Finance Pages: 481-502 Issue: 6 Volume: 16 Year: 2010 Keywords: population ageing, financial assets, household portfolio, survey data, X-DOI: 10.1080/13518470903075961 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903075961 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:6:p:481-502 Template-Type: ReDIF-Article 1.0 Author-Name: Helene Hamisultane Author-X-Name-First: Helene Author-X-Name-Last: Hamisultane Title: Utility-based pricing of weather derivatives Abstract: Since the underlying of the weather derivatives is not a traded asset, these contracts cannot be evaluated by the traditional financial theory. Cao and Wei [2004. Weather derivatives valuation and market price of weather risk. The Journal of Futures Markets 24, no. 11: 1065-89] price them by using the consumption-based asset pricing model of Lucas [1978. Asset prices in an exchange economy. Econometrica 46, no. 6: 1429-45] and by assuming different values for the constant relative risk aversion coefficient. Instead of taking this coefficient as given, we suggest in this article to estimate it by using the consumption data and the quotations of one of the most transacted weather contracts which is the New York weather futures on the Chicago Mercantile Exchange. We apply the well-known generalized method of moments introduced by Hansen [1982. Large sample properties of generalized method of moments estimators. Econometrica 50, no. 4: 1029-54] to estimate it as well as the simulated method of moments (SMM) attributed to Lee and Ingram [1991. Simulation estimation of time-series models. Journal of Econometrics 47, no. 2-3: 197-205] and Duffie and Singleton [1993. Simulated moments estimation of Markov models of asset prices. Econometrica 61, no. 4: 929-52]. This last method is studied since it is presumed to give satisfactory results in the case of the weather derivatives for which the prices are simulated. We find that the estimated coefficient from the SMM approach must have improbably high values in order to have the calculated weather futures prices matching the observations. Journal: The European Journal of Finance Pages: 503-525 Issue: 6 Volume: 16 Year: 2010 Keywords: weather derivatives, consumption-based asset pricing model, generalized method of moments, simulated method of moments, Monte-Carlo simulations, periodic variance, X-DOI: 10.1080/13518470902853392 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470902853392 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:6:p:503-525 Template-Type: ReDIF-Article 1.0 Author-Name: Yusho Kagraoka Author-X-Name-First: Yusho Author-X-Name-Last: Kagraoka Title: A time-varying common risk factor affecting corporate yield spreads Abstract: A time-varying common risk factor affecting corporate yield spreads is modelled by extending a panel data model. The panel data model accommodates a common factor, which is associated with time-varying individual effects. The factor multiplied by a bond-specific unobservable is identified as a systematic risk premium. In disentangling the systematic risk premium, both credit and liquidity risks are evaluated; the credit risk is assessed by bond rating, and the liquidity risk is indirectly measured by discrepancy in quoted yields by brokerage firms. Parameters are estimated by the generalized method of moments procedure. The model is tested on the corporate bond market in Japan. Empirical results show that the time-varying common risk factor is successfully estimated together with credit and liquidity risks. Journal: The European Journal of Finance Pages: 527-539 Issue: 6 Volume: 16 Year: 2010 Keywords: yield spread, systematic risk premium, panel data analysis, X-DOI: 10.1080/13518470903037615 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903037615 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:6:p:527-539 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Georgios Sermpinis Author-X-Name-First: Georgios Author-X-Name-Last: Sermpinis Title: Modelling and trading the EUR/USD exchange rate at the ECB fixing Abstract: The motivation for this paper is to investigate the use of alternative novel neural network (NN) architectures when applied to the task of forecasting and trading the euro/dollar (EUR/USD) exchange rate, using the European Central Bank (ECB) fixing series with only auto-regressive terms as inputs. This is done by benchmarking four different NN designs representing a higher-order neural network (HONN), a Psi Sigma Network and a recurrent neural network with the classic multilayer perception (MLP) and some traditional techniques, either statistical such as an auto-regressive moving average model, or technical such as a moving average convergence/divergence model, plus a naive strategy. More specifically, the trading performance of all models is investigated in a forecast and trading simulation on the EUR/USD ECB fixing time series over the period 1999-2007 using the last one and half years for out-of-sample testing, an original feature of this paper. We use the EUR/USD daily fixing by the ECB as many financial institutions are ready to trade at this level and it is therefore possible to leave orders with a bank for business to be transacted on that basis. As it turns out, the MLP does remarkably well and outperforms all other models in a simple trading simulation exercise. However, when more sophisticated trading strategies using confirmation filters and leverage are applied, the HONN network produces better results and outperforms all other NN and traditional statistical models in terms of annualized return. Journal: The European Journal of Finance Pages: 541-560 Issue: 6 Volume: 16 Year: 2010 Keywords: confirmation filters, higher-order neural networks, Psi Sigma networks, recurrent neural networks, leverage, multi-layer perception networks, quantitative trading strategies, X-DOI: 10.1080/13518470903037771 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903037771 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:6:p:541-560 Template-Type: ReDIF-Article 1.0 Author-Name: S. Muzzioli Author-X-Name-First: S. Author-X-Name-Last: Muzzioli Title: Option-based forecasts of volatility: an empirical study in the DAX-index options market Abstract: Volatility estimation and forecasting are essential for both the pricing and the risk management of derivative securities. Volatility forecasting methods can be divided into option-based ones, which use prices of traded options in order to unlock volatility expectations, and time series volatility models, which use historical information in order to predict future volatility. Among option-based volatility forecasts, we distinguish between the 'model-dependent' Black-Scholes implied volatility and the 'model-free' implied volatility, proposed by Britten-Jones and Neuberger [Option prices, implied price processes and stochastic volatility. Journal of Finance 55: 839-66], that does not rely on a particular option pricing model. The aim of this paper is to investigate the unbiasedness and efficiency, with respect to past realised volatility, of the two option-based volatility forecasts. The comparison is pursued by using intra-daily data on the DAX-index options market. Our results suggest that Black-Scholes implied volatility subsumes all the information contained in past realised volatility and is a better predictor for future realised volatility than model-free implied volatility. Journal: The European Journal of Finance Pages: 561-586 Issue: 6 Volume: 16 Year: 2010 Keywords: Black-Scholes implied volatility, model-free implied volatility, volatility forecasting, X-DOI: 10.1080/13518471003640134 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003640134 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:6:p:561-586 Template-Type: ReDIF-Article 1.0 Author-Name: Florian Ielpo Author-X-Name-First: Florian Author-X-Name-Last: Ielpo Author-Name: Guillaume Simon Author-X-Name-First: Guillaume Author-X-Name-Last: Simon Title: Mean-reversion properties of implied volatilities Abstract: In this paper, we present a new stylized fact for options whose underlying asset is a stock index. Extracting implied volatility time series from call and put options on the Deutscher Aktien index (DAX) and financial times stock exchange index (FTSE), we show that the persistence of these volatilities depends on the moneyness of the options used for its computation. Using a functional autoregressive model, we show that this effect is statistically significant. Surprisingly, we show that the diffusion-based stochastic volatility models are not consistent with this stylized fact. Finally, we argue that adding jumps to a diffusion-based volatility model help recovering this volatility pattern. This suggests that the persistence of implied volatilities can be related to the tails of the underlying volatility process: this corroborates the intuition that the liquidity of the options across moneynesses introduces an additional risk factor to the one usually considered. Journal: The European Journal of Finance Pages: 587-610 Issue: 6 Volume: 16 Year: 2010 Keywords: implied volatility, stylized fact, stocahstic volatility models, volatility surface dynamics, autoregressive models, X-DOI: 10.1080/1351847X.2010.481463 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481463 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:6:p:587-610 Template-Type: ReDIF-Article 1.0 Author-Name: Helder Sebastiao Author-X-Name-First: Helder Author-X-Name-Last: Sebastiao Title: The informational impact of electronic trading systems on the FTSE 100 stock index and its futures contracts Abstract: This article examines the partial adjustment factors of Financial Times Stock Exchange (FTSE) 100 stock index and stock index futures. Using high frequency data from 15 January 1997 to 17 March 2000, it aims to assess the informational impact of the electronic trading systems implemented at the London Stock Exchange and London International Financial Futures Exchange (LIFFE). The results suggest that information runs mainly from the futures market to the spot market. We find that the introduction of stock exchange trading system, in October 1997, has increased the FTSE 100 index's absolute efficiency; however, it reduced the informational feedback to the futures market. The implementation of LIFFE CONNECT at LIFFE, in May 1999, has reduced the absolute and relative efficiency of FTSE 100 futures. These findings seem to imply that during the period under scrutiny electronic trading increased the level of microstructural noise, probably due to the bid-ask bounce and order flow imbalances. Journal: The European Journal of Finance Pages: 611-640 Issue: 7 Volume: 16 Year: 2010 Keywords: partial adjustments, price discovery, high frequency data, FTSE 100, stock index futures, market microstructure, electronic trading, LIFFE, London stock exchange, X-DOI: 10.1080/13518470903345729 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903345729 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:7:p:611-640 Template-Type: ReDIF-Article 1.0 Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Author-Name: Mark Wohar Author-X-Name-First: Mark Author-X-Name-Last: Wohar Title: UK stock price effects of permanent and transitory shocks Abstract: This paper examines the dynamic relationship between stock prices and dividends using a structural cointegrated vector autoregression. The approach adopted fully identifies the system without imposing arbitrary restrictions and decomposes innovations into permanent and transitory components. Prior research indicates that transitory price shocks could lead to stock price predictability. Our key new empirical finding is that permanent dividend shocks could also lead to aggregate stock price predictability in the UK. Journal: The European Journal of Finance Pages: 641-656 Issue: 7 Volume: 16 Year: 2010 Keywords: stock prices, permanent dividend shock, cointegrated VAR, X-DOI: 10.1080/13518471003638682 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003638682 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:7:p:641-656 Template-Type: ReDIF-Article 1.0 Author-Name: Csaba Csavas Author-X-Name-First: Csaba Author-X-Name-Last: Csavas Title: The information content of risk-neutral densities: tests based on Hungarian currency option-implied densities Abstract: In this paper we test the information content of risk-neutral density functions estimated by the method of Malz [1997. Estimating the probability distribution of the future exchange rate from options prices. Journal of Derivatives 5, no. 2: 18-36]. The main question is whether risk-neutral densities coincide with the subjective densities. We find that the forecasting ability of 1-month EUR/HUF risk-neutral densities can be rejected for the period 2003-2007. Higher moments are responsible for the poor forecasting ability. Our interpretation is that the standard deviation, the skewness and the kurtosis of the risk-neutral densities are significantly above the respective central moments of subjective densities. We also find that delta-hedged gains on purchased options are negative, and can be considered high compared with the transaction costs of delta hedging. Journal: The European Journal of Finance Pages: 657-676 Issue: 7 Volume: 16 Year: 2010 Keywords: currency option, implied risk-neutral density function, density forecasting, delta-hedged gains, GMM, X-DOI: 10.1080/1351847X.2010.481451 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481451 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:7:p:657-676 Template-Type: ReDIF-Article 1.0 Author-Name: Luis Otero Gonzalez Author-X-Name-First: Luis Otero Author-X-Name-Last: Gonzalez Author-Name: Milagros Vivel Bua Author-X-Name-First: Milagros Vivel Author-X-Name-Last: Bua Author-Name: Sara Fernandez Lopez Author-X-Name-First: Sara Fernandez Author-X-Name-Last: Lopez Author-Name: Pablo Duran Santomil Author-X-Name-First: Pablo Duran Author-X-Name-Last: Santomil Title: Foreign debt as a hedging instrument of exchange rate risk: a new perspective Abstract: This paper analyzes the factors that determine the use of foreign currency debt to hedge currency exposure for a sample of 96 Spanish non-financial companies listed in 2004. Unlike previous empirical studies, which have attempted to explain the use of foreign currency debt using arguments stemming exclusively from hedging theory, we have complemented the analysis with hypotheses from capital structure theory. In particular, we analyze the variables that determine the decision to hedge with foreign currency debt and hedging volume. On the one hand, we found that the decision to hedge with foreign debt is positively related to the level of foreign currency exposure, size, tax loss carry-forwards, managerial risk aversion and the building, R&D and other services sector; and on the other hand, the extent of hedging is related positively to the foreign currency exposure, size, managerial risk aversion and negatively to the costs of financial distress. We also analyze the interaction between foreign currency debt and derivatives in the hedging decision. Moreover, after controlling for the existence and type of currency swaps, we found that this consideration did not have an effect on the determinants of hedging with foreign currency debt. Journal: The European Journal of Finance Pages: 677-710 Issue: 7 Volume: 16 Year: 2010 Keywords: foreign currency debt, exchange rate risk, hedging theories, capital theories, X-DOI: 10.1080/1351847X.2010.481455 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481455 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:7:p:677-710 Template-Type: ReDIF-Article 1.0 Author-Name: Maria Rosa Borges Author-X-Name-First: Maria Rosa Author-X-Name-Last: Borges Title: Efficient market hypothesis in European stock markets Abstract: This paper reports the results of tests on the weak-form market efficiency applied to stock market indexes of UK, France, Germany, Spain, Greece and Portugal, from January 1993 to December 2007. We use a runs test, and joint variance ratio tests, which are performed using daily and weekly data for the period 1993-2007 and for a subset, 2003-2007. Daily and weekly returns are not normally distributed, because they are negatively skewed and leptokurtic, and also display conditional heteroscedasticity. Overall, we find mixed evidence on the efficient market hypothesis (EMH). The hypothesis is rejected on daily data for Portugal and Greece, due to first-order positive autocorrelation in the returns. However, the empirical tests show that these two countries have been approaching a martingale behavior after 2003. France and UK data rejects EMH, due to the presence of mean reversion in weekly data, and stronger in recent years. Taken together, the tests for Germany and Spain do not allow the rejection of EMH, this last market being the most efficient. Journal: The European Journal of Finance Pages: 711-726 Issue: 7 Volume: 16 Year: 2010 Keywords: market efficiency, martingale, European stock markets, variance ratio test, X-DOI: 10.1080/1351847X.2010.495477 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.495477 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:7:p:711-726 Template-Type: ReDIF-Article 1.0 Author-Name: Jose Soares da Fonseca Author-X-Name-First: Jose Soares Author-X-Name-Last: da Fonseca Title: The performance of the European stock markets: a time-varying Sharpe ratio approach Abstract: This article studies the performance of the national stock markets of 16 European countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Holland, Ireland, Italy, Norway, Portugal, Spain, Sweden, Switzerland and the UK), using daily data covering the period between 2 January 2001 and 30 May 2009. Daily expected returns, and the conditional volatility of each index, were calculated using a model combining the market model and an implicit long-term relation between the index prices. Finally, time-varying (conditional) Sharpe ratios were calculated for each index. These were used as the basis for a statistical comparison of the performance of the stock indexes of this group of countries, throughout different sub-periods corresponding to different conditions (of expansion and depression) in the stock markets. Journal: The European Journal of Finance Pages: 727-741 Issue: 7 Volume: 16 Year: 2010 Keywords: expected return, Sharpe ratio, market model, conditional volatility, X-DOI: 10.1080/1351847X.2010.495479 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.495479 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:7:p:727-741 Template-Type: ReDIF-Article 1.0 Author-Name: R. H. Berry Author-X-Name-First: R. H. Author-X-Name-Last: Berry Author-Name: S. X. Zuo Author-X-Name-First: S. X. Author-X-Name-Last: Zuo Title: Numerical solution of the sequential investment model: a note on Dixit and Pindyck's (1994) analysis Abstract: This paper discusses the model and solution approach adopted by Majd and Pindyck (1987. Time to build, option value, and investment decisions. Journal of Financial Economics 18, March: 7-27) and Dixit and Pindyck (1994. Investment under uncertainty. Princeton, NJ: Princeton University Press), when considering the sequential investment decision. It is shown that specific results presented in these two sources are based on invalid solutions to the relevant partial differential equation. The problem stems from the possibility that economically feasible parameter values and apparently acceptable step sizes for the explicit finite difference approach used can combine to generate non-convergent, invalid solutions. Journal: The European Journal of Finance Pages: 743-752 Issue: 8 Volume: 16 Year: 2010 Keywords: real options, sequential investment, time to build, stability and convergence, explicit finite difference, sensitivity analysis, X-DOI: 10.1080/13518470903314469 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903314469 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:8:p:743-752 Template-Type: ReDIF-Article 1.0 Author-Name: David McMillan Author-X-Name-First: David Author-X-Name-Last: McMillan Author-Name: Isabel Ruiz Author-X-Name-First: Isabel Author-X-Name-Last: Ruiz Author-Name: Alan Speight Author-X-Name-First: Alan Author-X-Name-Last: Speight Title: Correlations and spillovers among three euro rates: evidence using realised variance Abstract: This paper uses three euro exchange rates - the US dollar, sterling and yen - to test for the presence of volatility spillovers and time-varying correlations using the realised variance approach, which has significant advantages over the multivariate-GARCH methodology. Our results suggest that the three currencies do exhibit some degree of volatility spillover and hence commonality in the driving force behind volatility movement. With regard to the nature of time-variation within the correlation coefficients, there is substantial evidence that correlations are time-varying but that the strength of correlation coefficients has not increased over the sample period. Furthermore, there is evidence that correlations themselves are predictable and interrelated. These results support the view that the three rates do exhibit interrelationships, commonality and time-varying correlation, factors that are important to portfolio managers. This latter point is illustrated by using the realised variances and covariances to determine portfolio weights, the portfolio variance of which is lower than constructing portfolios using (rolling) unconditional values. Journal: The European Journal of Finance Pages: 753-767 Issue: 8 Volume: 16 Year: 2010 Keywords: exchange rates, spillovers, correlation, realised variance, X-DOI: 10.1080/13518470903448424 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903448424 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:8:p:753-767 Template-Type: ReDIF-Article 1.0 Author-Name: Jerome Coffinet Author-X-Name-First: Jerome Author-X-Name-Last: Coffinet Author-Name: Sebastien Frappa Author-X-Name-First: Sebastien Author-X-Name-Last: Frappa Title: Determinants of the inflation compensation curve in the euro area Abstract: In this study, we analyse the effect of macroeconomic surprises on inflation compensation data - the sum of inflation expectation, risk and liquidity premia - in the euro area. The empirical analysis is based on a daily data set, which covers a wide spectrum of maturities, stemming from inflation-indexed markets between 2 January 2004 and 31 December 2007. Our results suggest that when gauging short- and medium-term inflation compensations, market operators are sensitive to surprises related to real activity and prices. Notwithstanding, long-term inflation compensations remain generally unresponsive to macroeconomic surprises, attesting the European Central Bank's high credibility on the sample under consideration. The study also cross-checks the results from two different euro area inflation-indexed instruments (bonds and swaps) which differ slightly regarding medium-term horizon but give a similar picture regarding long-term horizons. Journal: The European Journal of Finance Pages: 769-783 Issue: 8 Volume: 16 Year: 2010 Keywords: inflation compensation, macroeconomic surprises, euro area, X-DOI: 10.1080/1351847X.2010.481460 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481460 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:16:y:2010:i:8:p:769-783 Template-Type: ReDIF-Article 1.0 Author-Name: Jo Danbolt Author-X-Name-First: Jo Author-X-Name-Last: Danbolt Author-Name: Ian Hirst Author-X-Name-First: Ian Author-X-Name-Last: Hirst Author-Name: Eddie Jones Author-X-Name-First: Eddie Author-X-Name-Last: Jones Title: The growth companies puzzle: can growth opportunities measures predict firm growth? Abstract: While numerous empirical studies include proxies for growth opportunities in their analyses, there is limited evidence as to the validity of the various growth proxies used. Based on a sample of 1942 firm-years for listed UK companies over the 1990-2004 period, we assess the performance of eight growth opportunities measures. Our results show that while all the growth measures show some ability to predict growth in company sales, total assets, or equity, there are substantial differences between the various models. In particular, Tobin's Q performs poorly while dividend-based measures generally perform best. However, none of the measures has any success in predicting earnings per share growth, even when controlling for mean reversion and other time-series patterns in earnings. We term this the 'growth companies puzzle'. Growth companies do grow, but they do not grow in the key dimension (earnings) theory predicts. Whether the failure of 'growth companies' to deliver superior earnings growth is attributable to increased competition, poor investments, or behavioural biases, it is still a puzzle why growth companies on average fail to deliver superior earnings growth. Journal: The European Journal of Finance Pages: 1-25 Issue: 1 Volume: 17 Year: 2011 Keywords: growth opportunities, growth proxies, firm growth, X-DOI: 10.1080/13518470903448432 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903448432 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:1:p:1-25 Template-Type: ReDIF-Article 1.0 Author-Name: Julien Idier Author-X-Name-First: Julien Author-X-Name-Last: Idier Title: Long-term vs. short-term comovements in stock markets: the use of Markov-switching multifractal models Abstract: During financial crises, interest is strong for analysing market comovements. However, a majority of these analyses is based only on correlations. This article uses Markov switching multifractal models to derive new indicators by considering different horizons for dependency among four stock indices (NYSE FTSE DAX CAC) between 1996 and 2008. The detection of crises, extreme volatility comovements or the co-cycle lengths are derived. In this context, September 2008 appears to be an unprecedented example of global crisis, extended to all horizons and markets. Journal: The European Journal of Finance Pages: 27-48 Issue: 1 Volume: 17 Year: 2011 Keywords: multivariate volatility models, Markov switching multifractal model, transmission, comovements, X-DOI: 10.1080/13518470903448440 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903448440 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:1:p:27-48 Template-Type: ReDIF-Article 1.0 Author-Name: David Abad Author-X-Name-First: David Author-X-Name-Last: Abad Author-Name: Belen Nieto Author-X-Name-First: Belen Author-X-Name-Last: Nieto Title: Analysing bank-issued option pricing Abstract: This paper investigates whether Spanish bank-issued options (warrants) trade under a fair price. The analysis is twofold. Price differences between traditional options and equivalent bank-issued options are analysed. The results show that bank-issued options are systematically overpriced with respect to options and that an important portion of such overpricing is related to market design. We also compare the prices of bank-issued options that have the same payoff functions but different issuers. Strikingly, relative price differences between bank-issued options are also found. Moreover, the analysis of the temporal evolution of the price differences between equivalent bank-issued options reveals that they are not decreasing over time. Journal: The European Journal of Finance Pages: 49-65 Issue: 1 Volume: 17 Year: 2011 Keywords: options, bank-issued options, market design, X-DOI: 10.1080/13518471003638591 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003638591 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:1:p:49-65 Template-Type: ReDIF-Article 1.0 Author-Name: Greg Anderson Author-X-Name-First: Greg Author-X-Name-Last: Anderson Author-Name: Jonathan Fletcher Author-X-Name-First: Jonathan Author-X-Name-Last: Fletcher Author-Name: Andrew Marshall Author-X-Name-First: Andrew Author-X-Name-Last: Marshall Title: Performance evaluation of dynamic trading strategies in UK stock returns incorporating lagged conditioning information Abstract: This paper evaluates the performance of the optimal mean-variance portfolio decision when lagged conditioning information is included in the investment universe. Motivated by the dynamic trading literature, we evaluate the performance of eight conditioned information portfolios against an unconditional portfolio and various benchmark strategies. We find with that including lagged conditioning information into the optimal mean-variance portfolio decision can add economic wealth. A number of the conditioning information variables used are significantly effective at improving the portfolio performance in terms of the Sharpe [1966. Mutual fund performance. Journal of Business 39, no. 2: 119-38] ratio, certainty equivalent return, and Jensen [1968. The performance of mutual funds in the period 1945-1964. Journal of Finance 23, no.2: 389-416] performance. We find that the lagged market excess returns instrument has the greatest impact on the portfolio decision. Journal: The European Journal of Finance Pages: 67-82 Issue: 1 Volume: 17 Year: 2011 Keywords: mean-variance analysis, dynamic trading strategies, X-DOI: 10.1080/13518471003638641 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003638641 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:1:p:67-82 Template-Type: ReDIF-Article 1.0 Author-Name: Kevin Evans Author-X-Name-First: Kevin Author-X-Name-Last: Evans Author-Name: Alan Speight Author-X-Name-First: Alan Author-X-Name-Last: Speight Title: Intraday euro exchange rates and international macroeconomic announcements Abstract: This paper considers a 19-month sample of 5-min returns for three euro exchange rates, and provides an analysis of the news impact effects associated with the unexpected component of a wide range of international macroeconomic announcements. Our findings reveal that US news relating to leading indicators causes the most pronounced reactions in euro exchange rate returns. The few statistically significant non-US announcements identified relate primarily to Eurozone labour costs and German business expectations. However, the unexpected elements of interest rate announcements are not significant determinants of euro exchange rate volatility, indicating that it is the announcements of interest rates that cause jumps in exchange rates, quite apart from any actual information surprise delivered by those announcements. The analysis also shows evidence of asymmetric responses of exchange rates to good and bad news, indicating that positive surprises in poor economic climates are strong influences on short-term returns. Furthermore, impact response coefficients and the contribution of news announcement effects on daily price variation are found to vary across the sample and to depend on three factors: the magnitude of news surprises; the underlying economic conditions conveyed by news announcements; business cycle turning points as represented by switches from bad news to good news (and vice versa). Journal: The European Journal of Finance Pages: 83-110 Issue: 2 Volume: 17 Year: 2011 Keywords: high frequency data, exchange rates, macroeconomic news announcements, asymmetry, realised volatility, X-DOI: 10.1080/13518470903448457 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903448457 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:2:p:83-110 Template-Type: ReDIF-Article 1.0 Author-Name: Giuliano Iannotta Author-X-Name-First: Giuliano Author-X-Name-Last: Iannotta Title: Market discipline in the banking industry: evidence from spread dispersion Abstract: Do bond investors price hidden information? To address this question, we use a heteroscedastic regression model to empirically examine the factors affecting the spread dispersion unexplained by easy-to-observe issue characteristics (such as credit ratings, size, maturity, etc.). Two main results emerge from the empirical analysis. First, variables that accurately predict the spread of the typical bond lose their explanatory power for worse-rated, subordinated bonds with longer maturity and smaller face value. This result suggests that investors price hidden information. Secondly, unexplained spread dispersion increases for open-priced offers and decreases with the number of banks involved in the syndicate, indicating that primary market characteristics affect the investors' ability to uncover hidden information. Journal: The European Journal of Finance Pages: 111-131 Issue: 2 Volume: 17 Year: 2011 Keywords: banks, market discipline, opaqueness, credit ratings, X-DOI: 10.1080/13518471003638625 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003638625 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:2:p:111-131 Template-Type: ReDIF-Article 1.0 Author-Name: Arif Khurshed Author-X-Name-First: Arif Author-X-Name-Last: Khurshed Author-Name: Stephen Lin Author-X-Name-First: Stephen Author-X-Name-Last: Lin Author-Name: Mingzhu Wang Author-X-Name-First: Mingzhu Author-X-Name-Last: Wang Title: Institutional block-holdings of UK firms: do corporate governance mechanisms matter? Abstract: Using a sample of UK firms, we find that institutional block-holding is negatively associated with directors' ownership and is positively associated with board composition, suggesting that institutional block-holders regard directors' ownership and board composition as substitute and complementary control mechanisms, respectively. We also show that UK institutional block-holders prefer smaller firms and firms with a shorter listing history. The presence of institutional block-holders is associated with smaller boards and lower trading liquidity. Finally, our results indicate that the investment preference of UK institutional block-holders varies with the level of their shareholding. Journal: The European Journal of Finance Pages: 133-152 Issue: 2 Volume: 17 Year: 2011 Keywords: institutional block-holding, directors' ownership, board structure, corporate governance, X-DOI: 10.1080/13518471003638658 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003638658 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:2:p:133-152 Template-Type: ReDIF-Article 1.0 Author-Name: Stefan Reitz Author-X-Name-First: Stefan Author-X-Name-Last: Reitz Author-Name: Markus Schmidt Author-X-Name-First: Markus Author-X-Name-Last: Schmidt Author-Name: Mark Taylor Author-X-Name-First: Mark Author-X-Name-Last: Taylor Title: End-user order flow and exchange rate dynamics - a dealer's perspective Abstract: This paper empirically investigates the Evans and Lyons' [2002. Understanding order flow. International Journal of Finance and Economics 11: 3-23] model of the foreign exchange market from a dealer's perspective. We provide evidence of the suggested information aggregation process using a rich database on a German bank's end-user order flow from 2002 to 2003. Although customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the idea that customer order flow is a high-powered source of information easily exploitable for short-run speculation. Journal: The European Journal of Finance Pages: 153-168 Issue: 2 Volume: 17 Year: 2011 Keywords: foreign exchange, market microstructure, end-user order flow, X-DOI: 10.1080/13518471003651925 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003651925 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:2:p:153-168 Template-Type: ReDIF-Article 1.0 Author-Name: Carole Bernard Author-X-Name-First: Carole Author-X-Name-Last: Bernard Author-Name: Phelim Boyle Author-X-Name-First: Phelim Author-X-Name-Last: Boyle Title: Monte Carlo methods for pricing discrete Parisian options Abstract: The paper develops an efficient Monte Carlo method to price discretely monitored Parisian options based on a control variate approach. The paper also modifies the Parisian option design by assuming the option is exercised when the barrier condition is met rather than at maturity. We obtain formulas for this new design when the underlying is continuously monitored and develop an efficient Monte Carlo method for the discrete case. Our method can also be used for the case of multiple barriers. We use numerical examples to illustrate the approach and reveal important features of the different types of options considered. Some performance-based executive stock options include different tranches of discretely monitored Parisian options and we illustrate this with a practical example. Journal: The European Journal of Finance Pages: 169-196 Issue: 3 Volume: 17 Year: 2011 Keywords: Parisian options, Monte Carlo, discrete monitoring, control variate, early exercise, executive stock options, X-DOI: 10.1080/13518470903448473 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903448473 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:3:p:169-196 Template-Type: ReDIF-Article 1.0 Author-Name: Alistair Bruce Author-X-Name-First: Alistair Author-X-Name-Last: Bruce Author-Name: Johnnie Johnson Author-X-Name-First: Johnnie Author-X-Name-Last: Johnson Author-Name: Leilei Tang Author-X-Name-First: Leilei Author-X-Name-Last: Tang Title: The explanatory power of trading volume and insider activity in a pari-mutuel betting market Abstract: In this paper, we examine the role played by the holders of privileged information (insiders) in stimulating trading volume which adds explanatory power to a price-based model of returns in a market where the actions of insiders can be isolated - a pari-mutuel betting market. We conduct conditional logit analyses based on data relating to 19,164 horses running in 2078 races (49 racetracks) staged across the UK between 1 June and 31 August 1996. These analyses indicate that prices generally fail to incorporate fully information contained in trading volumes. However, the betting public fully discounts volume information in markets most commonly viewed as attracting bets from insiders. Isolation of the actual degree of insider activity sheds light on the variation in volume effects. Journal: The European Journal of Finance Pages: 197-216 Issue: 3 Volume: 17 Year: 2011 Keywords: markets, volume, insiders, betting, herding, X-DOI: 10.1080/1351847X.2010.481468 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481468 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:3:p:197-216 Template-Type: ReDIF-Article 1.0 Author-Name: Ann-Kristin Achleitner Author-X-Name-First: Ann-Kristin Author-X-Name-Last: Achleitner Author-Name: Christian Andres Author-X-Name-First: Christian Author-X-Name-Last: Andres Author-Name: Andre Betzer Author-X-Name-First: Andre Author-X-Name-Last: Betzer Author-Name: Charlie Weir Author-X-Name-First: Charlie Author-X-Name-Last: Weir Title: Wealth effects of private equity investments on the German stock market Abstract: This paper investigates the wealth effects of private equity (PE) investor purchases of shares in German quoted companies. It is the first study to analyse these effects for the German market, which is particularly interesting due to its distinct characteristics with regard to the ownership structure of publicly listed companies and the protection of minority shareholders. We find that PE investors generate positive wealth effects for target shareholders of 5.90% around the event day (t=-1 to t=0). In addition, we find that the wealth effects of PE investor involvement in Germany are positively related to the target's tax liabilities and degree of undervaluation and negatively related to the target's leverage and the shareholding of the second largest ownership block. The latter effect can be interpreted as a supplementary monitoring effect of the management or a monitoring effect of the largest shareholder through which private benefits of control are reduced. Journal: The European Journal of Finance Pages: 217-239 Issue: 3 Volume: 17 Year: 2011 Keywords: wealth effects, private equity, Germany, X-DOI: 10.1080/13518470903448465 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518470903448465 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:3:p:217-239 Template-Type: ReDIF-Article 1.0 Author-Name: Carl Chiarella Author-X-Name-First: Carl Author-X-Name-Last: Chiarella Author-Name: Roberto Dieci Author-X-Name-First: Roberto Author-X-Name-Last: Dieci Author-Name: Xue-Zhong He Author-X-Name-First: Xue-Zhong Author-X-Name-Last: He Title: Do heterogeneous beliefs diversify market risk? Abstract: It is believed that diversity is good for our society, but is it good for financial markets? In particular, does the diversity with respect to beliefs among investors reduce the market risk of risky assets? The current paper aims to answer this question. Within the standard mean-variance framework, we introduce heterogeneous beliefs not only in risk preferences and expected payoffs but also in variances/covariances. By aggregating heterogeneous beliefs into a market consensus belief, we obtain capital asset pricing model-like equilibrium price and return relationships under heterogeneous beliefs. We show that the market aggregate behaviour is in principle a weighted average of heterogeneous individual behaviours. The impact of heterogeneity on the market equilibrium price and risk premium is examined in general. In particular, we give a positive answer to the question in the title by considering some special structure in heterogeneous beliefs. In addition, we provide an explanation of Miller's long-standing hypothesis on the relation between a stock's risk and the divergence of opinions. Journal: The European Journal of Finance Pages: 241-258 Issue: 3 Volume: 17 Year: 2011 Keywords: heterogeneous beliefs, CAPM, mean-variance analysis, diversification, Miller's hypothesis, X-DOI: 10.1080/1351847X.2010.481457 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481457 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:3:p:241-258 Template-Type: ReDIF-Article 1.0 Author-Name: Tom Aabo Author-X-Name-First: Tom Author-X-Name-Last: Aabo Author-Name: Christos Pantzalis Author-X-Name-First: Christos Author-X-Name-Last: Pantzalis Title: In or out: the effect of euro membership on the exercise of real business options Abstract: This empirical study of manufacturing firms (NAICS 33) in the EU15 countries goes beyond the trade statistics that have indicated only a small to negligible effect from the introduction of the Euro and shows that the introduction of the Euro has made Euro firms (firms based in one of the 12 Euro countries) more inclined than non-Euro firms (firms based in one of the three non-Euro countries: UK, Sweden, and Denmark) to undertake various forms of real actions (exercise real business options) such as to establish alliances/partnerships, to enter new markets/market segments, to switch suppliers, and to generally expand in the Euro-area. The results are important in understanding the potential long-term effects of Euro membership. Journal: The European Journal of Finance Pages: 259-284 Issue: 4 Volume: 17 Year: 2011 Keywords: Euro membership, real business options, long-term effects: manufacturing firms, X-DOI: 10.1080/13518471003640142 File-URL: http://www.tandfonline.com/doi/abs/10.1080/13518471003640142 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:4:p:259-284 Template-Type: ReDIF-Article 1.0 Author-Name: Frank McGroarty Author-X-Name-First: Frank Author-X-Name-Last: McGroarty Author-Name: Owain ap Gwilym Author-X-Name-First: Owain Author-X-Name-Last: ap Gwilym Author-Name: Stephen Thomas Author-X-Name-First: Stephen Author-X-Name-Last: Thomas Title: Structural changes, bid-ask spread composition and tick size in inter-bank futures trading Abstract: This paper studies a period containing three major structural changes, which constitute a natural experiment in the NYSE.Euronext-LIFFE European short-term interest rate (STIR) futures market. These changes comprise (1) a 50% reduction in minimum tick size for the most heavily traded contract, (2) European Monetary Union and (3) the transition from open outcry to electronic trading. We analyse a number of microstructure features of the four largest European interest rate futures contracts throughout this period. In particular, we focus on bid-ask spread composition using a recent model which is appropriate for this market structure. Our analysis identifies the tick size as the largest bid-ask spread component in almost every instance, which suggests that participants in this STIR future market might benefit from a reduction in minimum tick sizes. Journal: The European Journal of Finance Pages: 285-306 Issue: 4 Volume: 17 Year: 2011 Keywords: bid-ask spreads, futures, market microstructure, price clustering, tick size, X-DOI: 10.1080/1351847X.2010.481465 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481465 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:4:p:285-306 Template-Type: ReDIF-Article 1.0 Author-Name: Z. Landsman Author-X-Name-First: Z. Author-X-Name-Last: Landsman Author-Name: U. Makov Author-X-Name-First: U. Author-X-Name-Last: Makov Title: Translation-invariant and positive-homogeneous risk measures and optimal portfolio management Abstract: The problem of risk portfolio optimization with translation-invariant and positive-homogeneous risk measures, which includes value-at-risk (VaR) and tail conditional expectation (TCE), leads to the problem of minimizing a combination of a linear functional and a square root of a quadratic functional for the case of elliptical multivariate underlying distributions. In this paper, we provide an explicit closed-form solution of this minimization problem, and the condition under which this solution exists. The results are illustrated using the data of 10 stocks from NASDAQ/Computers. The distance between the VaR and TCE optimal portfolios has been investigated. Journal: The European Journal of Finance Pages: 307-320 Issue: 4 Volume: 17 Year: 2011 Keywords: translation-invariant and positive-homogeneous risk measure, value-at-risk, tail condition expectation, minimization of root of quadratic functional, elliptical family, X-DOI: 10.1080/1351847X.2010.481467 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481467 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:4:p:307-320 Template-Type: ReDIF-Article 1.0 Author-Name: Yuming Li Author-X-Name-First: Yuming Author-X-Name-Last: Li Title: Time-varying stock returns and labor income risks in the US and UK Abstract: I propose and estimate conditional asset pricing models where the risk premiums of the markets are related to the conditional covariance of the markets with labor income growth within and across countries and the volatility of the markets are related to the shocks and interactions of stock returns and labor income growth. I document that the risk premiums for the US and UK stock markets are more related to the conditional covariance of returns with the labor income growth within countries than across countries. I also find significant interactions of volatilities between stock returns and labor income within countries but not across countries. The results are consistent with the hypothesis that prices of domestic stocks are determined to a greater extent by stochastic discount factors of domestic investors than foreign investors and vice versa. Journal: The European Journal of Finance Pages: 321-336 Issue: 4 Volume: 17 Year: 2011 Keywords: international asset pricing, exchange rates, labor income, X-DOI: 10.1080/1351847X.2010.481449 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481449 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:4:p:321-336 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Introduction and preface Abstract: Journal: The European Journal of Finance Pages: 337-337 Issue: 5-6 Volume: 17 Year: 2011 X-DOI: 10.1080/1351847X.2011.574990 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2011.574990 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:337-337 Template-Type: ReDIF-Article 1.0 Author-Name: Mika Vaihekoski Author-X-Name-First: Mika Author-X-Name-Last: Vaihekoski Title: History of financial research and education in Finland Abstract: This paper reviews the first 30 years of finance research and education history in Finland from the publication of the first financial dissertation in 1977. It was also the year when finance was first offered as a major subject in Finland, among the first ones in the Nordic countries. This review shows how Finnish financial education and research have developed from a very humble beginning to an internationally acclaimed one. This development can be attributed to a number of talented and hard-working individuals but also to the decision to collaborate among the Finnish universities to overcome some of the problems faced by a small country. Journal: The European Journal of Finance Pages: 339-354 Issue: 5-6 Volume: 17 Year: 2011 Keywords: financial education, research, graduate school, Finland, history, professors, dissertation, X-DOI: 10.1080/1351847X.2010.543829 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.543829 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:339-354 Template-Type: ReDIF-Article 1.0 Author-Name: Tor Brunzell Author-X-Name-First: Tor Author-X-Name-Last: Brunzell Author-Name: Mats Hansson Author-X-Name-First: Mats Author-X-Name-Last: Hansson Author-Name: Eva Liljeblom Author-X-Name-First: Eva Author-X-Name-Last: Liljeblom Title: The use of derivatives in Nordic firms Abstract: We contribute to the previous literature on the use of derivatives by studying separately the determinants of profit seeking versus those of hedging. In our sample of listed firms from four Nordic countries, about 62% use derivatives. Although the hedging motive clearly dominates, over half of the firms give some weight for additional income as a motive for the use of derivatives. Combining survey data on the use of derivatives with financial variables, data on management and blockholder ownership, and data on firm-level diversification, we find that very different determinants drive the use of derivatives for these two motives. Firm-level diversification is negatively related to hedging, but is positively related to the use of derivatives for additional income. Financial firms use derivatives more for profit than for hedging. We also find weak support for a value-increasing effect of the use of derivatives. Journal: The European Journal of Finance Pages: 355-376 Issue: 5-6 Volume: 17 Year: 2011 Keywords: derivatives, risk management, hedging, degree of diversification, impact of ownership, X-DOI: 10.1080/1351847X.2010.543836 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.543836 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:355-376 Template-Type: ReDIF-Article 1.0 Author-Name: Kenneth Hogholm Author-X-Name-First: Kenneth Author-X-Name-Last: Hogholm Author-Name: Johan Knif Author-X-Name-First: Johan Author-X-Name-Last: Knif Author-Name: Seppo Pynnonen Author-X-Name-First: Seppo Author-X-Name-Last: Pynnonen Title: Cross-distributional robustness of conditional weekday effects: evidence from European equity-index returns Abstract: The paper re-examines the issue of the robustness of the weekday effect. Specifically, by utilizing a quantile regression approach, the homogeneity of observed day-of-the-week anomalies is monitored and tested over different parts of the conditional return distribution. The day-of-the-week effects are measured for conditional returns as well as for conditional volatilities. The model applied accounts for asymmetry in first-order autocorrelation in both moments. The weekday patterns in the returns on the European market index and 18 European country indexes are analyzed for the time period from January 2000 through December 2006. Generally, the sign of the estimated weekday effects in both the conditional mean and volatility seems to be very robust over the return distribution. However, about one half of the country-specific indexes exhibit significant variation or asymmetry in the day-of-the-week coefficients across the quantiles of the conditional return distribution. Only in a few cases, the significant day-of-the-week effect is clearly driven by extreme events. Journal: The European Journal of Finance Pages: 377-390 Issue: 5-6 Volume: 17 Year: 2011 Keywords: weekday effect, European equity markets, quantile regression, X-DOI: 10.1080/1351847X.2010.544474 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.544474 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:377-390 Template-Type: ReDIF-Article 1.0 Author-Name: Mats Hansson Author-X-Name-First: Mats Author-X-Name-Last: Hansson Author-Name: Eva Liljeblom Author-X-Name-First: Eva Author-X-Name-Last: Liljeblom Author-Name: Minna Martikainen Author-X-Name-First: Minna Author-X-Name-Last: Martikainen Title: Corporate governance and profitability in family SMEs Abstract: We analyze the determinants of performance in small unlisted family firms and find, in line with previous studies, a positive effect associated with a family CEO. We contribute by bringing in an additional variable, the proportion of family members employed by the firm and find it to be negatively related to firm performance. There is a significant tendency for family CEOs to employ family members, which - given the negative effect of these - should offset some of the positive performance effects of a family CEO. We also analyze the effect of board size in these already small family boards, where the maximum number of board members is six. We find that even here, board size is significantly negatively associated with firm performance. Journal: The European Journal of Finance Pages: 391-408 Issue: 5-6 Volume: 17 Year: 2011 Keywords: firm performance, family employees, family CEO, board size, family SMEs, X-DOI: 10.1080/1351847X.2010.543842 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.543842 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:391-408 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Graham Author-X-Name-First: Michael Author-X-Name-Last: Graham Author-Name: Jussi Nikkinen Author-X-Name-First: Jussi Author-X-Name-Last: Nikkinen Title: Co-movement of the Finnish and international stock markets: a wavelet analysis Abstract: We use wavelet analysis to examine the short-term and long-term co-movement of international stock markets from a European perspective. First, we assess the co-movement of the Finnish stock market with stock markets in both developed and emerging economies. Second, the co-movement of five major European markets and a global equity portfolio is analysed. Our results show that the co-movement of Finland and the emerging market regions is confined to long-term fluctuations. We also find evidence of co-movement between Finland and the developed regions in Europe, the Pacific, and North America across all frequencies, with higher levels of co-movement in higher frequencies toward the end of the return series. Furthermore, the results suggest that little may be gained by diversifying from a country stock portfolio from the perspective of investors in France, Germany, Switzerland, and the UK into a global stock portfolio, whereas diversifying into the Finnish market would be advantageous. Journal: The European Journal of Finance Pages: 409-425 Issue: 5-6 Volume: 17 Year: 2011 Keywords: co-movement, Finland, international stock markets, wavelets, X-DOI: 10.1080/1351847X.2010.543839 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.543839 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:409-425 Template-Type: ReDIF-Article 1.0 Author-Name: Seppo Ikaheimo Author-X-Name-First: Seppo Author-X-Name-Last: Ikaheimo Author-Name: Vesa Puttonen Author-X-Name-First: Vesa Author-X-Name-Last: Puttonen Author-Name: Tuomas Ratilainen Author-X-Name-First: Tuomas Author-X-Name-Last: Ratilainen Title: External corporate governance and performance: evidence from the Nordic countries Abstract: We examine the influence of anti-takeover provisions on valuation, stock return and operating performance using data from an extensive sample of publicly listed Nordic companies during the time period of 1999-2004 (similar to Gompers, Ishii, and Metrick 2003 [Corporate governance and equity prices. The Quarterly Journal of Economics 118: 107-55] in the US). We collected data from nine of the most commonly used provisions. The results suggest that anti-takeover provisions have a negative impact on valuation, no effect on stock return, and a positive influence on operating performance. Analysing the influence of each reveals dual-class stock to be the single most important provision dummy contributing to the negative valuation, though the discount decreases over the years. Journal: The European Journal of Finance Pages: 427-450 Issue: 5-6 Volume: 17 Year: 2011 Keywords: corporate governance, anti-takeover provision, Nordic countries, dual-class share, X-DOI: 10.1080/1351847X.2010.543832 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.543832 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:427-450 Template-Type: ReDIF-Article 1.0 Author-Name: Eemeli Rinne Author-X-Name-First: Eemeli Author-X-Name-Last: Rinne Author-Name: Sami Vahamaa Author-X-Name-First: Sami Author-X-Name-Last: Vahamaa Title: The 'Dogs of the Dow' strategy revisited: Finnish evidence Abstract: This paper re-examines the performance of the 'Dogs of the Dow' (DoD) investment strategy in a different market setting and over a different time period. In particular, we use Finnish data over the period 1988-2008 to examine whether the DoD strategy can be successfully replicated in different types of markets and in different market conditions. Our empirical findings suggest that the DoD investment strategy is profitable in the Finnish stock market. The DoD strategy outperforms the market index with an average (median) annual abnormal return of 4.5% (7.5%). The outperformance of the DoD strategy appears particularly pronounced in stock market downturns. Furthermore, our results indicate that the DoD strategy outperforms the market index even after most risk adjustments and thereby suggest that the outperformance of the strategy is not merely a compensation for higher risk. Nevertheless, we also document that the superior returns of the DoD strategy may be largely attributed to the winner-loser effect. Journal: The European Journal of Finance Pages: 451-469 Issue: 5-6 Volume: 17 Year: 2011 Keywords: Dogs of the Dow strategy, investment strategy, portfolio management, X-DOI: 10.1080/1351847X.2010.544951 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.544951 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:5-6:p:451-469 Template-Type: ReDIF-Article 1.0 Author-Name: Hon-Lun Chung Author-X-Name-First: Hon-Lun Author-X-Name-Last: Chung Author-Name: Wai-Sum Chan Author-X-Name-First: Wai-Sum Author-X-Name-Last: Chan Author-Name: Jonathan Batten Author-X-Name-First: Jonathan Author-X-Name-Last: Batten Title: Threshold non-linear dynamics between Hang Seng stock index and futures returns Abstract: We test the joint dynamics between the Hong Kong Hang Seng Index futures and the underlying cash index using a Bivariate Threshold AutoRegressive model, which is better able to capture the complex return dynamics evident in financial time series. The results are consistent with a three-regime version of the model, where the lead-lag relation between the index and futures returns is a non-linear threshold-type and the regime switching process depends on the state of the threshold variable. This interaction is symmetric rather than unidirectional, with the strength of the interaction dependent on the regime. These three regimes are also characterised by significant variation in volume, which is consistent with liquidity-induced arbitrage trading. Journal: The European Journal of Finance Pages: 471-486 Issue: 7 Volume: 17 Year: 2011 Keywords: lead-lag relationship, threshold autoregression, non-linearity test, futures markets, Hang Seng index, X-DOI: 10.1080/1351847X.2010.481469 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.481469 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:471-486 Template-Type: ReDIF-Article 1.0 Author-Name: Sara Martino Author-X-Name-First: Sara Author-X-Name-Last: Martino Author-Name: Kjersti Aas Author-X-Name-First: Kjersti Author-X-Name-Last: Aas Author-Name: Ola Lindqvist Author-X-Name-First: Ola Author-X-Name-Last: Lindqvist Author-Name: Linda Neef Author-X-Name-First: Linda Author-X-Name-Last: Neef Author-Name: Håvard Rue Author-X-Name-First: Håvard Author-X-Name-Last: Rue Title: Estimating stochastic volatility models using integrated nested Laplace approximations Abstract: Volatility in financial time series is mainly analysed through two classes of models; the generalized autoregressive conditional heteroscedasticity (GARCH) models and the stochastic volatility (SV) ones. GARCH models are straightforward to estimate using maximum-likelihood techniques, while SV models require more complex inferential and computational tools, such as Markov Chain Monte Carlo (MCMC). Hence, although provided with a series of theoretical advantages, SV models are in practice much less popular than GARCH ones. In this paper, we solve the problem of inference for some SV models by applying a new inferential tool, integrated nested Laplace approximations (INLAs). INLA substitutes MCMC simulations with accurate deterministic approximations, making a full Bayesian analysis of many kinds of SV models extremely fast and accurate. Our hope is that the use of INLA will help SV models to become more appealing to the financial industry, where, due to their complexity, they are rarely used in practice. Journal: The European Journal of Finance Pages: 487-503 Issue: 7 Volume: 17 Year: 2011 Keywords: approximate Bayesian inference, Laplace approximation, latent Gaussian models, stochastic volatility model, X-DOI: 10.1080/1351847X.2010.495475 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.495475 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:487-503 Template-Type: ReDIF-Article 1.0 Author-Name: Baibing Li Author-X-Name-First: Baibing Author-X-Name-Last: Li Author-Name: Xiangkang Yin Author-X-Name-First: Xiangkang Author-X-Name-Last: Yin Title: Information and capital asset pricing Abstract: Investors in a market frequently update their diverse perceptions of the values of risky assets, thus invalidating the classic capital asset pricing model's (CAPM) assumption of complete agreement among investors. To accommodate information asymmetry and belief updating, we have developed an empirically testable information-adjusted CAPM, which states that the expected excess return of a risky asset/portfolio is solely determined by the information-adjusted beta rather than the market beta. The model is then used to analyze empirical anomalies of the classic CAPM, including a flatter relation between average return and the market beta than the CAPM predicts, a non-zero Jensen's alpha, insignificant explanatory power of the market beta, and size effect. Journal: The European Journal of Finance Pages: 505-523 Issue: 7 Volume: 17 Year: 2011 Keywords: asset pricing, asymmetric information, CAPM anomaly, rational expectations equilibrium, X-DOI: 10.1080/1351847X.2010.495476 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.495476 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:505-523 Template-Type: ReDIF-Article 1.0 Author-Name: Tobias Brunner Author-X-Name-First: Tobias Author-X-Name-Last: Brunner Author-Name: Rene Levinsky Author-X-Name-First: Rene Author-X-Name-Last: Levinsky Author-Name: Jianying Qiu Author-X-Name-First: Jianying Author-X-Name-Last: Qiu Title: Preferences for skewness: evidence from a binary choice experiment Abstract: In this paper, we experimentally test skewness preferences at the individual level. Several prospects that can be ordered with respect to the third-degree stochastic dominance criterion are ranked by the participants of the experiment. We find that the skewness of a distribution has a significant impact on the decisions. Yet, while skewness has an impact, its direction differs substantially across subjects: 39% of our subjects demonstrate a statistically significant preference for skewness and 10% seem to avoid skewness (at 5% level). On the level of individual decisions we find that the variances of the prospects and subjects' experience increase the probability of choosing the lottery with greater skewness. Journal: The European Journal of Finance Pages: 525-538 Issue: 7 Volume: 17 Year: 2011 Keywords: skewness, stochastic dominance, decision-making under uncertainty, X-DOI: 10.1080/1351847X.2010.495478 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.495478 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:525-538 Template-Type: ReDIF-Article 1.0 Author-Name: Snorre Lindset Author-X-Name-First: Snorre Author-X-Name-Last: Lindset Author-Name: Egil Matsen Author-X-Name-First: Egil Author-X-Name-Last: Matsen Title: Human capital investment and optimal portfolio choice Abstract: We analyze how an individual should optimally invest in human capital when he also has financial wealth. We treat the individual's possibilities to take more education as expansion options and apply real option analysis. In addition, we characterize the individual's optimal consumption strategy and portfolio weights. The individual has a demand for hedging financial risk, labor income risk, and also wage level risk. Journal: The European Journal of Finance Pages: 539-552 Issue: 7 Volume: 17 Year: 2011 Keywords: optimal portfolio choice, investment in human capital, hedging demand, X-DOI: 10.1080/1351847X.2010.495480 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.495480 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:539-552 Template-Type: ReDIF-Article 1.0 Author-Name: Robert Durand Author-X-Name-First: Robert Author-X-Name-Last: Durand Author-Name: John Gould Author-X-Name-First: John Author-X-Name-Last: Gould Author-Name: Ross Maller Author-X-Name-First: Ross Author-X-Name-Last: Maller Title: On the performance of the minimum VaR portfolio Abstract: Alexander and Baptista [2002. Economic implications of using a mean-value-at-risk (VaR) model for portfolio selection: A comparison with mean-variance analysis. Journal of Economic Dynamics and Control 26: 1159-93] develop the concept of mean-VaR efficiency for portfolios and demonstrate its very close connection with mean-variance efficiency. In particular, they identify the minimum VaR portfolio as a special type of mean-variance efficient portfolio. Our empirical analysis finds that, for commonly used VaR breach probabilities, minimum VaR portfolios yield ex post returns that conform well with the specified VaR breach probabilities and with return/risk expectations. These results provide a considerable extension of evidence supporting the empirical validity and tractability of the mean-VaR efficiency concept. Journal: The European Journal of Finance Pages: 553-576 Issue: 7 Volume: 17 Year: 2011 Keywords: portfolio optimization, mean-variance efficiency, value-at-risk, Fama-French portfolios, iShares, X-DOI: 10.1080/1351847X.2010.495484 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.495484 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:553-576 Template-Type: ReDIF-Article 1.0 Author-Name: Peter Dunne Author-X-Name-First: Peter Author-X-Name-Last: Dunne Author-Name: Michael Moore Author-X-Name-First: Michael Author-X-Name-Last: Moore Author-Name: Vasileios Papavassiliou Author-X-Name-First: Vasileios Author-X-Name-Last: Papavassiliou Title: Commonality in returns, order flows, and liquidity in the Greek stock market Abstract: Using a unique high-frequency data-set on a comprehensive sample of Greek blue-chip stocks, spanning from September 2003 through March 2006, this note assesses the extent and role of commonality in returns, order flows (OFs), and liquidity. It also formally models aggregate equity returns in terms of aggregate equity OF, in an effort to clarify OF's importance in explaining returns for the Athens Exchange market. Almost a quarter of the daily returns in the FTSE/ATHEX20 index is explained by aggregate own OF. In a second step, using principal components and canonical correlation analyses, we document substantial common movements in returns, OFs, and liquidity, both on a market-wide basis and on an individual security basis. These results emphasize that asset pricing and liquidity cannot be analyzed in isolation from each other. Journal: The European Journal of Finance Pages: 577-587 Issue: 7 Volume: 17 Year: 2011 Keywords: market microstructure, common factors, order flow, liquidity, X-DOI: 10.1080/1351847X.2010.505725 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.505725 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:577-587 Template-Type: ReDIF-Article 1.0 Author-Name: Ali Ataullah Author-X-Name-First: Ali Author-X-Name-Last: Ataullah Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: A modified Corrado test for assessing abnormal security returns Abstract: Event studies typically use the methodology developed by Fama et al. [1969. The adjustment of stock prices to new information. International Economic Review 10, no. 1: 1-21] to segregate a stock's return into expected and unexpected components. Moreover, conventional practice assumes that abnormal returns evolve in terms of a normal distribution. There is, however, an increasing tendency for event studies to employ non-parametric testing procedures due to the mounting empirical evidence which shows that stock returns are incompatible with the normal distribution. This paper focuses on the widely used non-parametric ranking procedure developed by Corrado [1989. A nonparametric test for abnormal security price performance in event studies. Journal of Financial Economics 23, no. 2: 385-95] for assessing the significance of abnormal security returns. In particular, we develop a consistent estimator for the variance of the sum of ranks of the abnormal returns, and show how this leads to a more efficient test statistic (as well as to less cumbersome computational procedures) than the test originally proposed by Corrado (1989). We also use the theorem of Berry [1941. The accuracy of the Gaussian approximation to the sum of independent variates. Transactions of the American Mathematical Society 49, no. 1: 122-36] and Esseen [1945. Fourier analysis of distribution functions: A mathematical study of the Laplace-Gaussian law. Acta Mathematica 77, no. 1: 1-125] to demonstrate how the distribution of the modified Corrado test statistic developed here asymptotically converges towards the normal distribution. This shows that describing the distributional properties of the sum of the ranks in terms of the normal distribution is highly problematic for small sample sizes and small event windows. In these circumstances, we show that a second-order Edgeworth expansion provides a good approximation to the actual probability distribution of the modified Corrado test statistic. The application of the modified Corrado test developed here is illustrated using data for the purchase and sale by UK directors of shares in their own companies. Journal: The European Journal of Finance Pages: 589-601 Issue: 7 Volume: 17 Year: 2011 Keywords: abnormal return, Corrado test, Edgeworth expansion, normal distribution, rank, X-DOI: 10.1080/1351847X.2011.554294 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2011.554294 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:7:p:589-601 Template-Type: ReDIF-Article 1.0 Author-Name: Dimitris Chronopoulos Author-X-Name-First: Dimitris Author-X-Name-Last: Chronopoulos Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Author-Name: John Nankervis Author-X-Name-First: John Author-X-Name-Last: Nankervis Title: Are there any cost and profit efficiency gains in financial conglomeration? Evidence from the accession countries Abstract: Diversified banks should benefit from an efficient allocation of resources, debt coinsurance and scope economies. At the same time, critics of diversification question these advantages pointing to agency problems such as managerial entrenchment and empire building that could also lead to diversification but for the 'wrong' reasons. This paper sheds further light on the issue of bank diversification by taking a direct look into how efficiently financial conglomerates operate and by measuring to what extent size and other bank- and market-specific factors matter in evaluating the relationship between diversification and efficiency. We focus on banks operating in the accession countries over the period 2001-2007 and estimate their cost and alternative profit efficiencies using a data envelopment analysis estimator. The results indicate that banks suffer from relatively high cost and profit inefficiencies and that there are noticeable differences in the efficiency levels across countries. Concerning banks' degree of diversification, we find strong evidence to suggest that more diversified institutions are more likely to be cost- and profit-efficient and that size is a key factor in explaining best practice, particularly on the profit side. Journal: The European Journal of Finance Pages: 603-621 Issue: 8 Volume: 17 Year: 2011 Keywords: financial conglomerates, efficiency, accession countries, DEA, two-stage approach, X-DOI: 10.1080/1351847X.2010.538300 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.538300 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:603-621 Template-Type: ReDIF-Article 1.0 Author-Name: Mariarosaria Agostino Author-X-Name-First: Mariarosaria Author-X-Name-Last: Agostino Author-Name: Maria Mazzuca Author-X-Name-First: Maria Author-X-Name-Last: Mazzuca Title: Empirical investigation of securitisation drivers: the case of Italian banks Abstract: This paper explores the determinants of securitisation by Italian banks over the period 1999-2006, investigating the funding, specialisation, and regulatory capital arbitrage hypotheses. According to our evidence, when we consider all securitisation types together, Italian banks seem to have securitised out of funding motives, to diversify and optimise their available funding channels. When we separately consider securitisations backed by residential mortgages and those backed by non-performing loans, we find that the main factors affecting the former type of securitisation are the need for funding and capital arbitrage motivation, whereas the latter appear to have been affected to a lesser extent by a need for funding and to have also been slightly conditioned by a desire to specialise. Journal: The European Journal of Finance Pages: 623-648 Issue: 8 Volume: 17 Year: 2011 Keywords: securitisation, determinants of securitisation, Italian banks, banks' funding, banks' specialisation, regulatory capital arbitrage, X-DOI: 10.1080/1351847X.2010.505727 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.505727 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:623-648 Template-Type: ReDIF-Article 1.0 Author-Name: Umberto Cherubini Author-X-Name-First: Umberto Author-X-Name-Last: Cherubini Author-Name: Silvia Romagnoli Author-X-Name-First: Silvia Author-X-Name-Last: Romagnoli Title: Multivariate digital options with memory Abstract: We study a class of multivariate digital products called Altiplanos. These products may be structured according to two general features: (i) they may be univariate or multivariate; (ii) they may be European or with barrier. In addition to that, they may be endowed with exotic characteristics. One of these is the so-called memory feature, which prescribes that the first time when the underlying event takes place, coupons are paid for all the previous periods in which it had not occurred. The task of this paper is to provide new results for the evaluation of this clause. We show that the memory features provide the products with the presence of a digital option paying all coupons in the final date, and that this option plays a dominant role in the evaluation. Concerning sensitivity, the value of digital products with memory are positively sensitive to an increase in cross-section correlation and to a decrease in temporal correlation. Journal: The European Journal of Finance Pages: 649-660 Issue: 8 Volume: 17 Year: 2011 Keywords: copula functions, Markov processes, multivariate options, memory feature, correlation products, X-DOI: 10.1080/1351847X.2010.505728 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.505728 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:649-660 Template-Type: ReDIF-Article 1.0 Author-Name: Gregory Koutmos Author-X-Name-First: Gregory Author-X-Name-Last: Koutmos Author-Name: Johan Knif Author-X-Name-First: Johan Author-X-Name-Last: Knif Title: Exchange rate exposure in the pre- and post-Euro periods: evidence from Finland Abstract: This paper investigates asymmetric as well as first- and second-moment exchange rate exposure of the Finnish stock exchange (FSE) during the pre- and post-Euro periods. There is evidence of significant market-level and residual exchange rate exposure in the pre-Euro period. In the period, following the introduction of the Euro, however, exchange rate exposure becomes insignificant both at the market level and at the individual portfolio level with minor exceptions. Obviously, the introduction of the Euro has had a profound impact on the exchange rate exposure of the FSE. Journal: The European Journal of Finance Pages: 661-674 Issue: 8 Volume: 17 Year: 2011 Keywords: exchange rate exposure, post-Euro exposure, asymmetric exposure, exchange rate volatility, X-DOI: 10.1080/1351847X.2010.543843 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2010.543843 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:661-674 Template-Type: ReDIF-Article 1.0 Author-Name: Joy Yihui Jia Author-X-Name-First: Joy Yihui Author-X-Name-Last: Jia Author-Name: Mike Adams Author-X-Name-First: Mike Author-X-Name-Last: Adams Author-Name: Mike Buckle Author-X-Name-First: Mike Author-X-Name-Last: Buckle Title: The strategic use of corporate insurance in China Abstract: We use the agency theory to conduct a novel test of the strategic use of property insurance in China's corporate sector. With regard to our main test hypotheses, we find that the incidence of property insurance purchased is directly related to the degree of product-market competitiveness, and positively related to market liquidity and firms' growth opportunities. However, the homogeneity of market operations is not statistically significant. In our second-stage Cragg regression, market liquidity becomes insignificant while firms' growth opportunities are now inversely related to the amount of insurance purchased. Additionally, the homogeneity of market operations becomes significantly related to the corporate purchase of property insurance. Therefore, different factors (e.g. cost considerations) may influence the decisions to purchase property insurance and subsequently, the level of coverage provided. We argue that our results are relevant for companies in other emerging markets such as Eastern Europe and companies operating in more developed Western economies such as the European Union (EU). Journal: The European Journal of Finance Pages: 675-694 Issue: 8 Volume: 17 Year: 2011 Keywords: insurance, strategy, agency theory, emerging markets, China, X-DOI: 10.1080/1351847X.2011.554281 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2011.554281 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:675-694 Template-Type: ReDIF-Article 1.0 Author-Name: Helena Chulia Author-X-Name-First: Helena Author-X-Name-Last: Chulia Author-Name: Hipolit Torro Author-X-Name-First: Hipolit Author-X-Name-Last: Torro Title: Firm size and volatility analysis in the Spanish stock market Abstract: Using Spanish stock market data, this paper examines volatility spillovers between large and small firms and their impact on expected returns. By using a conditional capital asset pricing model (CAPM) with an asymmetric multivariate GARCH-M covariance structure, it is shown that there exist bidirectional volatility spillovers between both types of companies, especially after bad news. After estimating the model, a positive and significant price of risk is obtained. This result is consistent with the volatility feedback effect, one of the most popular explanations of the asymmetric volatility phenomenon, and explains why risk premiums are much more sensitive to negative return shocks coming from the whole market or other related markets. Journal: The European Journal of Finance Pages: 695-715 Issue: 8 Volume: 17 Year: 2011 Keywords: volatility spillovers, GARCH, large and small firms, risk premium, X-DOI: 10.1080/1351847X.2011.554286 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2011.554286 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:695-715 Template-Type: ReDIF-Article 1.0 Author-Name: Ludwig Reinhard Author-X-Name-First: Ludwig Author-X-Name-Last: Reinhard Author-Name: Steven Li Author-X-Name-First: Steven Author-X-Name-Last: Li Title: The influence of taxes on corporate financing and investment decisions against the background of the German tax reforms Abstract: This paper analyses the influence of taxes and the 2000 tax reform-induced tax changes on the financing and investment decisions of a sample of German listed companies over the years from 1996 to 2005. In contrast to the perception of the German government, our results do not support the notion that companies deliberately adjust their financial structures in order to reduce their corporate tax payments. Moreover, this study finds that market opportunities and market pressures have a far larger influence on investment decisions than on tax considerations. In this context, no evidence is found for the notion that tax cuts result in a higher investment activity that might stimulate economic growth and reduce the high unemployment rate in Germany. Against the background of these findings, it seems thus doubtful whether the recent tax reform will be able to reach its objectives. Journal: The European Journal of Finance Pages: 717-737 Issue: 8 Volume: 17 Year: 2011 Keywords: taxes, tax reform, corporate financing decisions, corporate investment decisions, Germany, X-DOI: 10.1080/1351847X.2011.554291 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2011.554291 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:717-737 Template-Type: ReDIF-Article 1.0 Author-Name: Juan Fernandez de Guevara Author-X-Name-First: Juan Fernandez Author-X-Name-Last: de Guevara Author-Name: Joaquin Maudos Author-X-Name-First: Joaquin Author-X-Name-Last: Maudos Title: Banking competition and economic growth: cross-country evidence Abstract: The aim of this paper is to analyse the effect of banking competition on industry economic growth using both structural measures of competition and measures based on the new empirical industrial organisation perspective. The evidence obtained in the period 1993-2003 for a sample of 53 sectors in 21 countries indicates that financial development promotes economic growth. The results also show that bank monopoly power has an inverted-U-shaped effect on economic growth, suggesting that bank market power has its highest growth effect at intermediate values. The latter result is consistent with the literature on relationship lending, which argues that bank competition can have a negative effect on the availability of finance for companies that are informationally more opaque. Journal: The European Journal of Finance Pages: 739-764 Issue: 8 Volume: 17 Year: 2011 Keywords: economic growth, banking competition, financial development, X-DOI: 10.1080/1351847X.2011.554300 File-URL: http://www.tandfonline.com/doi/abs/10.1080/1351847X.2011.554300 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:8:p:739-764 Template-Type: ReDIF-Article 1.0 Author-Name: John O.S. Wilson Author-X-Name-First: John O.S. Author-X-Name-Last: Wilson Author-Name: David G. McMillan Author-X-Name-First: David G. Author-X-Name-Last: McMillan Author-Name: Barbara Casu Author-X-Name-First: Barbara Author-X-Name-Last: Casu Title: Contemporary issues in financial institutions and markets Journal: The European Journal of Finance Pages: 765-768 Issue: 9-10 Volume: 17 Year: 2011 Month: 11 X-DOI: 10.1080/1351847X.2010.546684 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.546684 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:765-768 Template-Type: ReDIF-Article 1.0 Author-Name: Barbara Casu Author-X-Name-First: Barbara Author-X-Name-Last: Casu Author-Name: Andrew Clare Author-X-Name-First: Andrew Author-X-Name-Last: Clare Author-Name: Anna Sarkisyan Author-X-Name-First: Anna Author-X-Name-Last: Sarkisyan Author-Name: Stephen Thomas Author-X-Name-First: Stephen Author-X-Name-Last: Thomas Title: Does securitization reduce credit risk taking? Empirical evidence from US bank holding companies Abstract: This study investigates the impact of securitization on the credit risk-taking behavior of banks. Using US Bank Holding Company data from 2001 to 2007, we find that banks with a greater balance of outstanding securitized assets choose asset portfolios of lower credit risks. Examining securitizations by the type of underlying assets, we find that the negative relationship between outstanding securitization and risk taking is primarily driven by securitizations of mortgages, home equity lines of credit, and other consumer loans. Securitizations of all other types of assets, on the other hand, seem to have no significant impact on bank credit risk-taking behavior. We attribute these results to the recourse commonly provided in securitization transactions, as it might alter the risk-taking appetite of the issuing banks across asset classes. Therefore, we conclude that the net impact of securitization on the risk-taking behavior of issuing banks, and consequently on the soundness of the banking system, is ambiguous and will depend on the transactions structure. In particular, it will depend on the relative magnitude of credit support provided by banks. This leads us to suggest that banks have typically viewed securitization as a financing rather than a risk management mechanism. Journal: The European Journal of Finance Pages: 769-788 Issue: 9-10 Volume: 17 Year: 2011 Month: 11 X-DOI: 10.1080/1351847X.2010.538526 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.538526 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:769-788 Template-Type: ReDIF-Article 1.0 Author-Name: Franco Fiordelisi Author-X-Name-First: Franco Author-X-Name-Last: Fiordelisi Author-Name: Ornella Ricci Author-X-Name-First: Ornella Author-X-Name-Last: Ricci Title: Bancassurance efficiency gains: evidence from the Italian banking and insurance industries Abstract: Bancassurance has rapidly grown in Europe over the past 20 years catching the attention of managers and academia. Most dedicated studies have only been descriptive in nature, while the number of empirical studies is very limited. Potential efficiency gains are a poorly investigated issue, even though cost and revenue synergies are commonly recognised among the main economic rationales for conglomeration. Our paper aims to assess bancassurance performance gains (from both the banking and the insurance standpoints) in the Italian banking and insurance sectors over the period 2005--2006 by estimating cost and profit efficiency using stochastic frontier analysis. With regard to the banking industry, we do not show any strong evidence in favour of entering the life insurance business. The investigation into the insurance industry highlights the competitive viability of bancassurance as a distribution channel, especially in terms of cost efficiency. In terms of profitability, our findings suggest that the mix of products should be continuously revised to adapt to customer needs and the evolution of financial markets. As a consequence, ownership links are not necessarily the best bancassurance strategy, and the parties involved should also consider more flexible forms of cooperation, such as cross-selling agreements and non-equity strategic alliances. Journal: The European Journal of Finance Pages: 789-810 Issue: 9-10 Volume: 17 Year: 2011 Month: 11 X-DOI: 10.1080/1351847X.2010.538519 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.538519 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:789-810 Template-Type: ReDIF-Article 1.0 Author-Name: Georgios E. Chortareas Author-X-Name-First: Georgios E. Author-X-Name-Last: Chortareas Author-Name: Jesús G. Garza-García Author-X-Name-First: Jesús G. Author-X-Name-Last: Garza-García Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Title: Financial deepening and bank productivity in Latin America Abstract: Financial intermediation in Latin America has experienced profound changes due to financial liberalization, which also resulted in further financial deepening. The bulk of the literature on financial deepening focuses on its macroeconomic dimension and its implications for growth. In this paper, we shift our attention to its microeconomic implications by shaping the environment within which banks operate. In particular, we examine the possible effects of financial deepening on bank productivity changes as well as the possibility of a two-way causality. We obtain bank productivity estimates using the non-parametric Malmquist methodology. We find strong evidence of causality from financial deepening to bank productivity and also evidence of reverse causality. Our results suggest that a virtuous circle between financial deepening and financial institutions’ productivity may exist. Journal: The European Journal of Finance Pages: 811-827 Issue: 9-10 Volume: 17 Year: 2011 Month: 11 X-DOI: 10.1080/1351847X.2010.538512 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.538512 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:811-827 Template-Type: ReDIF-Article 1.0 Author-Name: Andreas G.F. Hoepner Author-X-Name-First: Andreas G.F. Author-X-Name-Last: Hoepner Author-Name: Hussain G. Rammal Author-X-Name-First: Hussain G. Author-X-Name-Last: Rammal Author-Name: Michael Rezec Author-X-Name-First: Michael Author-X-Name-Last: Rezec Title: Islamic mutual funds’ financial performance and international investment style: evidence from 20 countries Abstract: We pursue the first large-scale investigation of a strongly growing mutual fund type: Islamic funds. Based on an unexplored, survivorship bias-adjusted data set, we analyse the financial performance and investment style of 265 Islamic equity funds from 20 countries. As Islamic funds often have diverse investment regions, we develop a (conditional) three-level Carhart model to simultaneously control for exposure to different national, regional and global equity markets and investment styles. Consistent with recent evidence for conventional funds, we find Islamic funds to display superior learning in more developed Islamic financial markets. While Islamic funds from these markets are competitive to international equity benchmarks, funds from especially Western nations with less Islamic assets tend to significantly underperform. Islamic funds’ investment style is somewhat tilted towards growth stocks. Funds from predominantly Muslim economies also show a clear small cap preference. These results are consistent over time and robust to time varying market exposures and capital market restrictions. Journal: The European Journal of Finance Pages: 829-850 Issue: 9-10 Volume: 17 Year: 2011 Month: 11 X-DOI: 10.1080/1351847X.2010.538521 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.538521 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:829-850 Template-Type: ReDIF-Article 1.0 Author-Name: Sergio Mayordomo Author-X-Name-First: Sergio Author-X-Name-Last: Mayordomo Author-Name: Juan Ignacio Peña Author-X-Name-First: Juan Ignacio Author-X-Name-Last: Peña Author-Name: Juan Romo Author-X-Name-First: Juan Author-X-Name-Last: Romo Title: The effect of liquidity on the price discovery process in credit derivatives markets in times of financial distress Abstract: This paper analyses the role of liquidity in the price discovery process. Specifically, we focus on the credit derivatives markets in the context of the subprime crisis. We present a theoretical price discovery model for the asset swap packages (ASPs), bond and credit default swap (CDS) markets and then we test the model with data from 2005 to 2009 on Euro-denominated non-financial firms. Our empirical results show that the ASP market clearly leads the bond market in the price discovery process in all cases, while the leadership between ASPs and CDSs is very sensitive to the appearance of the subprime crisis. Before the crisis, the CDSs market leads the ASP market, but during the crisis, the ASP market leads the CDS market. The liquidity, measured as the relative number of market participants, helps to explain these results. Journal: The European Journal of Finance Pages: 851-881 Issue: 9-10 Volume: 17 Year: 2011 Month: 11 X-DOI: 10.1080/1351847X.2010.538529 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.538529 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:851-881 Template-Type: ReDIF-Article 1.0 Author-Name: Thanos Verousis Author-X-Name-First: Thanos Author-X-Name-Last: Verousis Author-Name: Owain ap Gwilym Author-X-Name-First: Owain Author-X-Name-Last: ap Gwilym Title: Return reversals and the compass rose: insights from high frequency options data Abstract: We study the occurrence and visibility of the compass rose pattern in high frequency data from individual equity options contracts. We show that the compass rose pattern in options contracts is more complex than portrayed in prior work with other asset classes. We find that the tick/volatility ratio proposed in prior studies gives inconclusive results on the pattern's visibility. A major contribution arises from linking the compass rose pattern with return reversals, which gives new insights into the pattern's predictability. We show that return reversals are revealed as an element of the compass rose pattern and are particularly evident at higher sampling frequencies. We study the determinants of these reversals and report that return reversals are primarily associated with high transaction frequency and decrease with the presence of additional market makers. Also, the hypothesis that there is a reaction to overnight events which is reflected in prices at the market open is not supported. Reversals are less prevalent for larger firms and when trade sizes are larger. Journal: The European Journal of Finance Pages: 883-896 Issue: 9-10 Volume: 17 Year: 2011 Month: 11 X-DOI: 10.1080/1351847X.2010.538524 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.538524 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:17:y:2011:i:9-10:p:883-896 Template-Type: ReDIF-Article 1.0 Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Sydney Howell Author-X-Name-First: Sydney Author-X-Name-Last: Howell Title: Trading constraints and illiquidity discounts Abstract: Acting as the source of exogenous illiquidity, trading constraints prevent free trading of shares and discount their value relative to freely traded counterparts with identical dividends and voting rights. This paper numerically solves the theoretical illiquidity discounts for the restricted shares with long constraint horizon and then reconciles the contradictions in the results of various theoretical models. With control of leveraged positions, illiquidity discounts increase with the volatility, and their size is greatly diminished. We also empirically test the theories within the unique setting of China, which has the largest population of restricted shares worldwide. Large discounts are documented in two forms of occasional transactions in restricted shares: namely auctions and transfers. The results empirically verify the theoretical findings by showing that illiquidity discounts in auctions increase with both the volatility and constraint horizons. The results from transfers, however, are not always significant as the transfers are made privately and may be subject to price manipulation when the involved parties are related. Journal: The European Journal of Finance Pages: 1-27 Issue: 1 Volume: 18 Year: 2012 Month: 1 X-DOI: 10.1080/1351847X.2011.574972 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.574972 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:1:p:1-27 Template-Type: ReDIF-Article 1.0 Author-Name: Torben W. Hendricks Author-X-Name-First: Torben W. Author-X-Name-Last: Hendricks Author-Name: Bernd Kempa Author-X-Name-First: Bernd Author-X-Name-Last: Kempa Author-Name: Christian Pierdzioch Author-X-Name-First: Christian Author-X-Name-Last: Pierdzioch Title: Do banks’ buy and sell recommendations influence stock market volatility? Evidence from the German DAX30 Abstract: We investigate the impact of good and bad news on stock market volatility. To this end, we utilize a novel data set of banks’ buy and sell recommendations for the German DAX30 stock market index and estimate an EGARCH(1,1) model which features these recommendations as well as several other pertinent explanatory variables in the mean and variance equations. We find that in a rising market, buy recommendations lower the level of volatility and sell recommendations raise volatility, whereas the impact of news on stock market volatility is less clear-cut in a falling market. Journal: The European Journal of Finance Pages: 29-39 Issue: 1 Volume: 18 Year: 2012 Month: 1 X-DOI: 10.1080/1351847X.2010.495474 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.495474 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:1:p:29-39 Template-Type: ReDIF-Article 1.0 Author-Name: Jens Hagendorff Author-X-Name-First: Jens Author-X-Name-Last: Hagendorff Author-Name: Kevin Keasey Author-X-Name-First: Kevin Author-X-Name-Last: Keasey Title: The value of board diversity in banking: evidence from the market for corporate control Abstract: We examine the value of board diversity in the US banking industry as a mechanism to enhance the decision-making capabilities of a board. We employ a sample of mergers to assess if measures of diversity as displayed by the bidding bank's board are linked to the market performance of acquisitions. We find positive announcement returns to mergers approved by boards whose members are diverse in terms of their occupational background. By contrast, age and tenure diversity are associated with wealth losses surrounding acquisition announcements, while gender diversity does not lead to measurable value effects. Interestingly, boards with more banking expertise are not more effective at monitoring bank managers. Our results do not support calls for more representation of industry-specific expertise on bank boards and, instead, show that occupational diversity may play an important role in protecting shareholder wealth. Journal: The European Journal of Finance Pages: 41-58 Issue: 1 Volume: 18 Year: 2012 Month: 1 X-DOI: 10.1080/1351847X.2010.481471 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.481471 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:1:p:41-58 Template-Type: ReDIF-Article 1.0 Author-Name: Raphael Paschke Author-X-Name-First: Raphael Author-X-Name-Last: Paschke Author-Name: Marcel Prokopczuk Author-X-Name-First: Marcel Author-X-Name-Last: Prokopczuk Title: Investing in commodity futures markets: can pricing models help? Abstract: This article empirically investigates whether continuous time pricing models are able to help reveal mispriced commodity futures contracts. Mispricings are identified based on the difference between model and observed prices, using four different pricing models for four different commodity markets, namely crude oil, copper, silver, and gold. Pricing errors are found to carry informational content for future price movements in excess of the overall market. Investment strategies based on these pricing errors yield significant excess returns, particularly for the relatively small copper and silver markets. Journal: The European Journal of Finance Pages: 59-87 Issue: 1 Volume: 18 Year: 2012 Month: 1 X-DOI: 10.1080/1351847X.2011.601658 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601658 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:1:p:59-87 Template-Type: ReDIF-Article 1.0 Author-Name: Carlos P. Barros Author-X-Name-First: Carlos P. Author-X-Name-Last: Barros Author-Name: Luis Gil-Alana Author-X-Name-First: Luis Author-X-Name-Last: Gil-Alana Author-Name: Roman Matousek Author-X-Name-First: Roman Author-X-Name-Last: Matousek Title: Mean reversion of short-run interest rates: empirical evidence from new EU countries Abstract: This article deals with the analysis of the mean reversion property of short-term interest rates in Central and Eastern European countries, using daily data from January 2000 to December 2008. For this purpose, we use long memory (fractionally integrated) models, and employ non-parametric, semi-parametric and parametric techniques to check if our results are robust across different methods. The results indicate that the mean reversion only takes place in the case of Hungary. For the remaining countries, the short-term interest rates are clearly non-stationary and non-mean reverting. Allowing for one break in the data, the break date takes place about 2001/2003 in all the series except in Lithuania, where the break occurs in 2007. In general, we observe an increase in the degree of dependence after the break in the majority of the series. Journal: The European Journal of Finance Pages: 89-107 Issue: 2 Volume: 18 Year: 2012 Month: 2 X-DOI: 10.1080/1351847X.2011.601659 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601659 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:2:p:89-107 Template-Type: ReDIF-Article 1.0 Author-Name: C. José García Author-X-Name-First: C. José Author-X-Name-Last: García Author-Name: Begoña Herrero Author-X-Name-First: Begoña Author-X-Name-Last: Herrero Author-Name: Ana M. Ibáñez Author-X-Name-First: Ana M. Author-X-Name-Last: Ibáñez Title: Information processing in the stock market around anticipated accounting information: earnings release Abstract: Earnings announcements are anticipated events with significant price impacts. This fact can motivate informed traders to trade on private information and liquidity providers to reduce liquidity in order to be careful about insider trading. In this paper, we examine the effect of earnings announcements on information asymmetry. Specifically, we investigate whether liquidity suppliers value the possibility of trading with informed agents and whether market behaviour reflects this. To achieve this objective, we take into account the sign of the surprise, the quarter of the announcement, the quantity of previous information and the quality of the information released. One of the main results of the paper is the support of market efficiency. This result is important nowadays since this hypothesis is being questioned after the irruption of the financial crisis. Journal: The European Journal of Finance Pages: 109-133 Issue: 2 Volume: 18 Year: 2012 Month: 2 X-DOI: 10.1080/1351847X.2010.495473 File-URL: http://hdl.handle.net/10.1080/1351847X.2010.495473 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:2:p:109-133 Template-Type: ReDIF-Article 1.0 Author-Name: John Cotter Author-X-Name-First: John Author-X-Name-Last: Cotter Author-Name: Jim Hanly Author-X-Name-First: Jim Author-X-Name-Last: Hanly Title: Hedging effectiveness under conditions of asymmetry Abstract: 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 generalised autoregressive conditional heteroskedastic 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. Journal: The European Journal of Finance Pages: 135-147 Issue: 2 Volume: 18 Year: 2012 Month: 2 X-DOI: 10.1080/1351847X.2011.574977 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.574977 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:2:p:135-147 Template-Type: ReDIF-Article 1.0 Author-Name: Raymond Haga Author-X-Name-First: Raymond Author-X-Name-Last: Haga Author-Name: Snorre Lindset Author-X-Name-First: Snorre Author-X-Name-Last: Lindset Title: Understanding bull and bear ETFs Abstract: This paper analyzes leveraged exchange-traded funds (ETFs) with a particular focus on some of the early Norwegian ETFs. The funds use the futures markets to provide investors with 2 and−2 times the daily returns on the OBX index. First, we found that positive risk-free interest rates make the fund returns deviate from what is pictured by the providers. Secondly, we found that volatility can harm the investor returns. Thirdly, we found that the funds have fallen somewhat short of providing the pictured returns. Finally, we found that the positions taken in the futures markets are too small to obtain the pictured returns. Journal: The European Journal of Finance Pages: 149-165 Issue: 2 Volume: 18 Year: 2012 Month: 2 X-DOI: 10.1080/1351847X.2011.574980 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.574980 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:2:p:149-165 Template-Type: ReDIF-Article 1.0 Author-Name: Pedro Miguel Pimentel Author-X-Name-First: Pedro Miguel Author-X-Name-Last: Pimentel Author-Name: Jos� Azevedo-Pereira Author-X-Name-First: Jos� Author-X-Name-Last: Azevedo-Pereira Author-Name: Gualter Couto Author-X-Name-First: Gualter Author-X-Name-Last: Couto Title: High-speed rail transport valuation Abstract: In this paper, the optimal timing for investing in high-speed rail projects under uncertainty in relation to the utility provided to railway users was investigated. To accomplish this, a continuous time real options analysis framework using a stochastic demand model was developed to determine the optimal time to invest. Uncertainty upon investment expenditures was also added in an extended framework. The value of the option to defer and the investment opportunity value were also assessed. Journal: The European Journal of Finance Pages: 167-183 Issue: 2 Volume: 18 Year: 2012 Month: 2 X-DOI: 10.1080/1351847X.2011.574984 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.574984 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:2:p:167-183 Template-Type: ReDIF-Article 1.0 Author-Name: Robert Cressy Author-X-Name-First: Robert Author-X-Name-Last: Cressy Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Christine Mallin Author-X-Name-First: Christine Author-X-Name-Last: Mallin Title: Law, ethics and finance: implications for international investment and portfolio management Abstract: ‘Without integrity, nothing works!’ Michael Jensen, Jesse Isidor Straus Emeritus Professor of Business Administration, Keynote Remarks at the Conference on Law, Ethics and Finance at York University Schulich School of Business, September 2010. Journal: The European Journal of Finance Pages: 185-189 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.605899 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.605899 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:185-189 Template-Type: ReDIF-Article 1.0 Author-Name: Sanjai Bhagat Author-X-Name-First: Sanjai Author-X-Name-Last: Bhagat Author-Name: Heather Tookes Author-X-Name-First: Heather Author-X-Name-Last: Tookes Title: Voluntary and mandatory skin in the game: understanding outside directors’ stock holdings Abstract: We examine the determinants of equity ownership by outside directors as well as the relationship between ownership and operating performance. Unlike previous studies of equity ownership by directors, we use hand-collected data on firm-level policies requiring director ownership for S&P 500 firms during the years 2003 and 2005. Ownership requirements allow us to shed further light on the determinants of director holdings and to separate voluntary from mandatory holdings of directors. If ownership requirements reflect optimal ownership levels (from the firm's perspective), they provide a useful identification tool in the examination of ownership--performance relationships. Our primary findings are that mandatory holdings are unrelated to future performance; this is consistent with the theory that ownership requirements reflect optimal ownership levels. By contrast, voluntary holdings are positively and significantly related to future performance, suggesting that they perform an incentivizing role for directors. Journal: The European Journal of Finance Pages: 191-207 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579739 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579739 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:191-207 Template-Type: ReDIF-Article 1.0 Author-Name: April Knill Author-X-Name-First: April Author-X-Name-Last: Knill Title: The value of country-level perceived ethics to entrepreneurs around the world Abstract: The actions behind the ‘Great Recession’ have done a lot of damage to the ability of the average investor to trust both corporate executives and Wall Street. Given the riskiness of investing in private equity, private firms are particularly vulnerable to the risk aversion of investors. For this reason, maintaining trust may be particularly useful to private firms. Using a dataset that spans 33 countries from 1998 to 2004, this paper examines the impact of the perception of ethical behavior at the country level on the performance and outcome of private firms. Using two separate sources for country-level perception of ethics, this paper finds that both the performance and the outcome of the private firm are positively influenced by the level of perceived ethics in their country. The paper further finds that these benefits come without adding cost to the entrepreneurial firm (as well as its pre-issue investors) when it goes public. Journal: The European Journal of Finance Pages: 209-237 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579768 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579768 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:209-237 Template-Type: ReDIF-Article 1.0 Author-Name: Robert Cressy Author-X-Name-First: Robert Author-X-Name-Last: Cressy Author-Name: Hisham Farag Author-X-Name-First: Hisham Author-X-Name-Last: Farag Title: Do private equity-backed buyouts respond better to financial distress than PLCs? Abstract: The paper uses a new, hand-collected data set of 93 private equity (PE)-backed buyouts and 96 PLCs that became financially distressed over the period 1995--2008 to investigate empirically whether PE-owned companies (buyouts) in financial distress (Receivership/Administration) have better recovery rates (RRs) for secured debt (SD) than their publicly-owned (PLC) counterparts and, if so, why. We find that the RRs of buyouts (amount recovered in proportion to SD outstanding) are in fact about twice that of PLCs during this period. Administration, surprisingly, has no effect on debt-RRs but seems significantly to reduce the time to recovery. A larger number of creditors which in theory should reduce RRs, again has no impact, nor does company size. Intriguingly, however, higher leverage consistently reduces the RR as (we hypothesise) more leveraged buyouts need to have recourse to lower quality assets for security. Finally, the time in recovery is negatively related to the date of distress onset (later years have shorter durations) and to the size of the firm (a concave relationship). Journal: The European Journal of Finance Pages: 239-259 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579742 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579742 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:239-259 Template-Type: ReDIF-Article 1.0 Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Gael Imad'Eddine Author-X-Name-First: Gael Author-X-Name-Last: Imad'Eddine Author-Name: Armin Schwienbacher Author-X-Name-First: Armin Author-X-Name-Last: Schwienbacher Title: Harmonized regulatory standards, international distribution of investment funds and the recent financial crisis Abstract: In this paper, we consider for the first time the impact of fund regulation on the international distribution of investment funds. We study the 2001 Undertakings for Collective Investment in Transferable Securities (UCITS) Directive of the European Union, which was put in place to mitigate fraud and promote investor confidence throughout Europe. We examine the impact of UCITS on international distributions of European investment funds over the 2002--2009 period. We show that the UCITS regulatory structure has significantly facilitated cross-border fund distributions, albeit UCITS has had less success in facilitating distributions among smaller fund promoters. Also, UCITS funds, especially UCITS equity funds, have lost some of their advantage in terms of cross-border distribution during the period of the recent financial crisis. Further, we show there has been a growing interest in UCITS over time outside Europe, notably in Asia. Journal: The European Journal of Finance Pages: 261-292 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579743 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579743 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:261-292 Template-Type: ReDIF-Article 1.0 Author-Name: A. Fabretti Author-X-Name-First: A. Author-X-Name-Last: Fabretti Author-Name: S. Herzel Author-X-Name-First: S. Author-X-Name-Last: Herzel Title: Delegated portfolio management with socially responsible investment constraints Abstract: We consider the problem of how to establish compensation for a portfolio manager who is required to restrict the investment set, for example, because of socially responsible screening. This is a problem of delegated portfolio management, where the reduction of investment opportunities to the subset of sustainable assets involves a loss in expected earnings for the portfolio manager, compensated by the investor through an extra bonus on the realized return. Under simple assumptions on the investor, manager and market, we compute the optimal bonus as a function of the manager's risk aversion and expertise, and of the impact of portfolio restriction on the mean-variance efficient frontier. Journal: The European Journal of Finance Pages: 293-309 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579746 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579746 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:293-309 Template-Type: ReDIF-Article 1.0 Author-Name: Raj Aggarwal Author-X-Name-First: Raj Author-X-Name-Last: Aggarwal Author-Name: Sandra Dow Author-X-Name-First: Sandra Author-X-Name-Last: Dow Title: Corporate governance and business strategies for climate change and environmental mitigation Abstract: Strategic corporate responses to climate change and environmental challenges do not seem to be the primary domain of corporate management. In the short run, such decisions are generally not consistent with executive incentives and often not seen as profit maximizing. Nevertheless, as some climate change responses may indeed be firm value maximizing, such decisions can be expected to reflect the nature of a firm's corporate governance. Based on an analysis of 500 of the largest US firms, we show empirically that this is indeed the case. Specifically, this study documents that institutional ownership and board entrenchment seem to significantly influence climate change and environmental impact mitigation policies of large firms. Journal: The European Journal of Finance Pages: 311-331 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579745 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579745 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:311-331 Template-Type: ReDIF-Article 1.0 Author-Name: Stefano Herzel Author-X-Name-First: Stefano Author-X-Name-Last: Herzel Author-Name: Marco Nicolosi Author-X-Name-First: Marco Author-X-Name-Last: Nicolosi Author-Name: Cătălin Stărică Author-X-Name-First: Cătălin Author-X-Name-Last: Stărică Title: The cost of sustainability in optimal portfolio decisions Abstract: We examined the impact of including sustainability-related constraints in optimal portfolio decision-making. Our analysis covered an investment set containing the components of the S&P500 index from 1993 to 2008. Optimizations were performed according to the classic mean--variance approach, while sustainability constraints were introduced by eliminating, from the investment pool, those assets that do not comply with the given social responsibility criteria (screening). We compared the efficient frontiers with and without screening. The analysis focused on the three main dimensions of sustainability, namely the environmental, social and governance ones. We found that socially responsible screening gives rise to a small loss in terms of the Sharpe ratio even though it has a great impact on the market capitalization of the optimal portfolio. The spanning test showed that the ex-post differences between the two frontiers, when short selling is not allowed, are significant only in the case of environmental screening. Journal: The European Journal of Finance Pages: 333-349 Issue: 3-4 Volume: 18 Year: 2012 Month: 5 X-DOI: 10.1080/1351847X.2011.587521 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.587521 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:333-349 Template-Type: ReDIF-Article 1.0 Author-Name: Hisham Farag Author-X-Name-First: Hisham Author-X-Name-Last: Farag Author-Name: Robert Cressy Author-X-Name-First: Robert Author-X-Name-Last: Cressy Title: Stock market regulation and news dissemination: evidence from an emerging market Abstract: Stock market efficiency is associated with news being spread immediately in the market. The literature, however, offers two competing theories to explain this phenomenon. One theory, the mixture of distributions hypothesis (MDH) claims immediate dissemination, while the other, the sequential information arrival hypothesis (SIAH) argues for sequential dissemination, or effectively market inefficiency. The present paper provides a critical test of the two theories using emerging market data, specifically from Egypt, and finds evidence to validate both hypotheses, conditional on the regulatory regime (price limit versus circuit breaker). Using generalized method of moments estimation on 10 years of daily data on the EXG 30 market index, our results show that within the price limit window, news proxied by trading volume, spreads instantaneously to all market participants, consistently with the MDH. Within subsequent circuit breaker window, however, new information leaks out to all market participants only over a period of several days, consistently with the SIAH. We find this switch is moreover associated with an increase in price volatility. Thus, not only is the market less-efficient after the switch, it is also more volatile. Journal: The European Journal of Finance Pages: 351-368 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579740 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579740 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:351-368 Template-Type: ReDIF-Article 1.0 Author-Name: Huaili Lv Author-X-Name-First: Huaili Author-X-Name-Last: Lv Author-Name: Wanli Li Author-X-Name-First: Wanli Author-X-Name-Last: Li Author-Name: Simon Gao Author-X-Name-First: Simon Author-X-Name-Last: Gao Title: Dividend tunneling and joint expropriation: empirical evidence from China's capital market Abstract: This paper examines the association between cash dividends and the shareholders balancing mechanism (SBM) using the exogeneity and endogeneity assumptions of corporate ownership structure. This paper identifies, in the case of China, whether paying cash dividends is a means of protection or expropriation of minority shareholders’ interests. With 4810 observations from companies listed on the Shanghai Stock Exchange over the period 2004--2008, the authors find significant negative associations between cash dividend payments and the SBM of non-controlling large shareholders under the exogeneity assumption and the SBM of tradable shareholders under the endogeneity assumption. The findings suggest that cash dividends are used as a manner of tunneling by the controlling shareholder. This paper also shows that the SBM of non-controlling shareholders has a significant positive effect on cash dividends, especially for companies paying high and abnormal dividends. The results imply that in China's capital market, cash dividend payments are not only expropriations of minority shareholders’ interests by the controlling shareholder but also coalitions of controlling and non-controlling large shareholders. The findings confirm the tunneling and joint expropriation incentive of corporate dividend policy. Journal: The European Journal of Finance Pages: 369-392 Issue: 3-4 Volume: 18 Year: 2012 Month: 4 X-DOI: 10.1080/1351847X.2011.579741 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.579741 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:3-4:p:369-392 Template-Type: ReDIF-Article 1.0 Author-Name: Seth Armitage Author-X-Name-First: Seth Author-X-Name-Last: Armitage Title: The calculation of returns during seasoned equity offers Abstract: The article analyses how the returns to a shareholder and the returns for an event study are calculated during the three types of seasoned equity offer (SEO) in use in the UK, namely rights issues, open offers and placings. The calculations differ across the two types of return and the three types of offer. Evidence from a sample of SEOs shows the large impact that the choice of calculation method has on returns. An unresolved question is whether to use discount-adjusted returns in event studies of placings. Journal: The European Journal of Finance Pages: 393-417 Issue: 5 Volume: 18 Year: 2012 Month: 5 X-DOI: 10.1080/1351847X.2011.601665 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601665 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:5:p:393-417 Template-Type: ReDIF-Article 1.0 Author-Name: John Goddard Author-X-Name-First: John Author-X-Name-Last: Goddard Author-Name: Philip Molyneux Author-X-Name-First: Philip Author-X-Name-Last: Molyneux Author-Name: Tim Zhou Author-X-Name-First: Tim Author-X-Name-Last: Zhou Title: Bank mergers and acquisitions in emerging markets: evidence from Asia and Latin America Abstract: Following a global wave of consolidation in the banking industry, this study analyses 132 mergers and acquisitions (M&As) involving banks in emerging markets in Asia and Latin America between 1998 and 2009. An event study measures the change in shareholder value for acquirers and targets; and a multivariate regression identifies the drivers of the change in shareholder value for acquirers. On average M&As create shareholder value for target firms, while acquirer firms do not lose shareholder value. Geographical diversification creates shareholder value for acquirers. Acquirer shareholders benefit from the acquisition of underperforming targets; from transactions settled by cash rather than exchange of equity; and from government-instigated M&A transactions. Journal: The European Journal of Finance Pages: 419-438 Issue: 5 Volume: 18 Year: 2012 Month: 5 X-DOI: 10.1080/1351847X.2011.601668 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601668 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:5:p:419-438 Template-Type: ReDIF-Article 1.0 Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Title: Did expected returns fall? Evidence from UK size portfolios Abstract: Ex post equity returns were extremely high during the latter part of the twentieth century and in particular during the 1990s. Many observers suggest ex post returns have been higher than expected returns. This article suggests, in the case of the UK, that the largest firms primarily cause the appearance of a shift in expected returns during the 1990s. The article presents some novel evidence consistent with an earlier shift in expected returns for small- and medium-sized firms in the early 1980s. However, evidence from structural break tests on valuation ratios is consistent with either moderate changes in long-term expected fundamental growth or long-term expected returns; it is difficult to distinguish statistically between these two competing explanations. Journal: The European Journal of Finance Pages: 439-468 Issue: 5 Volume: 18 Year: 2012 Month: 5 X-DOI: 10.1080/1351847X.2011.601662 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601662 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:5:p:439-468 Template-Type: ReDIF-Article 1.0 Author-Name: Manuel J. Rocha Armada Author-X-Name-First: Manuel J. Author-X-Name-Last: Rocha Armada Author-Name: Paulo J. Pereira Author-X-Name-First: Paulo J. Author-X-Name-Last: Pereira Author-Name: Artur Rodrigues Author-X-Name-First: Artur Author-X-Name-Last: Rodrigues Title: Optimal subsidies and guarantees in public--private partnerships Abstract: In this paper, we analyse how certain subsidies and guarantees given to private firms in public--private partnerships should be optimally arranged to promote immediate investment in a real options framework. We show how an investment subsidy, a revenue subsidy, a minimum demand guarantee, and a rescue option could be optimally arranged to induce immediate investment, compensating for the value of the option to defer. These four types of incentives produce significantly different results when we compare the value of the project after the incentive structure is devised and also when we compare the timing of the resulting cash flows. Journal: The European Journal of Finance Pages: 469-495 Issue: 5 Volume: 18 Year: 2012 Month: 11 X-DOI: 10.1080/1351847X.2011.639789 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.639789 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:5:p:469-495 Template-Type: ReDIF-Article 1.0 Author-Name: Hsiang-Chun Michael Lin Author-X-Name-First: Hsiang-Chun Michael Author-X-Name-Last: Lin Author-Name: Hong Bo Author-X-Name-First: Hong Author-X-Name-Last: Bo Title: State-ownership and financial constraints on investment of Chinese-listed firms: new evidence Abstract: We examine how state-ownership affects financial constraints on investment of Chinese-listed firms during 1999--2008. We find that although an average sample firm experiences some degree of financial constraints, state-ownership does not necessarily help in reducing the firm's financial constraints on investment. Further evidence shows that state-ownership does not lead to more borrowing from the Chinese banking sector, implying that state-ownership does not necessarily reduce the firm's financial constraints via the state-controlled banking sector. We consider not only the standard factors in the investment equation, but also the firm's equity financing behaviour explicitly. The result is robust to both the conventional proxy for financial constraints, i.e. the investment--cash-flow sensitivity, and a recently developed proxy for financial constraints, i.e. the KZ index. Our results suggest that China's corporatisation movement is effective in that soft budget constraints once enjoyed by former state-owned enterprises have been removed along with the progress of corporatisation. These firms, although still state-involved, can be seen as modern corporations operating in a market environment. Journal: The European Journal of Finance Pages: 497-513 Issue: 6 Volume: 18 Year: 2012 Month: 7 X-DOI: 10.1080/1351847X.2011.611523 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.611523 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:6:p:497-513 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Mallin Author-X-Name-First: Chris Author-X-Name-Last: Mallin Author-Name: Kean Ow-Yong Author-X-Name-First: Kean Author-X-Name-Last: Ow-Yong Title: Factors influencing corporate governance disclosures: evidence from Alternative Investment Market (AIM) companies in the UK Abstract: This study examines the relationship between company and ownership characteristics and the disclosure level of compliance with Quoted Companies Alliance (QCA) recommendations on corporate governance in Alternative Investment Market (AIM) companies. We report clear evidence that compliance increases with company size, board size, the proportion of independent non-executive directors, the presence of turnover revenue, and being formerly listed on the Main Market. However, we find that shell and highly geared AIM companies disclose relatively lower levels of corporate governance than recommended under QCA guidelines. Our findings suggest that market regulators should review the potential impact of the quality of corporate governance in these companies on the future vibrancy of AIM. We find no evidence that ownership structure or the type of Nominated Advisor is related to disclosure of compliance with QCA guidelines. Overall, in a lightly regulated environment such as the AIM market, it seems that companies will ultimately pursue a cost--benefit strategy in voluntarily complying with good corporate governance practice. Journal: The European Journal of Finance Pages: 515-533 Issue: 6 Volume: 18 Year: 2012 Month: 7 X-DOI: 10.1080/1351847X.2011.601671 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601671 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:6:p:515-533 Template-Type: ReDIF-Article 1.0 Author-Name: Markus Leippold Author-X-Name-First: Markus Author-X-Name-Last: Leippold Author-Name: Harald Lohre Author-X-Name-First: Harald Author-X-Name-Last: Lohre Title: International price and earnings momentum Abstract: In this paper, we find that price and earnings momentum are pervasive features of international equity markets even when controlling for data-snooping biases. For Europe, we show price momentum to be subsumed by earnings momentum on an aggregate level. However, this rationale can hardly be sustained on a country level. Also, the above explanation is confined to certain time periods in the USA. Since we cannot establish a decent relation between momentum and macroeconomic risks, we suspect a behavior-based explanation to be at work. In fact, we find momentum profits to be more pronounced for portfolios characterized by higher information uncertainty. Hence, the momentum anomaly may well be rationalized in a model of investors underreacting to fundamental news. Finally, we find that momentum works better when limited to stocks with high idiosyncratic risk or higher illiquidity, suggesting that limits to arbitrage deter rational investors from exploiting the anomaly. Journal: The European Journal of Finance Pages: 535-573 Issue: 6 Volume: 18 Year: 2012 Month: 7 X-DOI: 10.1080/1351847X.2011.628683 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.628683 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:6:p:535-573 Template-Type: ReDIF-Article 1.0 Author-Name: Fei Chen Author-X-Name-First: Fei Author-X-Name-Last: Chen Author-Name: Charles Sutcliffe Author-X-Name-First: Charles Author-X-Name-Last: Sutcliffe Title: Better cross hedges with composite hedging? Hedging equity portfolios using financial and commodity futures Abstract: Unless a direct hedge is available, cross hedging must be used. In such circumstances portfolio theory implies that a composite hedge (the use of two or more hedging instruments to hedge a single spot position) will be beneficial. The study and use of composite hedging has been neglected; possibly because it requires the estimation of two or more hedge ratios. This paper demonstrates a statistically significant increase in out-of-sample effectiveness from the composite hedging of the Amex Oil Index using S&P500 and New York Mercantile Exchange crude oil futures. This conclusion is robust to the technique used to estimate the hedge ratios, and to allowance for transactions costs, dividends and the maturity of the futures contracts. Journal: The European Journal of Finance Pages: 575-595 Issue: 6 Volume: 18 Year: 2012 Month: 8 X-DOI: 10.1080/1351847X.2011.620253 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.620253 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:6:p:575-595 Template-Type: ReDIF-Article 1.0 Author-Name: Mohammed S. Khaled Author-X-Name-First: Mohammed S. Author-X-Name-Last: Khaled Author-Name: Stephen P. Keef Author-X-Name-First: Stephen P. Author-X-Name-Last: Keef Title: A note on the turn of the month and year effects in international stock returns Abstract: This examination of the turn of the month (TOM) and turn of the year (TOY) effects in 50 international stock indices, for the period 1994--2006, characterises the degree that the effects are influenced by: (i) the gross domestic product of the economy, (ii) the sign of the return on the prior day (called the prior day effect), (iii) a temporal indicator and (iv) the Monday effect. These effects are assessed by the use of an estimated generalised least squares (EGLS) panel regression model incorporating panel-corrected standard errors. Three important results relating to the TOM and TOY effects are observed. When the prior day effect on control days is used as the reference and controls are made for market development and year, we find that: (i) there is a relatively enhanced return on all TOM days, (ii) there is a relatively enhanced return on good TOY days and (iii) returns of bad TOY days are not remarkable. Journal: The European Journal of Finance Pages: 597-602 Issue: 6 Volume: 18 Year: 2012 Month: 7 X-DOI: 10.1080/1351847X.2011.617379 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.617379 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:6:p:597-602 Template-Type: ReDIF-Article 1.0 Author-Name: Emilios C. Galariotis Author-X-Name-First: Emilios C. Author-X-Name-Last: Galariotis Title: Recent evidence on the performance and riskiness of contrarian portfolios Abstract: The paper assesses the most recent performance, persistence and riskiness of contrarian portfolios. Evidence from the major world and European market of France shows that such portfolios appear profitable on average, but their performance is not persistent from one holding period to the next; hence there exist inherent risks, especially for investors that remain in markets for up to two consecutive investment periods. These risks, as measured by the CAPM (traditional, and less traditional versions that are meant to capture timing) and the Fama--French model, are not systematic and they are not related to market timing. Overall, taking only long positions in normal markets and hedged positions following market shocks seems to be the most promising route for contrarians in France. Journal: The European Journal of Finance Pages: 603-617 Issue: 7 Volume: 18 Year: 2012 Month: 9 X-DOI: 10.1080/1351847X.2011.628795 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.628795 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:7:p:603-617 Template-Type: ReDIF-Article 1.0 Author-Name: Nicos Koussis Author-X-Name-First: Nicos Author-X-Name-Last: Koussis Author-Name: Spiros H. Martzoukos Author-X-Name-First: Spiros H. Author-X-Name-Last: Martzoukos Title: Investment options with debt-financing constraints Abstract: A contingent claims model is used to study the impact of debt-financing constraints on firm value, optimal capital structure, the timing of investment and other variables, such as credit spreads. The optimal investment trigger follows a U shape as a function of exogenously imposed constraint. Risky, equity-financed R&D growth options increase firm value by increasing the option value on unlevered assets, while their impact on the net benefits of debt is small. Journal: The European Journal of Finance Pages: 619-637 Issue: 7 Volume: 18 Year: 2012 Month: 8 X-DOI: 10.1080/1351847X.2011.603347 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.603347 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:7:p:619-637 Template-Type: ReDIF-Article 1.0 Author-Name: Ettore Croci Author-X-Name-First: Ettore Author-X-Name-Last: Croci Author-Name: Dimitris Petmezas Author-X-Name-First: Dimitris Author-X-Name-Last: Petmezas Author-Name: Nickolaos Travlos Author-X-Name-First: Nickolaos Author-X-Name-Last: Travlos Title: Asymmetric information and target firm returns Abstract: This article examines the relationship between asymmetric information and target firm returns in mergers and acquisitions (M&As). We argue that if managers possess favourable (unfavourable) asymmetric information, they will offer, ceteris paribus, a high (low) premium, affecting target firm returns accordingly. We propose several proxies of asymmetric information. The empirical evidence strongly supports our hypothesis as we find that target firm returns are significantly negatively related to asymmetric information regarding synergy gains. Our results are robust after controlling for several target and deal characteristics. Journal: The European Journal of Finance Pages: 639-661 Issue: 7 Volume: 18 Year: 2012 Month: 6 X-DOI: 10.1080/1351847X.2011.599850 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.599850 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:7:p:639-661 Template-Type: ReDIF-Article 1.0 Author-Name: George Alexandridis Author-X-Name-First: George Author-X-Name-Last: Alexandridis Author-Name: Christos F. Mavrovitis Author-X-Name-First: Christos F. Author-X-Name-Last: Mavrovitis Author-Name: Nickolaos G. Travlos Author-X-Name-First: Nickolaos G. Author-X-Name-Last: Travlos Title: How have M&As changed? Evidence from the sixth merger wave Abstract: We examine the characteristics of the sixth merger wave that started in 2003 and came to an end approximately in late 2007. The drivers of this wave lie primarily in the availability of abundant liquidity, in line with neoclassical explanations of merger waves. Acquirers were less overvalued relative to targets, and merger proposals comprised higher cash elements. Moreover, the market for corporate control was less competitive, acquirers were less acquisitive, managers displayed less over-optimism and offers involved significantly lower premiums, indicating more cautious and rational acquisition decisions. Strikingly, however, deals destroyed at least as much value for acquiring shareholders as in the 1990s. Journal: The European Journal of Finance Pages: 663-688 Issue: 8 Volume: 18 Year: 2012 Month: 9 X-DOI: 10.1080/1351847X.2011.628401 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.628401 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:8:p:663-688 Template-Type: ReDIF-Article 1.0 Author-Name: Graham Smith Author-X-Name-First: Graham Author-X-Name-Last: Smith Title: The changing and relative efficiency of European emerging stock markets Abstract: The martingale hypothesis is tested for 15 European emerging stock markets located in Croatia, the Czech Republic, Estonia, Hungary, Iceland, Latvia, Lithuania, Malta, Poland, Romania, Russia, the Slovak Republic, Slovenia, Turkey and the Ukraine. For comparative purposes, the developed stock markets in Greece, Portugal and the UK are also included. Rolling window variance ratio tests based on returns and signs and with wild bootstrapped p-values are used with daily data over the period beginning in February 2000 and ending in December 2009. The fixed-length rolling sub-period window captures changes in efficiency and is used to identify events which coincide with departures from weak-form efficiency and to rank markets by relative efficiency. Overall, return predictability varies widely. The most efficient are the Turkish, UK, Hungarian and Polish markets; the least efficient are the Ukrainian, Maltese and Estonian stock markets. The global financial market crisis of 2007--2008 coincides with return predictability in the Croatian, Hungarian, Polish, Portuguese, Slovakian and UK stock markets. However, not all markets were affected: the crisis had little effect on weak-form efficiency in stock markets located in Greece, Latvia, Romania, Russia and Turkey. Journal: The European Journal of Finance Pages: 689-708 Issue: 8 Volume: 18 Year: 2012 Month: 9 X-DOI: 10.1080/1351847X.2011.628682 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.628682 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:8:p:689-708 Template-Type: ReDIF-Article 1.0 Author-Name: Eleimon Gonis Author-X-Name-First: Eleimon Author-X-Name-Last: Gonis Author-Name: Salima Paul Author-X-Name-First: Salima Author-X-Name-Last: Paul Author-Name: Jon Tucker Author-X-Name-First: Jon Author-X-Name-Last: Tucker Title: Rating or no rating? That is the question: an empirical examination of UK companies Abstract: The aim of this paper is to examine the main determinants of the rating likelihood of UK companies. We use a binary probit specification to model the main drivers of a firm's propensity to be rated. Using a sample of 245 non-financial UK companies over the period 1995--2006, representing up to 2872 firm years, the study establishes important differences in the financial profiles of rated and non-rated firms. The results of the rating likelihood models indicate that the decision to obtain a rating is driven by a company's financial risk, solvency, default risk, public debt issuance, R&D, and institutional ownership, thus identifying a wider range of determinants and extending the current literature. The study also finds that the rating decision can be modelled by means of a contemporaneous or predictive specification without any loss of efficiency or classification accuracy. This offers support to the argument that the rating process is fundamentally forward-looking. Journal: The European Journal of Finance Pages: 709-735 Issue: 8 Volume: 18 Year: 2012 Month: 9 X-DOI: 10.1080/1351847X.2011.649215 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.649215 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:8:p:709-735 Template-Type: ReDIF-Article 1.0 Author-Name: H�lena Beltran-Lopez Author-X-Name-First: H�lena Author-X-Name-Last: Beltran-Lopez Author-Name: Joachim Grammig Author-X-Name-First: Joachim Author-X-Name-Last: Grammig Author-Name: Albert J. Menkveld Author-X-Name-First: Albert J. Author-X-Name-Last: Menkveld Title: Limit order books and trade informativeness Abstract: In the microstructure literature, information asymmetry is an important determinant of market liquidity. The classic setting is that uninformed dedicated liquidity suppliers charge price concessions when incoming market orders are likely to be informationally motivated. In limit order book (LOB) markets, however, this relationship is less clear, as market participants can switch roles, and freely choose to immediately demand or patiently supply liquidity by submitting either market or limit orders. We study the importance of information asymmetry in LOBs based on a recent sample of 30 German Deutscher Aktienindex (DAX) stocks. We find that Hasbrouck's (1991) measure of trade informativeness Granger causes book liquidity, in particular that required to fill large market orders. Picking-off risk due to public news-induced volatility is more important for top-of-the book liquidity supply. In our multivariate analysis, we control for volatility, trading volume, trading intensity and order imbalance to isolate the effect of trade informativeness on book liquidity. Journal: The European Journal of Finance Pages: 737-759 Issue: 9 Volume: 18 Year: 2012 Month: 10 X-DOI: 10.1080/1351847X.2011.601651 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601651 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:9:p:737-759 Template-Type: ReDIF-Article 1.0 Author-Name: M. Bonato Author-X-Name-First: M. Author-X-Name-Last: Bonato Author-Name: M. Caporin Author-X-Name-First: M. Author-X-Name-Last: Caporin Author-Name: A. Ranaldo Author-X-Name-First: A. Author-X-Name-Last: Ranaldo Title: A forecast-based comparison of restricted Wishart autoregressive models for realized covariance matrices Abstract: Models for realized covariance matrices may suffer from the curse of dimensionality as more traditional multivariate volatility models (such as GARCH and stochastic volatility). Within the class of realized covariance models, we focus on the Wishart specification introduced by C. Gourieroux, J. Jasiak, and R. Sufana [2009. The Wishart autoregressive process of multivariate stochastic volatility. Journal of Econometrics 150, no. 2: 167--81] and analyze here the forecasting performances of the parametric restrictions discussed in M. Bonato [2009. Estimating the degrees of freedom of the realized volatility Wishart autoregressive model. Manuscript available at http://ssrn.com/abstract=135 7044], which are motivated by asset features such as their economic sector and book-to-market or price-to-earnings ratios, among others. Our purpose is to verify if restricted model forecasts are statistically equivalent to full-model specification, a result that would support the use of restrictions when the problem cross-sectional dimension is large. Journal: The European Journal of Finance Pages: 761-774 Issue: 9 Volume: 18 Year: 2012 Month: 10 X-DOI: 10.1080/1351847X.2011.601629 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601629 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:9:p:761-774 Template-Type: ReDIF-Article 1.0 Author-Name: Laura Coroneo Author-X-Name-First: Laura Author-X-Name-Last: Coroneo Author-Name: David Veredas Author-X-Name-First: David Author-X-Name-Last: Veredas Title: A simple two-component model for the distribution of intraday returns Abstract: We model the conditional distribution of high-frequency financial returns by means of a two-component quantile regression model. Using three years of 30 minute returns, we show that the conditional distribution depends on past returns and on the time of the day. Two practical applications illustrate the usefulness of the model. First, we provide quantile-based measures of conditional volatility, asymmetry and kurtosis that do not depend on the existence of moments. We find seasonal patterns and time dependencies beyond volatility. Second, we estimate and forecast intraday Value at Risk. The two-component model is able to provide good-risk assessments and to outperform GARCH-based Value at Risk evaluations. Journal: The European Journal of Finance Pages: 775-797 Issue: 9 Volume: 18 Year: 2012 Month: 10 X-DOI: 10.1080/1351847X.2011.601649 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601649 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:9:p:775-797 Template-Type: ReDIF-Article 1.0 Author-Name: Jón Daníelsson Author-X-Name-First: Jón Author-X-Name-Last: Daníelsson Author-Name: Richard Payne Author-X-Name-First: Richard Author-X-Name-Last: Payne Title: Liquidity determination in an order-driven market Abstract: We exploit full order level information from an electronic FX broking system to provide a comprehensive account of the determination of its liquidity. We not only look at bid-ask spreads and trading volumes, but also study the determination of order entry rates and depth measures derived from the entire limit order book. We find strong predictability in the arrival of liquidity supply/demand events. Further, in times of low (high) liquidity, liquidity supply (demand) events are more common. In times of high trading activity and volatility, the ratio of limit to market order arrivals is high but order book spreads and depth deteriorate. These results are consistent with market order traders having better information than limit order traders. Journal: The European Journal of Finance Pages: 799-821 Issue: 9 Volume: 18 Year: 2012 Month: 10 X-DOI: 10.1080/1351847X.2011.601654 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601654 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:9:p:799-821 Template-Type: ReDIF-Article 1.0 Author-Name: Jón Daníelsson Author-X-Name-First: Jón Author-X-Name-Last: Daníelsson Author-Name: Jinhui Luo Author-X-Name-First: Jinhui Author-X-Name-Last: Luo Author-Name: Richard Payne Author-X-Name-First: Richard Author-X-Name-Last: Payne Title: Exchange rate determination and inter-market order flow effects Abstract: The dependence of foreign exchange rates on order flow is investigated for four major exchange rate pairs, EUR/USD, EUR/GBP, GBP/USD and USD/JPY, across sampling frequencies ranging from 5 min to 1 week. Strong explanatory power is discovered for all sampling frequencies. We also uncover cross-market order flow effects, e.g. GBP exchange rates are very strongly influenced by EUR/USD order flow. We proceed to investigate the predictive power of order flow for exchange rate changes, and it is shown that the order flow specifications reduce RMSEs relative to a random walk for all exchange rates at high-frequencies and for EUR/USD and USD/JPY at lower sampling frequencies. Journal: The European Journal of Finance Pages: 823-840 Issue: 9 Volume: 18 Year: 2012 Month: 10 X-DOI: 10.1080/1351847X.2011.601655 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601655 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:9:p:823-840 Template-Type: ReDIF-Article 1.0 Author-Name: Alfonso Dufour Author-X-Name-First: Alfonso Author-X-Name-Last: Dufour Author-Name: Minh Nguyen Author-X-Name-First: Minh Author-X-Name-Last: Nguyen Title: Permanent trading impacts and bond yields Abstract: We analyse four years of transaction data for euro-area sovereign bonds traded on the MTS electronic platforms. In order to measure the informational content of trading activity, we estimate the permanent price response to trades. We not only find strong evidence of information asymmetry in sovereign bond markets, but also show the relevance of information asymmetry in explaining the cross-sectional variations of bond yields across a wide range of bond maturities and countries. Our results confirm that trades of more recently issued bonds and longer maturity bonds have a greater permanent effect on prices. We compare the price impact of trades for bonds across different maturity categories and find that trades of French and German bonds have the highest long-term price impact in the short maturity class, whereas trades of German bonds have the highest permanent price impact in the long maturity class. More importantly, we study the cross-section of bond yields and find that after controlling for conventional factors, investors demand higher yields for bonds with larger permanent trading impact. Interestingly, when investors face increased market uncertainty, they require even higher compensation for information asymmetry. Journal: The European Journal of Finance Pages: 841-864 Issue: 9 Volume: 18 Year: 2012 Month: 10 X-DOI: 10.1080/1351847X.2011.601639 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601639 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:9:p:841-864 Template-Type: ReDIF-Article 1.0 Author-Name: Ian W. Marsh Author-X-Name-First: Ian W. Author-X-Name-Last: Marsh Author-Name: Teng Miao Author-X-Name-First: Teng Author-X-Name-Last: Miao Title: High-frequency information content in end-user foreign exchange order flows Abstract: This article considers the impact of foreign exchange (FX) order flows on contemporaneous and future stock market returns using a new database of customer order flows in the euro-dollar exchange rate market as seen by a leading European bank. We do not find clear contemporaneous relationships between FX order flows and stock market changes at high frequencies, but FX flows do appear to have significant power to forecast stock index returns over 1--30 min horizons, after controlling for lagged exchange rate and stock market returns. The effects of order flows from financial customers on future stock market changes are negative, while the effects of corporate orders are positive. The latter results are consistent with the premise that corporate order flows contain dispersed, passively acquired information about fundamentals. Thus, purchases of the dollar by corporate customers represent good news about the state of the US economy. Importantly, though, there also appears to be extra information in corporate flows which is directly relevant to equity prices over and above the impact derived from stock prices reacting to (predicted) exchange rate changes. Our findings suggest that financial customer flows only affect stock prices through their impact on the value of the dollar. Journal: The European Journal of Finance Pages: 865-884 Issue: 9 Volume: 18 Year: 2012 Month: 10 X-DOI: 10.1080/1351847X.2011.601652 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601652 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:9:p:865-884 Template-Type: ReDIF-Article 1.0 Author-Name: Ingmar Nolte Author-X-Name-First: Ingmar Author-X-Name-Last: Nolte Title: A detailed investigation of the disposition effect and individual trading behavior: a panel survival approach Abstract: This article uses a panel survival approach to analyze the trading behavior of foreign exchange traders. We concentrate on a detailed characterization of the shape of the disposition effect over the entire profit and loss regions. In doing so, we investigate the influence of a number of trading characteristics on the impact of the disposition effect. These trading characteristics include: special limit order strategies, trading success, size and the experience of our investors. Our main findings are that (i) the disposition effect has a nonlinear shape. For small profits and losses we find an inverted disposition effect, while for larger ones, the usual positive disposition effect emerges. (ii) The inverted disposition effect is driven to a great extend by patient and cautious investors closing their positions with special limit orders (take-profit and stop-loss). The normal positive disposition effect is found to be intensified for impatient investors closing their positions actively with market orders. (iii) We show that unsuccessful investors reveal a stronger inverse disposition effect. (iv) Evidence that bigger investors are less prone to the disposition effect than smaller investors is also found. Journal: The European Journal of Finance Pages: 885-919 Issue: 10 Volume: 18 Year: 2012 Month: 11 X-DOI: 10.1080/1351847X.2011.601635 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601635 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:885-919 Template-Type: ReDIF-Article 1.0 Author-Name: Ingmar Nolte Author-X-Name-First: Ingmar Author-X-Name-Last: Nolte Author-Name: Sandra Nolte Author-X-Name-First: Sandra Author-X-Name-Last: Nolte Title: How do individual investors trade? Abstract: This paper examines how high-frequency trading decisions of individual investors are influenced by past price changes. Specifically, we address the question as to whether decisions to open or close a position are different when investors already hold a position compared with when they do not. Based on a unique data set from an electronic foreign exchange trading platform, OANDA FXTrade, we find that investors’ future order flow is (significantly) driven by past price movements and that these predictive patterns last up to several hours. This observation clearly shows that for high-frequency trading, investors rely on previous price movements in making future investment decisions. We provide clear evidence that market and limit orders flows are much more predictable if those orders are submitted to close an existing position than if they are used to open one. We interpret this finding as evidence for the existence of a monitoring effect, which has implications for theoretical market microstructure models and behavioral finance phenomena, such as the endowment effect. Journal: The European Journal of Finance Pages: 921-947 Issue: 10 Volume: 18 Year: 2012 Month: 11 X-DOI: 10.1080/1351847X.2011.601647 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601647 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:921-947 Template-Type: ReDIF-Article 1.0 Author-Name: Angel Pardo Author-X-Name-First: Angel Author-X-Name-Last: Pardo Author-Name: Roberto Pascual Author-X-Name-First: Roberto Author-X-Name-Last: Pascual Title: On the hidden side of liquidity Abstract: This article deals with the informativeness of iceberg orders, also known as hidden limit orders (HLOs). Namely, we analyze how the market reacts when the presence of hidden volume in the limit order book is revealed by the trading process. We use high-frequency book and transaction data from the Spanish Stock Exchange, including a large sample of executed HLOs. We show that just when hidden volume is detected, traders on the opposite side of the market become more aggressive, exploiting the opportunity to consume more than expected at the best quotes. However, neither illiquidity nor volatility increases in the short term. Furthermore, the detection of hidden volume has no relevant price impact. Overall, our results suggest that market participants do not attribute any relevant information content to the hidden side of liquidity. Journal: The European Journal of Finance Pages: 949-967 Issue: 10 Volume: 18 Year: 2012 Month: 11 X-DOI: 10.1080/1351847X.2011.601641 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601641 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:949-967 Template-Type: ReDIF-Article 1.0 Author-Name: Erik Theissen Author-X-Name-First: Erik Author-X-Name-Last: Theissen Title: Price discovery in spot and futures markets: a reconsideration Abstract: We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage opportunities to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that (a) the futures market leads in the process of price discovery and (b) the presence of arbitrage opportunities has a strong impact on the dynamics of the price discovery process. Journal: The European Journal of Finance Pages: 969-987 Issue: 10 Volume: 18 Year: 2012 Month: 11 X-DOI: 10.1080/1351847X.2011.601643 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601643 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:969-987 Template-Type: ReDIF-Article 1.0 Author-Name: Paolo Vitale Author-X-Name-First: Paolo Author-X-Name-Last: Vitale Title: Optimal informed trading in the foreign exchange market Abstract: We formulate a market microstructure model of exchange determination that we employ to investigate the impact of informed trading on exchange rates and on foreign exchange (FX) market conditions. With our formulation, we show how strategic informed agents influence exchange rates via both the portfolio-balance and information effects. We outline the connection which exists between the private value of information, market efficiency, liquidity and exchange rate volatility. Our model is also consistent with recent empirical research on the micro-structure of FX markets. Journal: The European Journal of Finance Pages: 989-1013 Issue: 10 Volume: 18 Year: 2012 Month: 11 X-DOI: 10.1080/1351847X.2011.601650 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601650 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:989-1013 Template-Type: ReDIF-Article 1.0 Author-Name: Gunther Wuyts Author-X-Name-First: Gunther Author-X-Name-Last: Wuyts Title: The impact of aggressive orders in an order-driven market: a simulation approach Abstract: This article investigates resiliency in an order-driven market. On basis of a vector autoregressive model capturing various dimensions of liquidity and their interactions, I simulate the effect of a large liquidity shock, measured by a very aggressive market order. I show that, despite the absence of market makers, the market is resilient. All dimensions of liquidity (spread, depth at the best prices and order book imbalances) revert to their steady-state values within 15 orders after the shock. For prices, a long run effect is found. Furthermore, different dimensions of liquidity interact. Immediately after a liquidity shock, the spread becomes wider than in the steady state, implying that one dimension of liquidity deteriorates, while at the same time, depth at the best prices increases, meaning an improvement of another liquidity dimension. In subsequent periods, the spread reverts back to the steady-state level but also depth decreases. Also, I find evidence for asymmetries in the impact of shocks on the ask and bid side. Shocks on the ask side have a stronger impact than shocks on the bid side. Finally, resiliency is higher for less-frequently traded stocks and stocks with a larger relative tick size. Journal: The European Journal of Finance Pages: 1015-1038 Issue: 10 Volume: 18 Year: 2012 Month: 11 X-DOI: 10.1080/1351847X.2011.601631 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601631 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:1015-1038 Template-Type: ReDIF-Article 1.0 Author-Name: Hong Liu Author-X-Name-First: Hong Author-X-Name-Last: Liu Author-Name: John O.S. Wilson Author-X-Name-First: John O.S. Author-X-Name-Last: Wilson Title: Competition and risk in Japanese banking Abstract: We investigate whether the relationship between competition and risk varies across different types of Japanese banks over the period 2000--2009. The results of our empirical investigation show that risk varies across bank types. Specifically, nationwide (City and Trust) banks are riskier on average than their counterparts (Regional, Tier 2 Regional, Shinkin and Credit Cooperative banks) with a regional focus. The relationship between competition and risk also varies across bank types based on different initial levels of risk. Increasing competition appears to reduce the risk of (City) banks with higher initial levels of risk, but increase the risk of their (Regional, Tier 2 Regional, Shinkin and Credit Cooperative) counterparts with lower initial levels of risk. Journal: The European Journal of Finance Pages: 1-18 Issue: 1 Volume: 19 Year: 2013 Month: 1 X-DOI: 10.1080/1351847X.2011.633614 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.633614 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:1:p:1-18 Template-Type: ReDIF-Article 1.0 Author-Name: Panagiotis Andrikopoulos Author-X-Name-First: Panagiotis Author-X-Name-Last: Andrikopoulos Author-Name: James Clunie Author-X-Name-First: James Author-X-Name-Last: Clunie Author-Name: Antonios Siganos Author-X-Name-First: Antonios Author-X-Name-Last: Siganos Title: Short-selling constraints and ‘quantitative’ investment strategies Abstract: This study uses stock lending data from Data Explorers to assess the impact of short-selling constraints on the profitability of eight investment strategies. Returns from unconstrained long--short portfolios are compared with those from ‘feasible’ portfolios, constrained to short-selling only those shares that can be borrowed. We find that only a small percentage of the firms identified by Datastream for short-selling are available for lending, but our results suggest that differences in profitability between unconstrained and feasible strategies are statistically insignificant. We also find that the stock borrowing fee for the majority of the strategies is normally less than 1% per annum, showing that prior UK studies, which assumed that the short-selling fee is flat at 1.50% per annum, have overestimated such cost. Overall, these results indicate that stock loan unavailability and stock borrowing fees do not explain the persistence of returns from anomaly-exploiting quantitative investment strategies in the UK stock market. Journal: The European Journal of Finance Pages: 19-35 Issue: 1 Volume: 19 Year: 2013 Month: 1 X-DOI: 10.1080/1351847X.2011.634426 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.634426 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:1:p:19-35 Template-Type: ReDIF-Article 1.0 Author-Name: Nicholas Taylor Author-X-Name-First: Nicholas Author-X-Name-Last: Taylor Title: A formula for the economic value of return predictability Abstract: This paper provides a formula for a commonly used measure of the economic value of asset return predictability. In doing this, we find that there is a strong connection between this measure and a traditional statistical measure of predictive quality. In particular, we demonstrate that the maximum amount an investor is willing to pay for predictability knowledge (the performance fee) is a simple transformation of the R -super-2 statistic associated with the predictor equation. We illustrate the use of these results with an application to the Ibbotson US bond and equity data (and a set of pertinent predictors), and via application to the results published in Fama and French [1988. Dividend yields and expected stock returns. Journal of Financial Economics 22: 3--25], Balvers, Cosimano, and McDonald [1990. Predicting stock returns in an efficient market. Journal of Finance 45: 1109--28], Lettau and Ludvigson [2001. Consumption, aggregate wealth and expected stock returns. Journal of Finance 56: 815--49], and Santa-Clara and Yan [2010. Crashes, volatility, and the equity premium: Lessons from S&P 500 options. Review of Economics and Statistics 92: 435--51]. Journal: The European Journal of Finance Pages: 37-53 Issue: 1 Volume: 19 Year: 2013 Month: 1 X-DOI: 10.1080/1351847X.2011.640340 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.640340 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:1:p:37-53 Template-Type: ReDIF-Article 1.0 Author-Name: Giampaolo Gabbi Author-X-Name-First: Giampaolo Author-X-Name-Last: Gabbi Author-Name: Pietro Vozzella Author-X-Name-First: Pietro Author-X-Name-Last: Vozzella Title: Asset correlations and bank capital adequacy Abstract: This paper addresses the estimation of confidence sets for asset correlations used in credit risk portfolio models. Research on the estimation of asset correlations using endogenous probabilities of default estimations has focused on the impact of concentration risk factors, such as firm size and industry. The empirical evidence from Italian small- and medium-size companies show that the assumptions underlying the Basel Committee regulatory capital risk weight function are not substantiated. The regulatory impact is that the capital adequacy is significantly compromised, driving an adverse selection, which favors the worst companies, and transferring the procyclical effects from firms to banks. Journal: The European Journal of Finance Pages: 55-74 Issue: 1 Volume: 19 Year: 2013 Month: 1 X-DOI: 10.1080/1351847X.2012.659266 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.659266 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:1:p:55-74 Template-Type: ReDIF-Article 1.0 Author-Name: Sebastian Garmann Author-X-Name-First: Sebastian Author-X-Name-Last: Garmann Author-Name: Peter Grundke Author-X-Name-First: Peter Author-X-Name-Last: Grundke Title: On the influence of autocorrelation and GARCH-effects on goodness-of-fit tests for copulas Abstract: Knowing the multivariate stochastic dependence between random variables is of crucial importance for many finance applications. To check the adequacy of copula assumptions by which stochastic dependencies can be described, goodness-of-fit (gof) tests have to be carried out. These tests require (serially) independent and identically distributed (i.i.d.) data as input. Due to autocorrelations and time-varying conditional volatilities, this prerequisite is usually not fulfilled by financial market returns. Within a simulation study, we analyze the influence of these violations of the i.i.d.-prerequisite on the rejection rates of gof tests. We find that in many cases the rejection rates are significantly different for non-i.i.d. data input than for adequately filtered data input. This finding questions the conclusions of early empirical studies applying gof tests for copulas to data without adequately filtering it before. Only in the majority of those constellations that in general yield very low rejection rates, no significant differences have been revealed. Journal: The European Journal of Finance Pages: 75-88 Issue: 1 Volume: 19 Year: 2013 Month: 1 X-DOI: 10.1080/1351847X.2012.676558 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.676558 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:1:p:75-88 Template-Type: ReDIF-Article 1.0 Author-Name: Andrew Marshall Author-X-Name-First: Andrew Author-X-Name-Last: Marshall Author-Name: Martin Kemmitt Author-X-Name-First: Martin Author-X-Name-Last: Kemmitt Author-Name: Helena Pinto Author-X-Name-First: Helena Author-X-Name-Last: Pinto Title: The determinants of foreign exchange hedging in Alternative Investment Market firms Abstract: This paper examines the foreign exchange (FX) hedging by firms listed on the Alternative Investment Market (AIM) in the UK to contribute to the empirical debate on the determinants of the FX hedging. Despite our selection criteria that all our firms have exposure to FX risk, we find that only around a third of our sample hedge their FX risk. Contrary to expectations, we find a significant negative relation between hedging and the extent of managerial ownership of the firm. This could be explained by the particular agency relations in AIM firms, the significant managerial ownership of these firms or managers’ overconfidence. We find that the larger of the AIM firms in our sample hedge more, indicating that despite the FX risks they face, some of the smaller AIM firms lack financial knowledge or understanding to deal with their potential FX risks. Finally, we find an industry effect in the decision to hedge as AIM firms in the basic material and financial sectors are less likely to hedge FX risk than other sectors Our results are robust to a number of further checks. Journal: The European Journal of Finance Pages: 89-111 Issue: 2 Volume: 19 Year: 2013 Month: 2 X-DOI: 10.1080/1351847X.2012.659267 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.659267 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:2:p:89-111 Template-Type: ReDIF-Article 1.0 Author-Name: Montserrat Ferr� Author-X-Name-First: Montserrat Author-X-Name-Last: Ferr� Author-Name: Carolina Manzano Author-X-Name-First: Carolina Author-X-Name-Last: Manzano Title: Central bank coordinated intervention: a microstructure approach Abstract: In this article, we develop a theoretical microstructure model of coordinated central bank intervention based on asymmetric information. We also set up a game where central banks will choose whether to intervene unilaterally or in a coordinated manner, and we study the conditions under which they prefer to coordinate. Finally, we study the economic implications of coordination on some measures of market quality and show that the model predicts higher volatility and more significant exchange rate changes when central banks coordinate compared to the case when they intervene unilaterally. These predictions are in line with empirical evidence. Further, the effects of coordinated intervention are, from a social point of view, more desirable than those of unilateral intervention. Journal: The European Journal of Finance Pages: 113-126 Issue: 2 Volume: 19 Year: 2013 Month: 2 X-DOI: 10.1080/1351847X.2012.660535 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.660535 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:2:p:113-126 Template-Type: ReDIF-Article 1.0 Author-Name: Stephan Jank Author-X-Name-First: Stephan Author-X-Name-Last: Jank Author-Name: Michael Wedow Author-X-Name-First: Michael Author-X-Name-Last: Wedow Title: Purchase and redemption decisions of mutual fund investors and the role of fund families Abstract: This paper investigates the purchases and redemptions of a large cross-sectional sample of German equity funds. We find that investors not only punish bad performance by selling their shares, but also have a tendency to sell winners. Investors in large fund families show higher sales and redemption rates. Furthermore, family size also affects the flow-performance relationship: investors in large families punish bad performance more. Last, we find that inner family rankings play an important part for redemptions, with investors strongly redeeming their shares from intra-family losers. This result provides a potential reconciliation to the apparent contradiction between the low average holding period of mutual fund investors and the lack of investor discipline. Journal: The European Journal of Finance Pages: 127-144 Issue: 2 Volume: 19 Year: 2013 Month: 2 X-DOI: 10.1080/1351847X.2012.662908 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.662908 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:2:p:127-144 Template-Type: ReDIF-Article 1.0 Author-Name: Georges Dionne Author-X-Name-First: Georges Author-X-Name-Last: Dionne Author-Name: Thouraya Triki Author-X-Name-First: Thouraya Author-X-Name-Last: Triki Title: On risk management determinants: what really matters? Abstract: We develop a theoretical model in which debt and hedging decisions are made simultaneously, and test its predictions empirically. To address inefficiencies in current estimation methods for simultaneous equations with censored dependent variables, we build an original estimation technique based on the minimum distance estimator. Consistent with predictions drawn from our theoretical model, we show that more hedging does not always lead to a higher debt capacity. We also find that financial distress costs, information asymmetry, the presence of financial slack, corporate governance, and managerial risk aversion are important determinants of corporate hedging. Overall, our evidence shows that modeling hedging and leverage as simultaneous decisions makes a difference in analyzing corporate hedging determinants. Journal: The European Journal of Finance Pages: 145-164 Issue: 2 Volume: 19 Year: 2013 Month: 2 X-DOI: 10.1080/1351847X.2012.664156 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.664156 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:2:p:145-164 Template-Type: ReDIF-Article 1.0 Author-Name: Georgios Sermpinis Author-X-Name-First: Georgios Author-X-Name-Last: Sermpinis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Christian L. Dunis Author-X-Name-First: Christian L. Author-X-Name-Last: Dunis Title: Modelling and trading the realised volatility of the FTSE100 futures with higher order neural networks Abstract: The motivation for this article is the investigation of the use of a promising class of neural network (NN) models, higher order neural networks (HONNs), when applied to the task of forecasting and trading the 21-day-ahead realised volatility of the FTSE 100 futures index. This is done by benchmarking their results with those of two different NN designs, the multi-layer perceptron (MLP) and the recurrent neural network (RNN), along with a traditional technique, RiskMetrics. More specifically, the forecasting and trading performance of all models is examined over the eight FTSE 100 futures maturities of the period 2007--2008 using the realised volatility of the last 21 trading days of each maturity as the out-of-sample target. The statistical evaluation of our models is done by using a series of measures such as the mean absolute error, the mean absolute percentage error, the root-mean-squared error and the Theil U-statistic. Then we apply a simple trading strategy to exploit our forecasts based on trading at-the-money call options on FTSE 100 futures. As it turns out, HONNs demonstrate a remarkable performance and outperform all other models not only in terms of statistical accuracy but also in terms of trading efficiency. We also note that both the RNNs and MLPs provide sufficient results in the trading application in terms of cumulative profit and average profit per trade. Journal: The European Journal of Finance Pages: 165-179 Issue: 3 Volume: 19 Year: 2013 Month: 3 X-DOI: 10.1080/1351847X.2011.606990 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.606990 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:3:p:165-179 Template-Type: ReDIF-Article 1.0 Author-Name: Christian L. Dunis Author-X-Name-First: Christian L. Author-X-Name-Last: Dunis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Andreas Karathanasopoulos Author-X-Name-First: Andreas Author-X-Name-Last: Karathanasopoulos Title: GP algorithm versus hybrid and mixed neural networks Abstract: In the current paper, we present an integrated genetic programming (GP) environment called java GP modelling. The java GP modelling environment is an implementation of the steady-state GP algorithm. This algorithm evolves tree-based structures that represent models of inputs and outputs. The motivation of this paper is to compare the GP algorithm with neural network (NN) architectures when applied to the task of forecasting and trading the ASE 20 Greek Index (using autoregressive terms as inputs). This is done by benchmarking the forecasting performance of the GP algorithm and six different autoregressive moving average model (ARMA) NN combination designs representing a Hybrid, Mixed Higher Order Neural Network (HONN), a Hybrid, Mixed Recurrent Neural Network (RNN), a Hybrid, Mixed classic Multilayer Perceptron with some traditional techniques, either statistical such as a an ARMA or technical such as a moving average convergence/divergence model, and a naïve trading strategy. More specifically, the trading performance of all models is investigated in a forecast and trading simulation on ASE 20 time-series closing prices over the period 2001--2008, using the last one and a half years for out-of-sample testing. We use the ASE 20 daily series as many financial institutions are ready to trade at this level, and it is therefore possible to leave orders with a bank for business to be transacted on that basis. As it turns out, the GP model does remarkably well and outperforms all other models in a simple trading simulation exercise. This is also the case when more sophisticated trading strategies using confirmation filters and leverage are applied, as the GP model still produces better results and outperforms all other NN and traditional statistical models in terms of annualized return. Journal: The European Journal of Finance Pages: 180-205 Issue: 3 Volume: 19 Year: 2013 Month: 3 X-DOI: 10.1080/1351847X.2012.679740 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.679740 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:3:p:180-205 Template-Type: ReDIF-Article 1.0 Author-Name: Hamad Alsayed Author-X-Name-First: Hamad Author-X-Name-Last: Alsayed Author-Name: Frank McGroarty Author-X-Name-First: Frank Author-X-Name-Last: McGroarty Title: Optimal portfolio selection in nonlinear arbitrage spreads Abstract: This paper analytically solves the portfolio optimization problem of an investor faced with a risky arbitrage opportunity (e.g. relative mispricing in equity pairs). Unlike the extant literature, which typically models mispricings through the Ornstein--Uhlenbeck (OU) process, we introduce a nonlinear generalization of OU which jointly captures several important risk factors inherent in arbitrage trading. While these factors are absent from the standard OU, we show that considering them yields several new insights into the behavior of rational arbitrageurs: Firstly, arbitrageurs recognizing these risk factors exhibit a diminishing propensity to exploit large mispricings. Secondly, optimal investment behavior in light of these risk factors precipitates the gradual unwinding of losing trades far sooner than is entailed in existing approaches including OU. Finally, an empirical application to daily FTSE100 pairs data shows that incorporating these risks renders our model's risk-management capabilities superior to both OU and a simple threshold strategy popular in the literature. These observations are useful in understanding the role of arbitrageurs in enforcing price efficiency. Journal: The European Journal of Finance Pages: 206-227 Issue: 3 Volume: 19 Year: 2013 Month: 3 X-DOI: 10.1080/1351847X.2012.659265 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.659265 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:3:p:206-227 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Hanke Author-X-Name-First: Michael Author-X-Name-Last: Hanke Author-Name: Michael Kirchler Author-X-Name-First: Michael Author-X-Name-Last: Kirchler Title: Football championships and jersey sponsors’ stock prices: an empirical investigation Abstract: Corporate sports sponsorship is an important part of many companies’ corporate communication strategy. In this paper, we take the example of major football tournaments to show that sponsorship indeed affects the sponsor's (stock) market value. We find a statistically significant impact of football results (at an individual match level) of the seven most important football nations at European and World Championships on the stock prices of jersey sponsors. In general, the more important a match and the less expected its result, the higher its impact. In addition, we find a form of ‘mere-exposure’ effect which is difficult to reconcile with the efficient markets hypothesis. Journal: The European Journal of Finance Pages: 228-241 Issue: 3 Volume: 19 Year: 2013 Month: 3 X-DOI: 10.1080/1351847X.2012.659268 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.659268 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:3:p:228-241 Template-Type: ReDIF-Article 1.0 Author-Name: Szabolcs Blazsek Author-X-Name-First: Szabolcs Author-X-Name-Last: Blazsek Author-Name: Anna Downarowicz Author-X-Name-First: Anna Author-X-Name-Last: Downarowicz Title: Forecasting hedge fund volatility: a Markov regime-switching approach Abstract: The article addresses forecasting volatility of hedge fund (HF) returns by using a non-linear Markov-Switching GARCH (MS-GARCH) framework. The in- and out-of-sample, multi-step ahead volatility forecasting performance of GARCH(1,1) and MS-GARCH(1,1) models is compared when applied to 12 global HF indices over the period of January 1990 to October 2010. The results identify different regimes with periods of high and low volatility for most HF indices. In-sample estimation results reveal a superior performance of the MS-GARCH model. The findings show that regime switching is related to structural changes in the market factor for most strategies. Out-of-sample forecasting shows that the MS-GARCH formulation provides more accurate volatility forecasts for most forecast horizons and for most HF strategies. Inclusion of MS dynamics in the GARCH specification highly improves the volatility forecasts for those strategies that are particularly sensitive to general macroeconomic conditions, such as Distressed Restructuring and Merger Arbitrage. Journal: The European Journal of Finance Pages: 243-275 Issue: 4 Volume: 19 Year: 2013 Month: 4 X-DOI: 10.1080/1351847X.2011.653576 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.653576 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:4:p:243-275 Template-Type: ReDIF-Article 1.0 Author-Name: Chien-Chiang Lee Author-X-Name-First: Chien-Chiang Author-X-Name-Last: Lee Author-Name: Ching-Chuan Tsong Author-X-Name-First: Ching-Chuan Author-X-Name-Last: Tsong Author-Name: Shih-Jui Yang Author-X-Name-First: Shih-Jui Author-X-Name-Last: Yang Author-Name: Chi-Hung Chang Author-X-Name-First: Chi-Hung Author-X-Name-Last: Chang Title: Investigating the stationarity of insurance premiums: international evidence Abstract: This article explores whether there is support for the stationarity hypotheses of life and non-life insurance premiums during the period 1979--2007 for 40 heterogeneous countries. The stationarity of insurance premiums affects insurance companies’ prediction on their future inflow of premium income, which affects the liquidity of insurance companies and their investment plans and thus is relevant to the insurers’ operation. This article employs the advanced nonlinear panel unit-root test with a sequential panel selection method to classify the entire panel into two groups: stationary countries and non-stationary countries. We apply Monte Carlo simulations to derive empirical distributions of the test, which allows us to correct for the finite-sample bias and to consider the cross-country effects. We find relatively stationary life insurance premiums in countries from the following groups: high-income, Europe, and common law origin; relatively stationary non-life insurance premiums exist in the following groups: low-income, Middle East and Africa, and common law origin. Evidence herein shows that different classifications, including income levels, geographic regions, regionally or economically integrated blocs, and legal system, affect the stationarity of life and non-life insurance premiums. Journal: The European Journal of Finance Pages: 276-297 Issue: 4 Volume: 19 Year: 2013 Month: 4 X-DOI: 10.1080/1351847X.2011.653577 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.653577 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:4:p:276-297 Template-Type: ReDIF-Article 1.0 Author-Name: Ioulia D. Ioffe Author-X-Name-First: Ioulia D. Author-X-Name-Last: Ioffe Author-Name: Eliezer Z. Prisman Author-X-Name-First: Eliezer Z. Author-X-Name-Last: Prisman Title: Arbitrage violations and implied valuations: the option market Abstract: The ideas presented in this paper are those of the authors and not necessarily reflect the views of the National bank of Canada. Both authors thank the National Bank of Canada and the SSHRC of Canada for their help. Thanks are also due to Professor Y. Tian for his comments, and for participating, together with students of the Financial Engineering program at York University, in the data preparation and the execution of the Matlab programs. In this paper, we propose a necessary and sufficient condition for bid and ask prices of European options to be free of arbitrage, and derive from it an efficient numerical methodology to determine its satisfaction by a given set of prices. If the bid and ask prices satisfy the no-arbitrage (NA) condition, our methodology produces a vector of NA prices that lie between the bid and ask prices. Otherwise, our methodology generates a vector of arbitrage-free prices that is as close as possible, in some sense, to the bid--ask strip. The arbitrage-free prices detected by our methodology render the commonly used practice of using mid-points and then ‘cleaning’ arbitrage from them as unnecessary. Moreover, a vector of ‘cleaned’ prices obtained from mid-point prices may be outside the bid--ask spread even in an arbitrage-free market and, hence, in this case will not be representative of the current market. A new procedure of estimating implied valuation operators is also suggested here. This procedure is rooted in the economic properties of put and call prices and is based on Phillips and Taylor's approximation of a convex function. This approach is superior to common estimation techniques in that it produces an analytical expression for the implied valuation operator and is not data intensive as some other studies. Empirical findings for the new methods are documented and their economic implications are discussed. Journal: The European Journal of Finance Pages: 298-317 Issue: 4 Volume: 19 Year: 2013 Month: 4 X-DOI: 10.1080/1351847X.2012.672440 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.672440 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:4:p:298-317 Template-Type: ReDIF-Article 1.0 Author-Name: Tom Aabo Author-X-Name-First: Tom Author-X-Name-Last: Aabo Author-Name: Christos Pantzalis Author-X-Name-First: Christos Author-X-Name-Last: Pantzalis Author-Name: Maja Stoholm S?rensen Author-X-Name-First: Maja Stoholm Author-X-Name-Last: S?rensen Title: Game hoarding in Europe: stock-price consequences of local bias? Abstract: Local bias within a country and between countries is well established in the empirical literature. However, the underlying reasons are less well established. In a simple supply and demand framework, Hong, Kubik, and Stein (hereafter HKS) [2008. The only game in town: Stock-price consequences of local bias. Journal of Financial Economics 90, no. 1: 20--37.] find an ‘only-game-in-town’ effect in the USA -- the stock price in a region decreases in the ratio of aggregate book value of listed firms to the aggregate personal income (‘RATIO’). We first replicate the HKS (2008) study using European data and find an opposite effect, a ‘game-hoarding’ effect. We then investigate the underlying factors of RATIO and find that after controlling for differences in origin of law, investor rights, corruption and Euro adoption, neither a game-hoarding effect nor an only-game-in-town effect is strongly supported in the European case. The results are important in understanding the concept of local bias in a cross-country framework. Journal: The European Journal of Finance Pages: 318-335 Issue: 4 Volume: 19 Year: 2013 Month: 4 X-DOI: 10.1080/1351847X.2012.689775 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.689775 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:4:p:318-335 Template-Type: ReDIF-Article 1.0 Author-Name: C. Kyrtsou Author-X-Name-First: C. Author-X-Name-Last: Kyrtsou Author-Name: D. Sornette Author-X-Name-First: D. Author-X-Name-Last: Sornette Title: Editorial introduction: ‘new facets of the economic complexity in modern financial markets’ Journal: The European Journal of Finance Pages: 337-343 Issue: 5 Volume: 19 Year: 2013 Month: 5 X-DOI: 10.1080/1351847X.2012.723282 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.723282 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:5:p:337-343 Template-Type: ReDIF-Article 1.0 Author-Name: L. Lin Author-X-Name-First: L. Author-X-Name-Last: Lin Author-Name: D. Sornette Author-X-Name-First: D. Author-X-Name-Last: Sornette Title: Diagnostics of rational expectation financial bubbles with stochastic mean-reverting termination times Abstract: We propose two rational expectation models of transient financial bubbles with heterogeneous arbitrageurs and positive feedbacks leading to self-reinforcing transient stochastic faster-than-exponential price dynamics. As a result of the nonlinear feedbacks, the termination of a bubble is found to be characterized by a finite-time singularity in the bubble price formation process ending at some potential critical time [ttilde] c, which follows a mean-reverting stationary dynamics. Because of the heterogeneity of the rational agents’ expectations, there is a synchronization problem for the optimal exit times determined by these arbitrageurs, which leads to the survival of the bubble almost all the way to its theoretical end time. The explicit exact analytical solutions of the two models provide nonlinear transformations which allow us to develop novel tests for the presence of bubbles in financial time series. Avoiding the difficult problem of parameter estimation of the stochastic differential equation describing the price dynamics, the derived operational procedures allow us to diagnose bubbles that are in the making and to forecast their termination time. The tests have been performed on four financial markets, the US S&P500 index from 1 February 1980 to 31 October 2008, the US NASDAQ Composite index from 1 January 1980 to 31 July 2008, the Hong Kong Hang Seng index from 1 December 1986 to 30 November 2008 and the US Dow Jones Industrial Average Index from 3 January 1920 to 31 December 1931. Our results suggest the feasibility of advance bubble warning using stochastic models that embody the mechanism of positive feedback. Journal: The European Journal of Finance Pages: 344-365 Issue: 5 Volume: 19 Year: 2013 Month: 5 X-DOI: 10.1080/1351847X.2011.607004 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.607004 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:5:p:344-365 Template-Type: ReDIF-Article 1.0 Author-Name: Petr Geraskin Author-X-Name-First: Petr Author-X-Name-Last: Geraskin Author-Name: Dean Fantazzini Author-X-Name-First: Dean Author-X-Name-Last: Fantazzini Title: Everything you always wanted to know about log-periodic power laws for bubble modeling but were afraid to ask Abstract: Sornette, Johansen, and Bouchaud (1996), Sornette and Johansen (1997), Johansen, Ledoit, and Sornette (2000) and Sornette (2003a) proposed that, prior to crashes, the mean function of a stock index price time series is characterized by a power law decorated with log-periodic oscillations, leading to a critical point that describes the beginning of the market crash. This article reviews the original log-periodic power law model for financial bubble modeling and discusses early criticism and recent generalizations proposed to answer these remarks. We show how to fit these models with alternative methodologies, together with diagnostic tests and graphical tools, to diagnose financial bubbles in the making in real time. An application of this methodology to the gold bubble which burst in December 2009 is then presented. Journal: The European Journal of Finance Pages: 366-391 Issue: 5 Volume: 19 Year: 2013 Month: 5 X-DOI: 10.1080/1351847X.2011.601657 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601657 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:5:p:366-391 Template-Type: ReDIF-Article 1.0 Author-Name: Carl Chiarella Author-X-Name-First: Carl Author-X-Name-Last: Chiarella Author-Name: Xue-Zhong He Author-X-Name-First: Xue-Zhong Author-X-Name-Last: He Author-Name: Min Zheng Author-X-Name-First: Min Author-X-Name-Last: Zheng Title: Heterogeneous expectations and exchange rate dynamics Abstract: This article presents a continuous-time model of exchange rates not only relying on macroeconomic factors but also having an investor heterogeneity component. The driving macroeconomic factor is the domestic--foreign interest rate differential, while the investor heterogeneity is described by the expectations of boundedly rational portfolio managers who use a weighted average of the expectations of fundamentalists and chartists. Within this framework, the different roles of the macroeconomic factor and investor heterogeneity in the determination of the exchange rate are examined explicitly. We show that this simple model generates very complicated market behaviour, including the existence of multiple steady-state equilibria, deviations of the market exchange rate from the fundamental one and market fluctuations. Numerical simulation of the corresponding stochastic version of the model shows that the model is able to generate typical time series and volatility clustering patterns observed in exchange rate markets. Journal: The European Journal of Finance Pages: 392-419 Issue: 5 Volume: 19 Year: 2013 Month: 5 X-DOI: 10.1080/1351847X.2011.601690 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601690 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:5:p:392-419 Template-Type: ReDIF-Article 1.0 Author-Name: Weihong Huang Author-X-Name-First: Weihong Author-X-Name-Last: Huang Author-Name: Huanhuan Zheng Author-X-Name-First: Huanhuan Author-X-Name-Last: Zheng Author-Name: Wai-Mun Chia Author-X-Name-First: Wai-Mun Author-X-Name-Last: Chia Title: Asymmetric returns, gradual bubbles and sudden crashes Abstract: By applying the deterministic heterogenous agent model developed by Huang et al. [Financial crises and interacting heterogeneous agents. Journal of Economic Dynamics and Control 34, no. 6: 1105--22], this paper examines the phenomena of asymmetric returns, gradual bubbles and sudden crashes. It shows that (i) returns are asymmetric because the most positive returns initiated by fundamentalist are attenuated by the selling force of chartists, while the most negative return initiated by chartists is hardly affected by the buying force of fundamentalists; (ii) bubbles arise gradually while crashes happen suddenly as the upward price movements are counterbalanced while the downward movements are enhanced by fundamentalists. It also shows for the first time that deterministic dynamic model can simultaneously generate a wide range of stylized facts common across financial markets, including those hardly duplicated by current heterogeneous agent models, such as long-range dependence. Journal: The European Journal of Finance Pages: 420-437 Issue: 5 Volume: 19 Year: 2013 Month: 5 X-DOI: 10.1080/1351847X.2011.606993 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.606993 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:5:p:420-437 Template-Type: ReDIF-Article 1.0 Author-Name: Kartik Anand Author-X-Name-First: Kartik Author-X-Name-Last: Anand Author-Name: Alan Kirman Author-X-Name-First: Alan Author-X-Name-Last: Kirman Author-Name: Matteo Marsili Author-X-Name-First: Matteo Author-X-Name-Last: Marsili Title: Epidemics of rules, rational negligence and market crashes Abstract: Structural changes in an economy or in financial markets can arise as a result of agents adopting rules that appear to be the norm around them. Such rules are adopted by implicit consensus as they turn out to be profitable for individuals. However, as rules develop and spread they may have consequences at the aggregate level which are not anticipated by individuals. To illustrate this, we develop a simple model, motivated by the 2007--2008 crisis in credit derivatives markets. This shows how coordination on simple and apparently profitable rules may weaken regulatory constraints, rendering the whole system more fragile. The rule, in the specific example, consists in deciding not to exercise due diligence in the evaluation of complex credit derivative products, free riding on information and operational costs. We show that such "rational negligence", in the face of deteriorating macro-economic conditions, can bring a market to a sudden collapse. Journal: The European Journal of Finance Pages: 438-447 Issue: 5 Volume: 19 Year: 2013 Month: 5 X-DOI: 10.1080/1351847X.2011.601872 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601872 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:5:p:438-447 Template-Type: ReDIF-Article 1.0 Author-Name: S. Alfarano Author-X-Name-First: S. Author-X-Name-Last: Alfarano Author-Name: M. Milakovic Author-X-Name-First: M. Author-X-Name-Last: Milakovic Author-Name: M. Raddant Author-X-Name-First: M. Author-X-Name-Last: Raddant Title: A note on institutional hierarchy and volatility in financial markets Abstract: From a statistical point of view, the prevalence of non-Gaussian distributions in financial returns and their volatilities shows that the Central Limit Theorem (CLT) often does not apply in financial markets. In this article, we take the position that the independence assumption of the CLT is violated by herding tendencies among market participants, and investigate whether a generic probabilistic herding model can reproduce non-Gaussian statistics in systems with a large number of agents. It is well known that the presence of a herding mechanism in the model is not sufficient for non-Gaussian properties, which crucially depend on the details of the communication network among agents. The main contribution of this article is to show that certain hierarchical networks, which portray the institutional structure of fund investment, warrant non-Gaussian properties for any system size and even lead to an increase in system-wide volatility. Viewed from this perspective, the mere existence of financial institutions with socially interacting managers contributes considerably to financial volatility. Journal: The European Journal of Finance Pages: 449-465 Issue: 6 Volume: 19 Year: 2013 Month: 7 X-DOI: 10.1080/1351847X.2011.601871 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601871 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:6:p:449-465 Template-Type: ReDIF-Article 1.0 Author-Name: David Brookfield Author-X-Name-First: David Author-X-Name-Last: Brookfield Author-Name: Halim Boussabaine Author-X-Name-First: Halim Author-X-Name-Last: Boussabaine Author-Name: Chen Su Author-X-Name-First: Chen Author-X-Name-Last: Su Title: Identifying reference companies using the book-to-market ratio: a minimum spanning tree approach Abstract: There is substantial evidence to suggest that the book-to-market (BM) ratio is an important factor in explaining stock market returns. Its role has proved difficult to isolate, however, due to statistical problems in its construction and to its observational equivalence to a number of risk and behavioural explanations. In addition, now widely recognised complex behaviour in financial markets has called into question modelling approaches that are limited in their ability to uncover relationships that are possibly masked during financial crises, for example. As one response, our research explores the value of a newly applied technique which examines the topological properties of minimum spanning trees as applied to both the BM ratio and market returns. Our intention is to identify and report investment signals as determined by the BM ratio and to assess the relationships of these signals to returns outcomes. The approach enables highly nonlinear behaviour to be addressed and the relationships we set out to capture to be reported in novel ways. We motivate and evidence a previously unreported role for BM as an investment signal which is effective over varying stock market conditions, including the financial crisis that began in 2008. Journal: The European Journal of Finance Pages: 466-490 Issue: 6 Volume: 19 Year: 2013 Month: 7 X-DOI: 10.1080/1351847X.2011.637571 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.637571 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:6:p:466-490 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Wenzelburger Author-X-Name-First: Jan Author-X-Name-Last: Wenzelburger Title: Risk sharing in a financial market with endogenous option prices Abstract: This article investigates a financial market in which investors may trade in risk-free bonds, stock and put options written on the stock. In each period, stock and option prices are simultaneously determined by market clearing. While the introduction of put options will decrease the systematic risk in the financial market, it will increase the price of risk. Investors with mean-variance preferences will generally hold portfolios containing the primary asset and the put option and may use the option to increase the risk in their wealth position in exchange for higher returns. Aggregate wealth is unaffected by an option market when there are no spillover effects on stock prices, and it is shown that short selling of options will increase the volatility of individual wealth positions. Investors with erroneous beliefs may on average be better off not trading in put options. Journal: The European Journal of Finance Pages: 491-517 Issue: 6 Volume: 19 Year: 2013 Month: 7 X-DOI: 10.1080/1351847X.2011.606989 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.606989 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:6:p:491-517 Template-Type: ReDIF-Article 1.0 Author-Name: Shady Aboul-Enein Author-X-Name-First: Shady Author-X-Name-Last: Aboul-Enein Author-Name: Georges Dionne Author-X-Name-First: Georges Author-X-Name-Last: Dionne Author-Name: Nicolas Papageorgiou Author-X-Name-First: Nicolas Author-X-Name-Last: Papageorgiou Title: Performance analysis of a collateralized fund obligation (CFO) equity tranche Abstract: This article examines the performance of the junior tranche of a collateralized fund obligation (CFO), i.e. the residual claim (equity) on a securitized portfolio of hedge funds. We use a polynomial goal programming model to create optimal portfolios of hedge funds, conditional to investor preferences and diversification constraints (maximum allocation per strategy). For each portfolio, we build CFO structures that have different levels of leverage, and analyze both the stand-alone performance as well as potential diversification benefits (low systematic risk exposures) of investing in the equity tranche of these structures. We find that the unconstrained mean-variance portfolio yields a high performance, but greater exposure to systematic risk. We observe the exact opposite picture in the case of unconstrained optimization, where a skewness bias is added, thus proving the existence of a trade-off between stand-alone performance and low exposure to systematic risk factors. We provide evidence that leveraged exposure to these hedge fund portfolios through the structuring of CFOs creates value for the equity tranche investor, even during the recent financial crisis. Journal: The European Journal of Finance Pages: 518-553 Issue: 6 Volume: 19 Year: 2013 Month: 7 X-DOI: 10.1080/1351847X.2011.601666 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601666 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:6:p:518-553 Template-Type: ReDIF-Article 1.0 Author-Name: Fabio Caccioli Author-X-Name-First: Fabio Author-X-Name-Last: Caccioli Author-Name: Susanne Still Author-X-Name-First: Susanne Author-X-Name-Last: Still Author-Name: Matteo Marsili Author-X-Name-First: Matteo Author-X-Name-Last: Marsili Author-Name: Imre Kondor Author-X-Name-First: Imre Author-X-Name-Last: Kondor Title: Optimal liquidation strategies regularize portfolio selection Abstract: We consider the problem of portfolio optimization in the presence of market impact, and derive optimal liquidation strategies. We discuss in detail the problem of finding the optimal portfolio under expected shortfall (ES) in the case of linear market impact. We show that, once market impact is taken into account, a regularized version of the usual optimization problem naturally emerges. We characterize the typical behavior of the optimal liquidation strategies, in the limit of large portfolio sizes, and show how the market impact removes the instability of ES in this context. Journal: The European Journal of Finance Pages: 554-571 Issue: 6 Volume: 19 Year: 2013 Month: 7 X-DOI: 10.1080/1351847X.2011.601661 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601661 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:6:p:554-571 Template-Type: ReDIF-Article 1.0 Author-Name: Efthymios G. Pavlidis Author-X-Name-First: Efthymios G. Author-X-Name-Last: Pavlidis Author-Name: Ivan Paya Author-X-Name-First: Ivan Author-X-Name-Last: Paya Author-Name: David A. Peel Author-X-Name-First: David A. Author-X-Name-Last: Peel Author-Name: Costas Siriopoulos Author-X-Name-First: Costas Author-X-Name-Last: Siriopoulos Title: Nonlinear dynamics in economics and finance and unit root testing Abstract: The recent financial crisis exposed the inability of traditional theoretical and empirical models to parsimoniously capture the rich dynamics of the economic environment. This has stimulated the interest of both academics and practitioners in the development and application of more sophisticated models. By allowing for the presence of nonlinearities, complex dynamics, multiple equilibria, structural breaks and spurious trends, these latter models resemble more closely the properties of economic and financial time series. In this article, we illustrate the flexibility of a family of econometric models, namely the exponential smooth transition autoregressive (ESTAR), to encompass several of the above characteristics. We then re-assess the power of the ESTAR unit root test developed by Kapetanios, Shin and Snell ((2003)) in the presence of nuisance parameters typically encountered in the literature and compare its performance with that of the augmented Dickey-Fuller and the Enders and Granger ((1998)) tests. Our results show the lack of dominance of any particular test and that the power is not independent to priors about the nuisance parameters. Finally, we examine several asset price deviations from fundamentals and one hyper-inflation series and find contradictory results between the nonlinear fitted models and unit root tests. The findings highlight that new testing procedures with higher power are desirable in order to shed light on the behavior of financial and economic series. Journal: The European Journal of Finance Pages: 572-588 Issue: 6 Volume: 19 Year: 2013 Month: 7 X-DOI: 10.1080/1351847X.2011.607006 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.607006 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:6:p:572-588 Template-Type: ReDIF-Article 1.0 Author-Name: Artur Rodrigues Author-X-Name-First: Artur Author-X-Name-Last: Rodrigues Title: Real options - introduction to the state of the art Journal: The European Journal of Finance Pages: 589-590 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2013.830868 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.830868 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:589-590 Template-Type: ReDIF-Article 1.0 Author-Name: Octavio Augusto Fontes Tourinho Author-X-Name-First: Octavio Augusto Fontes Author-X-Name-Last: Tourinho Title: Revisiting the Tourinho real options model: outstanding issues 30 years later Abstract: This article presents and extends the first known model in real options, proposed in Tourinho (1979), and provides thoughts on addressing issues that are still outstanding 30 years later. It discusses the need to ensure the existence of market equilibrium when applying real options valuation to price assets, once all agents behave as suggested by the solution to the pricing equation. It argues that this can be achieved by using a stochastic process for the price that is sufficiently general to respond to supply and demand imbalances in the market for the resource. Once the individual decision rules are derived, the parameters of the process must be determined to ensure market equilibrium exists. For reserves of natural resources, this can be done by using a mean-reverting process for the price of the commodity and ensuring that the long-term price to which it reverts equals the trigger price for development of the marginal reserve. Journal: The European Journal of Finance Pages: 591-603 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.601686 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601686 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:591-603 Template-Type: ReDIF-Article 1.0 Author-Name: Roger Adkins Author-X-Name-First: Roger Author-X-Name-Last: Adkins Author-Name: Dean Paxson Author-X-Name-First: Dean Author-X-Name-Last: Paxson Title: The Tourinho model: neglected nugget or a receding relic? Abstract: This article evaluates Tourinho's (1979b) work as one of the earliest contributors to the real options literature. His model pioneered the application of risk neutrality to uncertain investments, but his originality of introducing an option-holding cost albeit to overcome the extraction paradox is rarely imitated. We claim that the combination of a convenience yield and an option-holding cost produces a more satisfying representation. Moreover, variations in the holding cost give rise to a host of investment decisions ranging from the standard real option solution for a zero-holding cost to a net present value solution for an infinite-holding cost. Not only does the holding cost mediate between these two poles, but it provides the option seller (usually a landowner or a government) with a policy instrument for influencing the extraction timing and thus the extraction profit of the option buyer. We derive the holding cost that optimizes the landowner's combined value of the option premium, holding costs and eventual royalties. Journal: The European Journal of Finance Pages: 604-624 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.601873 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601873 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:604-624 Template-Type: ReDIF-Article 1.0 Author-Name: Sebastian Jaimungal Author-X-Name-First: Sebastian Author-X-Name-Last: Jaimungal Author-Name: Max O. de Souza Author-X-Name-First: Max O. Author-X-Name-Last: de Souza Author-Name: Jorge P. Zubelli Author-X-Name-First: Jorge P. Author-X-Name-Last: Zubelli Title: Real option pricing with mean-reverting investment and project value Abstract: Journal: The European Journal of Finance Pages: 625-644 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.601660 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601660 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:625-644 Template-Type: ReDIF-Article 1.0 Author-Name: J�rg Dockendorf Author-X-Name-First: J�rg Author-X-Name-Last: Dockendorf Author-Name: Dean Paxson Author-X-Name-First: Dean Author-X-Name-Last: Paxson Title: Continuous rainbow options on commodity outputs: what is the real value of switching facilities? Abstract: We develop real rainbow option models to value an operating asset with the flexibility to choose between two commodity outputs. We provide a quasi-analytical solution and a numerical lattice solution to a model with continuous switching opportunities between two commodity outputs, taking into account operating and switching costs. The models are applied to an illustrative case, demonstrating that the quasi-analytical solution and the lattice approach provide near identical results for the asset valuation and optimal switching boundaries. We find that the switching boundaries generally narrow as prices decline. In the presence of operating costs and temporary suspension, however, the thresholds diverge for low enough prices. A fertilizer plant with flexibility between selling ammonia and urea is valued in an empirical section using our real option models. Despite the high correlation between the two alternative commodities, ammonia and urea, there is significant value in the flexibility to choose between the two. Both strategic and policy implications for stakeholders in flexible assets are discussed, with some generalisations outside the fertilizer industry. Journal: The European Journal of Finance Pages: 645-673 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.601663 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.601663 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:645-673 Template-Type: ReDIF-Article 1.0 Author-Name: Luiz Eduardo T. Brandão Author-X-Name-First: Luiz Eduardo T. Author-X-Name-Last: Brandão Author-Name: Gilberto Master Penedo Author-X-Name-First: Gilberto Master Author-X-Name-Last: Penedo Author-Name: Carlos Bastian-Pinto Author-X-Name-First: Carlos Author-X-Name-Last: Bastian-Pinto Title: The value of switching inputs in a biodiesel production plant Abstract: There has been a growing concern in recent years about the quality of the environment and dependence on fossil fuels to supply the world's energy needs, which has created an interest in the development of renewable and less polluting energy sources. One of these alternatives is the biodiesel fuel, which has many advantages over the fossil based diesel, or petro diesel. In this paper we use the real options approach to determine the value of the managerial flexibility embedded in a biodiesel plant that has the option to switch inputs among two different grain commodities. Our results indicate that the option to choose inputs has significant value if we assume that future prices follow stochastic processes such as Geometric Brownian Motion and Mean Reversion Models, and can be sufficient to recommend the use of input commodities that would not be optimal under traditional valuation methods. We also show that the choice of model and parameters has a significant impact on the valuation of this class of projects. Journal: The European Journal of Finance Pages: 674-688 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.607005 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.607005 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:674-688 Template-Type: ReDIF-Article 1.0 Author-Name: Mark Cassano Author-X-Name-First: Mark Author-X-Name-Last: Cassano Author-Name: Gordon Sick Author-X-Name-First: Gordon Author-X-Name-Last: Sick Title: Valuation of a spark spread: an LM6000 power plant Abstract: This paper analyzes a power plant powered by two General Electric LM6000 gas turbines combined with a steam generator that allows combined cycle operations. We consider four distinct operating modes for the plant. Such a plant can be characterized as a real option on a spark spread: optimally converting natural gas to electricity. We use a Margrabe approach by using the market heat rate (the ratio of the electricity price to the natural gas price) as our underlying stochastic variable. We estimate a stochastic model for market heat rates that incorporates time of day, day of week, month, and the incidence or otherwise of a spike in heat rates. We use the model and its residuals in a bootstrap process simulating future market heat rates, and use a least-squares Monte Carlo approach to determine the optimal operating policy. We find that the annual average market heat rate is a good explanatory variable for the time integral of the plant operating margin, denominated in the natural gas numeraire. This allows us to express plant values in terms of the numeraire and convert to dollars by multiplying this by the natural gas forward curve and a forward curve of riskless discount rates. We also provide information about the optimal operating modes selected, the number of transitions between modes and how they relate to transition costs and the average heat rate for the year. Journal: The European Journal of Finance Pages: 689-714 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.617763 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.617763 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:689-714 Template-Type: ReDIF-Article 1.0 Author-Name: Bastian Felix Author-X-Name-First: Bastian Author-X-Name-Last: Felix Author-Name: Oliver Woll Author-X-Name-First: Oliver Author-X-Name-Last: Woll Author-Name: Christoph Weber Author-X-Name-First: Christoph Author-X-Name-Last: Weber Title: Gas storage valuation under limited market liquidity: an application in Germany Abstract: Natural gas storages may be valued by applying real options theory. However, it is crucial to take into account that most evolving gas markets, like the German spot market, lack liquidity. This implies that large-scale operation of storages reduces the achievable operating margin since storage operators will pay higher prices for injected gas and earn less on withdrawn gas. Optimal storage operation will take this into account. In this context, considering storage operators as price takers does not account for interdependencies of storage operations and market prices. This paper offers a novel approach to storage valuation taking into account the effect of management decisions on market prices. The methodology proposed within this paper determines the optimal production schedule and value by determining the stochastic differential equation describing the storage value and then applying a finite difference scheme. We find that limited liquidity lowers the storage value and reduces withdrawal and injection amounts. Further, we observe decreasing reservation prices for injection and withdrawing for growing illiquidity resulting in a left shift of injection and withdrawing threshold prices. Journal: The European Journal of Finance Pages: 715-733 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2012.681793 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.681793 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:715-733 Template-Type: ReDIF-Article 1.0 Author-Name: Lenos Trigeorgis Author-X-Name-First: Lenos Author-X-Name-Last: Trigeorgis Author-Name: Sophocles Ioulianou Author-X-Name-First: Sophocles Author-X-Name-Last: Ioulianou Title: Valuing a high-tech growth company: the case of EchoStar Communications Corporation Abstract: This article uses real options to value a high-tech company with significant growth option potential. The case of EchoStar Communications Corporation is used as an illustration. The company's growth opportunities are modeled and valued as a portfolio of growth options, namely options to expand its pay television, equipment, and internet services. Expansion of the main business can occur geographically (in the USA, internationally, and through partnerships) or through cross-selling of new products and services to its customer base. The internet business can expand via switching to digital subscriber line and through partnerships. The underlying asset (business) for the expansion options is the 'base' discounted cash flow (DCF), after removing the constant growth rate in the terminal-value DCF assumption. The options-based estimate of present value of growth opportunities (PVGO) value substitutes for the terminal growth DCF estimate. We show that our options-based portfolio PVGO provides a better estimate of the firm's growth prospects than the terminal growth DCF assumption. Journal: The European Journal of Finance Pages: 734-759 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.640343 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.640343 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:734-759 Template-Type: ReDIF-Article 1.0 Author-Name: Benjamin Avanzi Author-X-Name-First: Benjamin Author-X-Name-Last: Avanzi Author-Name: Isik Bicer Author-X-Name-First: Isik Author-X-Name-Last: Bicer Author-Name: Suzanne de Treville Author-X-Name-First: Suzanne Author-X-Name-Last: de Treville Author-Name: Lenos Trigeorgis Author-X-Name-First: Lenos Author-X-Name-Last: Trigeorgis Title: Real options at the interface of finance and operations: exploiting embedded supply-chain real options to gain competitiveness Abstract: Exploiting embedded supply-chain real options creates powerful opportunities for competitive manufacturing in high-cost environments. Rather than seeking competitiveness through standardization as is common to lean production, real-options reasoning explores opportunities to use supply-chain variability as a strategic weapon. We present an illustrative case study of a Swiss manufacturer of cable extrusion equipment supported by a formal real-options model that aids in valuing the embedded options that make up supply-chain flexibility: postponement, contraction, expansion, switching, and abandonment. Real-options reasoning provides a plausible retrospective rationale for the case firm's use of supply-chain flexibility that provided protection against competition from low cost, but less responsive competitors. Their intuitive real-options reasoning facilitated incorporating fuller information concerning volatility, flexibility, and control into choosing what products to make, in what quantity, and with work allocated to which supplier. The case study also highlights how competing through exploiting embedded real options requires a different managerial skill set than does competing through cost reduction. Skills such as customer communication, supplier management, and ability to ensure a smooth flow of production join the ability to reduce and control lead times as key sources of competitive advantage. Journal: The European Journal of Finance Pages: 760-778 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2012.681792 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.681792 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:760-778 Template-Type: ReDIF-Article 1.0 Author-Name: Jos� Azevedo-Pereira Author-X-Name-First: Jos� Author-X-Name-Last: Azevedo-Pereira Author-Name: Gualter Couto Author-X-Name-First: Gualter Author-X-Name-Last: Couto Author-Name: Cl�udia Nunes Author-X-Name-First: Cl�udia Author-X-Name-Last: Nunes Title: Some results on relocation policies Abstract: In this paper, we derive general results concerning optimal relocation policy under some assumptions. We consider a firm that is located in a specific location, producing at a certain level of efficiency. With time, the firm can decide to change its location to a new and more efficient site, paying relocation costs. Moreover, we assume that these new sites become available according to a Poisson process, and that the levels of efficiency improvement inherent to each one of these sites are random variables. With this framework, we characterise certain parameters of the optimal relocation policy. In particular, we characterise the expected relocation time and we prove that it depends on the distribution of the level of efficiency improvement only through an expected value. Therefore, the optimal policy shows a kind of robustness in terms of the stochastic assumptions of the problem, which has a major impact in the application of relocation policies. In addition, we also characterise the optimal relocation time. Impacts on the final results driven by the characteristics of the firm's original location site, the market environment and the way in which risk is modelled are studied numerically. The overall results are in line with economic intuition. Journal: The European Journal of Finance Pages: 779-790 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2011.606991 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.606991 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:779-790 Template-Type: ReDIF-Article 1.0 Author-Name: Bernadette Power Author-X-Name-First: Bernadette Author-X-Name-Last: Power Author-Name: Gavin C. Reid Author-X-Name-First: Gavin C. Author-X-Name-Last: Reid Title: Organisational change and performance in long-lived small firms: a real options approach Abstract: This paper supports two key principles of real options reasoning: (a) the value of waiting and (b) the value of staging. It tests whether real options logic applies to small firms implementing significant changes (e.g. in technology) in a model of small firm performance, estimated on data collected by interviews with entrepreneurs. We found that to achieve a higher value by waiting, a delicate balance of precipitators of change against time until exercise is necessary (e.g. if there were just one or two precipitators, then waiting would certainly raise the value). Similarly, to achieve a higher value by staging, the entrepreneur needs to balance embedding against investment time. Thus, provided that investment time is less than 1¼ years, we found that embedding will raise the value. Overall, this implies that strategic flexibility in investment decisions is necessary for good long-run performance of small firms. Journal: The European Journal of Finance Pages: 791-809 Issue: 7-8 Volume: 19 Year: 2013 Month: 9 X-DOI: 10.1080/1351847X.2012.670124 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.670124 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:7-8:p:791-809 Template-Type: ReDIF-Article 1.0 Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Author-Name: Philip A. Hamill Author-X-Name-First: Philip A. Author-X-Name-Last: Hamill Author-Name: John Wilson Author-X-Name-First: John Author-X-Name-Last: Wilson Title: Contemporary issues in financial markets and institutions Journal: The European Journal of Finance Pages: 811-814 Issue: 9 Volume: 19 Year: 2013 Month: 10 X-DOI: 10.1080/1351847X.2012.696550 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.696550 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:9:p:811-814 Template-Type: ReDIF-Article 1.0 Author-Name: Giovanni Calice Author-X-Name-First: Giovanni Author-X-Name-Last: Calice Author-Name: Jing Chen Author-X-Name-First: Jing Author-X-Name-Last: Chen Author-Name: Julian M. Williams Author-X-Name-First: Julian M. Author-X-Name-Last: Williams Title: Are there benefits to being naked? The returns and diversification impact of capital structure arbitrage Abstract: In a naked credit default swap (CDS) position, a party pays an income stream to a seller of protection to swap away default risk on an underlying defaultable security without actually holding this reference instrument. Using mark-to-market returns on a large cross section of CDS positions, held independent from their reference entity, we implement a novel test to establish whether their inclusion in an optimised portfolio is replicable by a large set of alternative assets. Overall, we find significant excess returns of over 28% per annum against an optimised benchmark, we speculate that it is these characteristics that could be driving a bubble in the CDS market. Journal: The European Journal of Finance Pages: 815-840 Issue: 9 Volume: 19 Year: 2013 Month: 10 X-DOI: 10.1080/1351847X.2011.637115 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.637115 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:9:p:815-840 Template-Type: ReDIF-Article 1.0 Author-Name: Matthias Bodenstedt Author-X-Name-First: Matthias Author-X-Name-Last: Bodenstedt Author-Name: Daniel R�sch Author-X-Name-First: Daniel Author-X-Name-Last: R�sch Author-Name: Harald Scheule Author-X-Name-First: Harald Author-X-Name-Last: Scheule Title: The path to impairment: do credit-rating agencies anticipate default events of structured finance transactions? Abstract: The global financial crisis (GFC) has led to a general discussion of the accuracy and declining standards of credit-rating agency ratings. Substantial criticism has been directed towards the securitisation market, which has been identified as one of the main sources of the crisis. This study focuses on the ability of rating agencies to adjust their ratings prior to impairments of structured finance transactions. We develop a new measure that quantifies a rating agency's performance in advance of defaults. By analysing a large number of impaired transactions rated by Moody's Investors Service, we find that rating quality deteriorated during the GFC. Furthermore, we identify tranche-specific and macroeconomic factors that explain differences in Moody's performance. Journal: The European Journal of Finance Pages: 841-860 Issue: 9 Volume: 19 Year: 2013 Month: 10 X-DOI: 10.1080/1351847X.2011.636831 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.636831 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:9:p:841-860 Template-Type: ReDIF-Article 1.0 Author-Name: Laura Chiaramonte Author-X-Name-First: Laura Author-X-Name-Last: Chiaramonte Author-Name: Barbara Casu Author-X-Name-First: Barbara Author-X-Name-Last: Casu Title: The determinants of bank CDS spreads: evidence from the financial crisis Abstract: Based on a sample of mid-tier and top-tier internationally active banks with 5-year senior CDS, this paper investigates the determinants of credit default swaps (CDS) spreads and whether CDS spreads can be considered a good proxy of bank performance. The analysis encompasses three time periods: a pre-crisis period (1 January 2005-30 June 2007), a crisis period (1 July 2007-31 March 2009) and a post-crisis period (1 April 2009-30 June 2011) and focuses exclusively on bank-specific balance sheet ratios. The results of the empirical analysis indicate that bank CDS spreads, both in the pre-crisis period, but especially in the crisis period, reflect the risk captured by bank balance sheet ratios. We find that the determinants of bank CDS spreads vary strongly across time, as economic and financial conditions vary. TIER 1 ratio and leverage appear insignificant in all of the three periods considered, while liquidity indicators become significant only during the crisis and post crisis period. Journal: The European Journal of Finance Pages: 861-887 Issue: 9 Volume: 19 Year: 2013 Month: 10 X-DOI: 10.1080/1351847X.2011.636832 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.636832 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:9:p:861-887 Template-Type: ReDIF-Article 1.0 Author-Name: Mohammed Amidu Author-X-Name-First: Mohammed Author-X-Name-Last: Amidu Author-Name: Simon Wolfe Author-X-Name-First: Simon Author-X-Name-Last: Wolfe Title: The impact of market power and funding strategy on bank-interest margins Abstract: This paper investigates the implications of market power and funding strategies for bank-interest margins, using a sample of 978 banks in 55 emerging and developing countries over an eight-year period, 2000-2007. We provide additional insight by examining the complex interlocking of three key variables that are important for regulators: the degree of market power, funding sources and bank performance. The results show that market power increases when banks use internal funding to diversify into non-interest income-generating activities. We also find that the high net-interest margins of banks in emerging and developing countries can be explained by the degree of market power, credit risk, and implicit interest payments. In addition, our results suggest that interest margins among banks with market power are significantly more sensitive to internally generated funds than they are to deposit and wholesale funding. Journal: The European Journal of Finance Pages: 888-908 Issue: 9 Volume: 19 Year: 2013 Month: 10 X-DOI: 10.1080/1351847X.2011.636833 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.636833 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:9:p:888-908 Template-Type: ReDIF-Article 1.0 Author-Name: Deven Bathia Author-X-Name-First: Deven Author-X-Name-Last: Bathia Author-Name: Don Bredin Author-X-Name-First: Don Author-X-Name-Last: Bredin Title: An examination of investor sentiment effect on G7 stock market returns Abstract: This paper examines the relationship between investor sentiment and G7 stock market returns. Using a range of investor sentiment proxies, including investor survey, equity fund flow, closed-end equity fund (CEEF) discount and equity put-call ratio, we examine if investor sentiment has a significant influence on value and growth stock returns as well as aggregate market returns. Using monthly data for the period January 1995-December 2007, our results depict a negative relationship between investor sentiment and future returns. We find results that are consistent with previous studies in that when investor sentiment is high (low), future returns are low (high). Our panel results display evidence of commonality across all the sentiment measures with the value stocks having a particularly strong effect relative to growth stocks. Furthermore, the effect of survey sentiment on future returns gradually decreases beyond the one-month forecast horizon. We observe evidence of price pressure on value stocks and the overall market due to increases in concurrent equity fund flow. Finally, the discount of CEEFs is also found to proxy for investor sentiment, with a narrower discount being associated with an increase (decrease) in value (growth) stocks. Journal: The European Journal of Finance Pages: 909-937 Issue: 9 Volume: 19 Year: 2013 Month: 10 X-DOI: 10.1080/1351847X.2011.636834 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.636834 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:9:p:909-937 Template-Type: ReDIF-Article 1.0 Author-Name: Go Tamakoshi Author-X-Name-First: Go Author-X-Name-Last: Tamakoshi Author-Name: Shigeyuki Hamori Author-X-Name-First: Shigeyuki Author-X-Name-Last: Hamori Title: An asymmetric dynamic conditional correlation analysis of linkages of European financial institutions during the Greek sovereign debt crisis Abstract: This article employs the asymmetric dynamic conditional correlation (DCC) model to assess impacts of the recent sovereign debt crisis on the time-varying correlations of five European financial institutions holding large amounts of Greek sovereign bonds (National Bank of Greece, BNP Paribas, Dexia, Generali, and Commerzbank). Contrary to the results of preceding studies, we find significant increases in the correlations between several combinations of the financial institutions' stock returns after the inception of the sovereign debt crisis, indicating contagion effects. Moreover, our findings show that the parameter of the standardized negative residuals is statistically significant in the case of DCC estimates between two specific institutions. This suggests that the conditional correlation of stock returns between the two institutions is more significantly influenced by negative shocks than by positive innovations to return. Journal: The European Journal of Finance Pages: 939-950 Issue: 10 Volume: 19 Year: 2013 Month: 11 X-DOI: 10.1080/1351847X.2012.712921 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.712921 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:10:p:939-950 Template-Type: ReDIF-Article 1.0 Author-Name: Keith Cuthbertson Author-X-Name-First: Keith Author-X-Name-Last: Cuthbertson Author-Name: Dirk Nitzsche Author-X-Name-First: Dirk Author-X-Name-Last: Nitzsche Title: Winners and losers: German equity mutual funds Abstract: We investigate the performance of winners and losers for German equity mutual funds (1990-2009), using empirical order statistics. When using gross returns and the Fama-French three-factor model, the number of statistically significant positive alpha funds is zero but increases markedly when market timing variables are added. However, when using a 'total performance' measure (which incorporates both alpha and the contribution of market timing), the number of statistically significant winner funds falls to zero. The latter is consistent with the bias in estimated alphas in the presence of market timing. We also find that many poorly performing funds are unskilled rather than unlucky. Journal: The European Journal of Finance Pages: 951-963 Issue: 10 Volume: 19 Year: 2013 Month: 11 X-DOI: 10.1080/1351847X.2012.684098 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.684098 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:10:p:951-963 Template-Type: ReDIF-Article 1.0 Author-Name: Taufiq Choudhry Author-X-Name-First: Taufiq Author-X-Name-Last: Choudhry Title: The long memory of the forward premium during the 1920s' float: evidence from the European foreign exchange market Abstract: This paper investigates the fractional dynamics of the foreign exchange forward premium during the floating period of the 1920s. We apply weekly exchange rates of the currencies from Belgium, France, Germany, Holland, Italy and the USA against the British pound from February 1921 to May 1925 and employ two different definitions of the forward premium. The German data are for the period ranging from February 1921 to December 1922. This period includes the German hyperinflation era. The empirical investigation is conducted by means of two different fractional integration methods: the Geweke and Porter-Hudak and the Robinson tests. The results provide some evidence of long memory, mostly in the case of Belgium, Holland and Italy. Many of the forward premiums during the 1920s may have become non-stationary as markets began to anticipate the UK's return to gold at its pre-war parity. In the case of Germany, it may have been due to market failure. The varying results presented could be due to the wide differences in the microeconomic and macroeconomic fundamentals and political setups of the countries during the 1920s. Journal: The European Journal of Finance Pages: 964-977 Issue: 10 Volume: 19 Year: 2013 Month: 11 X-DOI: 10.1080/1351847X.2012.703142 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.703142 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:10:p:964-977 Template-Type: ReDIF-Article 1.0 Author-Name: Sonia Baños-Caballero Author-X-Name-First: Sonia Author-X-Name-Last: Baños-Caballero Author-Name: Pedro J. García-Teruel Author-X-Name-First: Pedro J. Author-X-Name-Last: García-Teruel Author-Name: Pedro Martínez-Solano Author-X-Name-First: Pedro Author-X-Name-Last: Martínez-Solano Title: The speed of adjustment in working capital requirement Abstract: This paper analyzes the determinants of working capital requirement (WCR) and examines the speed with which firms adjust toward their target WCR. The findings indicate that firms adjust relatively quickly, which supports the hypothesis that current balance sheet items are easier to manipulate and could be changed quite easily, even in the short run. Moreover, we find that the speed of adjustment is not equal across all firms and varies according to their external finance constraints and their bargaining power. Firms with better access to external capital markets and greater bargaining power adjust faster due to their lower costs of adjustment. Journal: The European Journal of Finance Pages: 978-992 Issue: 10 Volume: 19 Year: 2013 Month: 11 X-DOI: 10.1080/1351847X.2012.691889 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.691889 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:19:y:2013:i:10:p:978-992 Template-Type: ReDIF-Article 1.0 Author-Name: Roberto Savona Author-X-Name-First: Roberto Author-X-Name-Last: Savona Title: Risk and beta anatomy in the hedge fund industry Abstract: Based on a Bayesian time-varying beta model, we explore how the systematic risk exposures of hedge funds vary over time conditional on some exogenous variables that managers are assumed to use in changing their trading strategies. Using data from CSFB/Tremont indices over the period January 1994-September 2008, we found that (1) volatility, changes in T-bill, term spread and shocks in liquidity significantly impact the time variation of hedge fund betas; (2) when mean reversion and instruments in beta become predominant, hedge funds tend to be more risky, more dynamic and less dependent by their own style benchmark; (3) if risk exposure is assumed to be constant while it is time-varying, performance appraisal can be seriously distorted and overestimated. Journal: The European Journal of Finance Pages: 1-32 Issue: 1 Volume: 20 Year: 2014 Month: 1 X-DOI: 10.1080/1351847X.2011.649216 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.649216 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:1:p:1-32 Template-Type: ReDIF-Article 1.0 Author-Name: Georgios Chalamandaris Author-X-Name-First: Georgios Author-X-Name-Last: Chalamandaris Author-Name: Andrianos E. Tsekrekos Author-X-Name-First: Andrianos E. Author-X-Name-Last: Tsekrekos Title: Predictability in implied volatility surfaces: evidence from the Euro OTC FX market Abstract: Recent general equilibrium models prescribe predictable dynamics in the volatility surfaces that are implied by observed option prices. In this paper, we investigate the predictability of surfaces, using extensive time series of implied volatilities from over-the-counter options on eight different currencies, quoted against the Euro. We examine implied volatility surfaces in the context of predictability through three different models, two that employ parametric specifications to describe the surface and one that decomposes it into latent statistical factors. All examined models are shown to (a) accurately describe the surfaces in-sample, and (b) produce forecasts that are superior to hard-to-beat benchmarks that ignore information about the shape of the surface, in medium- to long-term horizons. We show that these forecasts can support profitable volatility trading strategies in the absence of transaction costs. Comparing across competing models, our results suggest that parametric models, that allow for a more structured description of the surface, are more successful in terms of forecasts' accuracy and significance of trading profits. Journal: The European Journal of Finance Pages: 33-58 Issue: 1 Volume: 20 Year: 2014 Month: 1 X-DOI: 10.1080/1351847X.2012.670123 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.670123 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:1:p:33-58 Template-Type: ReDIF-Article 1.0 Author-Name: David G. McMillan Author-X-Name-First: David G. Author-X-Name-Last: McMillan Author-Name: Manouchehr Tavakoli Author-X-Name-First: Manouchehr Author-X-Name-Last: Tavakoli Author-Name: Phillip J. McKnight Author-X-Name-First: Phillip J. Author-X-Name-Last: McKnight Title: Insider employee stock option trading and stock prices Abstract: We examine the information content of insider employee stock option trading and its value to market investors using a US dataset. There should be no presumption that option trading would not convey valuable information and indeed, the exercise of option rights is likely to signal insider knowledge. Our results from Granger-causality tests suggest that the actions of directors, officers (senior management) and the other groups, such as company lawyers, do indeed have predictive power for future returns. However, the actions of large shareholders have no additional information content over that which is publicly available. Evidence from predictive regressions largely supports these results, but is often weaker in significance. This seems to arise as the Granger-causality approach utilises a longer lag length and suggests that it takes time for the market to assimilate the information from insider actions. Overall, the results suggest that any outsider who can mimic the behaviour of certain insider groups could benefit in predicting future returns. Finally, the results confirm the belief that the market is unlikely to be strong-form efficient and that this is particularly true with smaller firms. In contrast, larger firms appear to be priced more efficiently than smaller ones. Journal: The European Journal of Finance Pages: 59-79 Issue: 1 Volume: 20 Year: 2014 Month: 1 X-DOI: 10.1080/1351847X.2012.670122 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.670122 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:1:p:59-79 Template-Type: ReDIF-Article 1.0 Author-Name: Yi-Mien Lin Author-X-Name-First: Yi-Mien Author-X-Name-Last: Lin Author-Name: Chin-Fang Chao Author-X-Name-First: Chin-Fang Author-X-Name-Last: Chao Author-Name: Chih-Liang Liu Author-X-Name-First: Chih-Liang Author-X-Name-Last: Liu Title: Transparency, idiosyncratic risk, and convertible bonds Abstract: We first investigate the relationship among a company's information transparency, idiosyncratic risk, and return of its convertible bonds. The effects of a company's idiosyncratic risk on its equity's value volatility and its credit risk are also examined. The findings indicate that when a company discloses a significant amount of information, it is likely to have a higher idiosyncratic risk and a lower credit risk, with no impact on returns on convertible bonds. The volatility of stock returns is positively related to returns on convertible bonds, and it is found that diversified strategies and returns on a company's equity help to improve its credit rating and that a better credit rating triggers an increase in returns on convertible bonds and idiosyncratic risk, indicating that evaluations of the value of convertible bonds must take pure bonds and equity (option) values into account. After excluding conversion values and estimating the idiosyncratic risk on daily, weekly, and monthly bases, this study suggests that there is a positive relation between returns on convertible bonds and information transparency when estimating idiosyncratic risk on a monthly basis and that a positive association also exists between credit rating, idiosyncratic risk, and returns on bonds. Journal: The European Journal of Finance Pages: 80-103 Issue: 1 Volume: 20 Year: 2014 Month: 1 X-DOI: 10.1080/1351847X.2012.681791 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.681791 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:1:p:80-103 Template-Type: ReDIF-Article 1.0 Author-Name: Franco Fiordelisi Author-X-Name-First: Franco Author-X-Name-Last: Fiordelisi Author-Name: Maria-Gaia Soana Author-X-Name-First: Maria-Gaia Author-X-Name-Last: Soana Author-Name: Paola Schwizer Author-X-Name-First: Paola Author-X-Name-Last: Schwizer Title: Reputational losses and operational risk in banking Abstract: Reputation is a key asset for any company whose affairs, like those of banks, are based on trust. Despite its importance, the number of studies dealing with reputational risk in the financial industry is still limited. We estimate the reputational impact of announced operational losses for a large sample of banks (both commercial and investment) in Europe and the USA between 1994 and 2008. By conducting an event study, we show that substantial reputational losses occur following announcements of 'pure' operational losses. We provide evidence that 'fraud' is the event type that generates the greatest reputational damage. 'Trading and sales' and 'payment and settlement' are the two business lines determining considerable reputational losses. We also found that losses are higher in Europe than in North America. Journal: The European Journal of Finance Pages: 105-124 Issue: 2 Volume: 20 Year: 2014 Month: 2 X-DOI: 10.1080/1351847X.2012.684218 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.684218 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:2:p:105-124 Template-Type: ReDIF-Article 1.0 Author-Name: Romain Boissin Author-X-Name-First: Romain Author-X-Name-Last: Boissin Author-Name: Patrick Sentis Author-X-Name-First: Patrick Author-X-Name-Last: Sentis Title: Long-run performance of IPOs and the role of financial analysts: some French evidence Abstract: This paper examines the long-run performance of French initial public offerings (IPOs) carried out between 1991 and 2005. Using various methodologies, we found that IPOs in our sample performed poorly relative to the comparison portfolios over the 1991-2005 horizon in contrast to that reported by prior studies of the French market. This abnormal long-run performance is more severe for orphan IPOs (those without financial analysts' recommendations) than for non-orphan IPOs the first year following the offerings (a statistically significant difference). In contrast to the widely held belief, this evidence suggests that analyst coverage is indeed not important to the issuing firm. Investors pay more attention to non-orphan IPOs when they are not book built, venture capital backed, underwritten by a large syndicate and less underpriced. Over the 1991-2005 period, an analyst's affiliation does not appear to matter. This result is inconsistent with the conflict of interest hypothesis. During the first year of issuance, analysts' recommendations are associated with the success of a newly public firm. However, once we extend the horizon to 3 or 5 years after the issuance, we can find that analysts' recommendations are not significantly related to the long-run performance of IPOs. Journal: The European Journal of Finance Pages: 125-149 Issue: 2 Volume: 20 Year: 2014 Month: 2 X-DOI: 10.1080/1351847X.2012.689773 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.689773 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:2:p:125-149 Template-Type: ReDIF-Article 1.0 Author-Name: John Crosby Author-X-Name-First: John Author-X-Name-Last: Crosby Title: Optimal hedging of variance derivatives Abstract: We examine the optimal hedging of derivatives written on realised variance, focussing principally on variance swaps (VS) (but, en route, also considering skewness swaps), when the underlying stock price has discontinuous sample paths, i.e. jumps. In general, with jumps in the underlying, the market is incomplete and perfect hedging is not possible. We derive easily implementable formulae which give optimal (or nearly optimal) hedges for VS under very general dynamics for the underlying stock which allow for multiple jump processes and stochastic volatility. We illustrate how, for parameters which are realistic for options on the S&P 500 and Nikkei-225 stock indices, our methodology gives significantly better hedges than the standard log-contract replication approach of Neuberger and Dupire which assumes continuous sample paths. Our analysis seeks to emphasise practical implications for financial institutions trading variance derivatives. Journal: The European Journal of Finance Pages: 150-180 Issue: 2 Volume: 20 Year: 2014 Month: 2 X-DOI: 10.1080/1351847X.2012.689774 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.689774 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:2:p:150-180 Template-Type: ReDIF-Article 1.0 Author-Name: Lawrence Kryzanowski Author-X-Name-First: Lawrence Author-X-Name-Last: Kryzanowski Author-Name: Sana Mohsni Author-X-Name-First: Sana Author-X-Name-Last: Mohsni Title: Persistence and current determinants of the future earnings growth rates of firms Abstract: Consistent with economic intuition, short- and long-term growth rates of both accrual earnings (AE) and cash flows (CF) exhibit mean-reversion at the firm level that is stronger when their base-year counterpart is negative. Firm attributes such as size, firm's age, earnings volatility, and past returns exhibit predictive power for growth rates for individual firms. Short- and long-term IBES earnings growth rate forecasts, when orthogonalized with respect to contemporaneous and past actual earnings growth rates, exhibit predictive power for, respectively, short- and long-term AE (but not CF) growth rates for both positive and negative base-year growth rates. Journal: The European Journal of Finance Pages: 181-200 Issue: 2 Volume: 20 Year: 2014 Month: 2 X-DOI: 10.1080/1351847X.2013.769891 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.769891 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:2:p:181-200 Template-Type: ReDIF-Article 1.0 Author-Name: Boulis Maher Ibrahim Author-X-Name-First: Boulis Maher Author-X-Name-Last: Ibrahim Author-Name: Janusz Brzeszczynski Author-X-Name-First: Janusz Author-X-Name-Last: Brzeszczynski Title: How beneficial is international stock market information in domestic stock market trading? Abstract: This paper uses the foreign information transmission (FIT) model of Ibrahim and Brzeszczynski [Inter-regional and region-specific transmission of international stock market returns: The role of foreign information. Journal of International Money and Finance 28, no. 2: 322-43] to quantify the incremental benefits of foreign overnight international stock market information over domestic market momentum information. The main objective is to answer the question: how much more (or less) returns will a day trader earn by using various combinations of different interpretations of foreign news signals and domestic market momentum than the latter alone? Trading strategies are constructed with added features that take advantage of better modelling of changes over time in the return equivalent of the meteor shower of Engle, Ito, and Lin [Meteor showers or heat waves? Heteroscedastic intra-daily volatility in the foreign exchange market. Econometrica 58, no. 3: 525-42]. The results show that overnight international information is more economically beneficial than previous-day's domestic information. Moreover, better modelling of the time variation in the impact of this overnight information has substantial benefits to stock market investors. Journal: The European Journal of Finance Pages: 201-231 Issue: 3 Volume: 20 Year: 2014 Month: 3 X-DOI: 10.1080/1351847X.2012.690773 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.690773 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:3:p:201-231 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Bessler Author-X-Name-First: Wolfgang Author-X-Name-Last: Bessler Author-Name: Wolfgang Drobetz Author-X-Name-First: Wolfgang Author-X-Name-Last: Drobetz Author-Name: Martin Seim Author-X-Name-First: Martin Author-X-Name-Last: Seim Title: Share repurchases of initial public offerings: motives, valuation effects, and the impact of market regulation Abstract: This study investigates the motives and valuation effects of share repurchase announcements of German firms during the 1998-2008 period, addressing the question why initial public offering (IPO) firms repurchase shares soon after going public. While our focus is on IPO firms, we also examine the impact of firm size by differentiating between IPO and established DAX/MDAX firms and by analyzing the source of surplus cash holdings, that is, either from equity issuances or from operating cash flows. We further explore the impact of the regulatory environment. Our empirical analysis reveals significant differences between the IPO and DAX/MDAX subsamples regarding their repurchase motives, stock price performance, and explanatory factors. Standard corporate payout theories are essential in explaining the different valuation effects. Our empirical analysis suggests agency costs of free cash flow as the main reason for the observed valuation effects of both IPO and DAX/MDAX firms, yet for different reasons. While DAX/MDAX firms continuously generate high operating cash flows before and after repurchasing shares, IPO firms exhibit low operating cash flows during the entire period but large surplus cash holdings due to the mandatory equity issuance at their public offering. Overall, the repurchase decisions of IPO firms are best explained by the agency costs of cash holdings and the unique rules and regulations of the German stock exchange. Journal: The European Journal of Finance Pages: 232-263 Issue: 3 Volume: 20 Year: 2014 Month: 3 X-DOI: 10.1080/1351847X.2012.698991 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.698991 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:3:p:232-263 Template-Type: ReDIF-Article 1.0 Author-Name: KiHoon Jimmy Hong Author-X-Name-First: KiHoon Jimmy Author-X-Name-Last: Hong Author-Name: Steve Satchell Author-X-Name-First: Steve Author-X-Name-Last: Satchell Title: The sensitivity of beta to the time horizon when log prices follow an Ornstein-Uhlenbeck process Abstract: This paper provides a new theoretical approach to investigate the sensitivity of the familiar beta of the capital asset pricing model to the length of the return measurement interval; a phenomenon known as the intervalling effect. By setting the problem in a continuous time setting, and using exact results, we are able to generalize existing results in the literature. We derive an expression for beta as a function of the time horizon h, conditional on current time t. We show that beta is monotonic in h and derive conditions for it to be increasing or decreasing. Journal: The European Journal of Finance Pages: 264-290 Issue: 3 Volume: 20 Year: 2014 Month: 3 X-DOI: 10.1080/1351847X.2012.698992 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.698992 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:3:p:264-290 Template-Type: ReDIF-Article 1.0 Author-Name: J. Colin Glass Author-X-Name-First: J. Colin Author-X-Name-Last: Glass Author-Name: Donal G. McKillop Author-X-Name-First: Donal G. Author-X-Name-Last: McKillop Author-Name: Barry Quinn Author-X-Name-First: Barry Author-X-Name-Last: Quinn Author-Name: John Wilson Author-X-Name-First: John Author-X-Name-Last: Wilson Title: Cooperative bank efficiency in Japan: a parametric distance function analysis Abstract: This study examines the relative performance of Japanese cooperative banks between 1998 and 2009, explicitly modelling non-performing loans as an undesirable output. Three key findings emerge. First, the sector is characterized by increasing returns to scale which supports the ongoing amalgamation process within the sector. Second, although restricted in product offerings, markets and their membership base, Japanese cooperatives secured both technical progress (a positive shift in the frontier) and a decrease in technical inefficiency (distance from the frontier). Third, the analysis highlighted that regulatory pressure to reduce non-performing loans will have an adverse impact on both output and performance. Journal: The European Journal of Finance Pages: 291-317 Issue: 3 Volume: 20 Year: 2014 Month: 3 X-DOI: 10.1080/1351847X.2012.698993 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.698993 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:3:p:291-317 Template-Type: ReDIF-Article 1.0 Author-Name: Martin Holmén Author-X-Name-First: Martin Author-X-Name-Last: Holmén Author-Name: Eugene Nivorozhkin Author-X-Name-First: Eugene Author-X-Name-Last: Nivorozhkin Author-Name: Rakesh Rana Author-X-Name-First: Rakesh Author-X-Name-Last: Rana Title: Do anti-takeover devices affect the takeover likelihood or the takeover premium? Abstract: In this paper, we use Heckman selection models to analyse the relation between the likelihood of the firm becoming a takeover target, the takeover premium, and the use of anti-takeover devices. Ordinary least squares regressions suggest that anti-takeover devices, especially dual class shares, are associated with a higher takeover premium. However, we also document that anti-takeover devices reduce the likelihood that the firm will be taken over. When we control for the fact that takeover targets are selected, we do not find a significant relation between the takeover premium and dual class shares. Hence, our results suggest that the takeover premium is indeed influenced by private information about the likelihood of takeover. Journal: The European Journal of Finance Pages: 319-340 Issue: 4 Volume: 20 Year: 2014 Month: 4 X-DOI: 10.1080/1351847X.2012.703141 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.703141 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:4:p:319-340 Template-Type: ReDIF-Article 1.0 Author-Name: Beat Reber Author-X-Name-First: Beat Author-X-Name-Last: Reber Title: Estimating the risk-return profile of new venture investments using a risk-neutral framework and 'thick' models Abstract: This study proposes cascade neural networks to estimate the model parameters of the Cox-Ross-Rubinstein risk-neutral approach, which, in turn, explain the risk-return profile of firms at venture capital and initial public offering (IPO)financing rounds. Combining the two methods provides better estimation accuracy than risk-adjusted valuation approaches, conventional neural networks, and linear benchmark models. The findings are persistent across in-sample and out-of-sample tests using 3926 venture capital and 1360 US IPO financing rounds between January 1989 and December 2008. More accurate estimates of the risk-return profile are due to less heterogeneous risk-free rates of return from the risk-neutral framework. Cascade neural networks nest both the linear and nonlinear functional estimation form in addition to taking account of variable interaction effects. Better estimation accuracy of the risk-return profile is desirable for investors so they can make a more informed judgement before committing capital at different stages of development and various financing rounds. Journal: The European Journal of Finance Pages: 341-360 Issue: 4 Volume: 20 Year: 2014 Month: 4 X-DOI: 10.1080/1351847X.2012.708471 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.708471 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:4:p:341-360 Template-Type: ReDIF-Article 1.0 Author-Name: Eberhard Feess Author-X-Name-First: Eberhard Author-X-Name-Last: Feess Author-Name: Axel Halfmeier Author-X-Name-First: Axel Author-X-Name-Last: Halfmeier Title: The German Capital Markets Model Case Act (KapMuG): a European role model for increasing the efficiency of capital markets? Analysis and suggestions for reform Abstract: In this paper, we analyze the German Capital Markets Model Case Law (KapMuG) enacted to reduce transaction costs in securities mass litigation. The KapMuG is often seen as a European role model trying to enhance investor rights without running the risk of frivolous claims known from the US class actions. We show that the current legislation is insufficient due to two main obstacles: first, shareholders need to file individual lawsuits before being eligible for participation in the model case, which leads to a rational ignorance of small shareholders. Second, for wrong and omitted capital market information beyond prospectus liability, it is unclear if shareholders need to prove the causal link between the wrong information and the investment decision, which is hardly possible. We suggest two major changes for the reform due in November 2012: a simplified opt-in mechanism without the prerequisite of individual lawsuits and extension of the reversal of the burden of proof for causation from prospectus liability to wrong or omitted ad hoc information. Besides, we argue that gross negligence is the appropriate liability rule in the substantive law underlying the KapMuG. Journal: The European Journal of Finance Pages: 361-379 Issue: 4 Volume: 20 Year: 2014 Month: 4 X-DOI: 10.1080/1351847X.2012.709469 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.709469 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:4:p:361-379 Template-Type: ReDIF-Article 1.0 Author-Name: Norhuda Abdul Rahim Author-X-Name-First: Norhuda Abdul Author-X-Name-Last: Rahim Author-Name: Alan Goodacre Author-X-Name-First: Alan Author-X-Name-Last: Goodacre Author-Name: Chris Veld Author-X-Name-First: Chris Author-X-Name-Last: Veld Title: Wealth effects of convertible-bond and warrant-bond offerings: a meta-analysis Abstract: The literature on wealth effects associated with the announcements of convertible-bond and warrant-bond offerings is reviewed. The findings of 35 event studies, which include 84 sub-samples and 6310 announcements, are analysed using meta-analysis. We find a mean cumulative abnormal return of - 1.14% for convertibles compared with - 0.02% for warrant bonds, the significant difference confirming a relative advantage for warrant bonds. Abnormal returns for hybrid securities issued in the USA are significantly more negative than those issued in other countries. In addition, issuing hybrid securities to refund debt does not seem to be favoured by investors. Finally, several factors identified as important by theory or in prior research are not significant within our cross-study models, suggesting that more evidence is needed to confirm whether they are robust. Journal: The European Journal of Finance Pages: 380-398 Issue: 4 Volume: 20 Year: 2014 Month: 4 X-DOI: 10.1080/1351847X.2012.712920 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.712920 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:4:p:380-398 Template-Type: ReDIF-Article 1.0 Author-Name: Thomas Mazzoni Author-X-Name-First: Thomas Author-X-Name-Last: Mazzoni Title: A functional approach to pricing complex barrier options Abstract: In this article, a new method for pricing contingent claims, which is particularly well suited for options with complex barrier and volatility structures, is introduced. The approach is based on a high-precision approximation of the Feynman-Kac equation with distributed approximating functionals. The method is particularly well suited for long maturity valuation problems, and it is shown to be faster and more accurate than conventional solution schemes. Journal: The European Journal of Finance Pages: 399-418 Issue: 5 Volume: 20 Year: 2014 Month: 5 X-DOI: 10.1080/1351847X.2012.713174 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.713174 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:5:p:399-418 Template-Type: ReDIF-Article 1.0 Author-Name: Ricardo Correia Author-X-Name-First: Ricardo Author-X-Name-Last: Correia Author-Name: Sydney Howell Author-X-Name-First: Sydney Author-X-Name-Last: Howell Author-Name: Peter Duck Author-X-Name-First: Peter Author-X-Name-Last: Duck Title: Patent now or later? Corporate financing decisions, agency costs and social benefits Abstract: We analyze the incentives of firms to delay patenting a product they intend to commercialize to maximize the period they can exploit the market under patent protection. We model the patenting and market-launching decisions and consider partial financing of these costs with debt. Agency conflicts between equityholders and debtholders arise concerning the optimal patenting and market-launch timing and represent a classical moral hazard problem. We show that delaying patenting increases the value of the firm significantly in the absence of preemption risk. In the presence of preemption risk, the firm that aims to maximize the market exploitation period under patent protection accelerates the market-launch of the product. The use of debt financing reduces the incentives to delay patenting, but generates significant agency costs in terms of loss of firm value, debt capacity and increases in the fair credit spreads. When considered in terms of social effects, the impact of the agency conflicts is overall positive, as it accelerates patenting and market-launching the product and delays default. Journal: The European Journal of Finance Pages: 419-445 Issue: 5 Volume: 20 Year: 2014 Month: 5 X-DOI: 10.1080/1351847X.2012.714393 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.714393 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:5:p:419-445 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Breuer Author-X-Name-First: Wolfgang Author-X-Name-Last: Breuer Author-Name: Michael Riesener Author-X-Name-First: Michael Author-X-Name-Last: Riesener Author-Name: Astrid Juliane Salzmann Author-X-Name-First: Astrid Juliane Author-X-Name-Last: Salzmann Title: Risk aversion vs. individualism: what drives risk taking in household finance? Abstract: Despite a considerable premium on equity with respect to risk-free assets, many households do not own stocks. We ask why the prevalence of stockholding is so limited. We focus on individuals' attitudes toward risk and identify relevant factors that affect the willingness to take financial risks. Our empirical evidence contradicts standard portfolio theory, as it does not indicate a significant relationship between risk aversion and financial risk taking. However, our analysis supports the behavioral view that psychological factors rooted in national culture affect portfolio choice. Individualism, which is linked to overconfidence and overoptimism, has a significantly positive effect on financial risk taking. In microdata from Germany and Singapore, as well as in cross-country data, we find evidence consistent with low levels of individualism being an important factor in explaining the limited participation puzzle. Journal: The European Journal of Finance Pages: 446-462 Issue: 5 Volume: 20 Year: 2014 Month: 5 X-DOI: 10.1080/1351847X.2012.714792 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.714792 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:5:p:446-462 Template-Type: ReDIF-Article 1.0 Author-Name: Soosung Hwang Author-X-Name-First: Soosung Author-X-Name-Last: Hwang Author-Name: Stephen E. Satchell Author-X-Name-First: Stephen E. Author-X-Name-Last: Satchell Title: Testing linear factor models on individual stocks using the average F-test Abstract: In this paper, we propose the average F-statistic for testing linear asset pricing models. The average pricing error, captured in the statistic, is of more interest than the ex post maximum pricing error of the multivariate F-statistic that is associated with extreme long and short positions and excessively sensitive to small perturbations in the estimates of asset means and covariances. The average F-test can be applied to thousands of individual stocks and thus is free from the information loss or the data-snooping biases from grouping. This test is robust to ellipticity, and more importantly, our simulation and bootstrapping results show that the power of the average F-test continues to increase as the number of stocks increases. Empirical tests using individual stocks from 1967 to 2006 demonstrate that the popular four-factor model (i.e. Fama-French three factors and momentum) is rejected in two sub-periods from 1967 to 1971 and from 1982 to 1986. Journal: The European Journal of Finance Pages: 463-498 Issue: 5 Volume: 20 Year: 2014 Month: 5 X-DOI: 10.1080/1351847X.2012.717097 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.717097 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:5:p:463-498 Template-Type: ReDIF-Article 1.0 Author-Name: Ana-Maria Fuertes Author-X-Name-First: Ana-Maria Author-X-Name-Last: Fuertes Author-Name: Gulnur Muradoglu Author-X-Name-First: Gulnur Author-X-Name-Last: Muradoglu Author-Name: Belma Ozturkkal Author-X-Name-First: Belma Author-X-Name-Last: Ozturkkal Title: A behavioral analysis of investor diversification Abstract: This paper studies the link between individual investors' portfolio diversification levels and various personal traits that proxy informational advantages and overconfidence. The analysis is based on objective data from the largest Turkish brokerage house tracking 59,951 individual investors' accounts with a total of 3,248,654 million transactions over the period 2008-2010. Wealthier, highly educated, older investors working in the finance sector and those trading relatively often show higher diversification levels possibly because they are better equipped to obtain and process information. Finance professionals, married investors, and those placing high-volume orders through investment centers show poorer diversification possibly as a reflection of overconfidence. Our analysis reveals important nonlinear effects, implying that the marginal impact of overconfidence on diversification is not uniform across investors but varies according to the investor's information gathering and processing abilities. Journal: The European Journal of Finance Pages: 499-523 Issue: 6 Volume: 20 Year: 2014 Month: 6 X-DOI: 10.1080/1351847X.2012.719829 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.719829 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:6:p:499-523 Template-Type: ReDIF-Article 1.0 Author-Name: Chau Duong Author-X-Name-First: Chau Author-X-Name-Last: Duong Author-Name: Gioia Pescetto Author-X-Name-First: Gioia Author-X-Name-Last: Pescetto Author-Name: Daniel Santamaria Author-X-Name-First: Daniel Author-X-Name-Last: Santamaria Title: How value-glamour investors use financial information: UK evidence of investors' confirmation bias Abstract: This paper investigates how investors in value and glamour stocks use financial information. The empirical evidence presented is in line with a model of investors' asymmetric reaction to good and bad news due to confirmation bias. Pessimistic value investors typically under-react to good financial information, while they process bad information rationally or over-confidently. On the contrary, glamour investors are often too optimistic to timely update prices following bad financial information, while they are likely to fairly price or even over-react when receiving good information. Journal: The European Journal of Finance Pages: 524-549 Issue: 6 Volume: 20 Year: 2014 Month: 6 X-DOI: 10.1080/1351847X.2012.722117 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.722117 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:6:p:524-549 Template-Type: ReDIF-Article 1.0 Author-Name: David Gray Author-X-Name-First: David Author-X-Name-Last: Gray Title: Central European foreign exchange markets: a cross-spectral analysis of the 2007 financial crisis Abstract: This article investigates co-movements between currency markets of Czech Republic, Poland, Hungary, Slovakia and the Euro in the year following the drying up of money markets in August 2007. The article shows that assessing the degree of foreign currency co-movement by correlation can lead to concluding, erroneously, that financial contagion has not occurred. Using cross-spectral methods, the article shows that defining contagion as changes in the structure of co-movements of asset prices encompasses more of the complex nature of exchange rate dynamics. What is shown is that, following August 2007, there is increase in the intensity of co-movements, but non-linearly. Focusing on the activities of a mix of banks and currency managers, it is suggested that changes in the structure of currency interaction present an unfavourable view of the contagion experienced by at least three of these currencies. Journal: The European Journal of Finance Pages: 550-567 Issue: 6 Volume: 20 Year: 2014 Month: 6 X-DOI: 10.1080/1351847X.2012.733314 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.733314 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:6:p:550-567 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Breuer Author-X-Name-First: Wolfgang Author-X-Name-Last: Breuer Author-Name: Daniel Fuchs Author-X-Name-First: Daniel Author-X-Name-Last: Fuchs Author-Name: Klaus Mark Author-X-Name-First: Klaus Author-X-Name-Last: Mark Title: Estimating cost of capital in firm valuations with arithmetic or geometric mean - or better use the Cooper estimator? Abstract: We test the extent and determinants of bias effects of the arithmetic as well as the geometric mean estimator and the estimator of Cooper [1996. Arithmetic versus geometric mean estimators: Setting discount rates for capital budgeting. European Financial Management 2 (July): 157-67] regarding discount rate estimation for firm valuation by way of a bootstrap approach for 13 different countries. The Cooper estimator is superior to both the geometric and the (conventional) arithmetic mean estimator. However, a 'truncated' version of the arithmetic mean estimator leads generally to better estimation outcomes than the Cooper estimator. This means that, in order to reduce problems of upward-biased firm value estimates, expected cash flows beyond a certain time horizon are completely neglected in terminal value estimation. Such an approach seems particularly reasonable for the valuation of young growth companies as well as for companies from quickly developing countries such as Brazil, China, or Thailand, because the bias in terminal value estimation is increasing in the growth rate of future expected cash flows. Journal: The European Journal of Finance Pages: 568-594 Issue: 6 Volume: 20 Year: 2014 Month: 6 X-DOI: 10.1080/1351847X.2012.733717 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.733717 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:6:p:568-594 Template-Type: ReDIF-Article 1.0 Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Edward Lee Author-X-Name-First: Edward Author-X-Name-Last: Lee Title: The experiences and challenges in the development of the Chinese capital market Journal: The European Journal of Finance Pages: 595-598 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.672001 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.672001 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:595-598 Template-Type: ReDIF-Article 1.0 Author-Name: Franklin Allen Author-X-Name-First: Franklin Author-X-Name-Last: Allen Author-Name: Jun 'QJ' Qian Author-X-Name-First: Jun 'QJ' Author-X-Name-Last: Qian Author-Name: Susan Chenyu Shan Author-X-Name-First: Susan Chenyu Author-X-Name-Last: Shan Author-Name: Mengxin Zhao Author-X-Name-First: Mengxin Author-X-Name-Last: Zhao Title: The IPO of Industrial and Commercial Bank of China and the 'Chinese Model' of privatizing large financial institutions Abstract: We examine the privatization process of the Industrial and Commercial Bank of China (ICBC), the largest bank in the world by market capitalization, and its dual initial public offerings (IPOs) in the Hong Kong and Shanghai Stock exchanges in 2006. The Chinese government retains majority equity ownership of ICBC while foreign institutional investors hold minority equity stakes. Other large financial institutions went through the same reform process and have similar, post-IPO ownership structures. The largest Chinese banks, as a group, outperformed their counterparts from other emerging and developed markets before and during the 2007-2009 financial crisis. We argue that the 'Chinese model' of privatizing and managing large financial institutions can be advantageously used in other countries. Journal: The European Journal of Finance Pages: 599-624 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671780 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671780 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:599-624 Template-Type: ReDIF-Article 1.0 Author-Name: Huiyao Wang Author-X-Name-First: Huiyao Author-X-Name-Last: Wang Title: Ten Chinese going global models: emerging patterns and analysis Abstract: For the past 10 years, since joining the World Trade Organization, China's global investment has increased 60-fold. Yet this increasingly emerged international business phenomenon has been under-studied. This paper examines the strategies of Chinese companies going global. It initially proposes and describes 10 models most frequently used by Chinese firms going global, and subsequently outlines and analyses the emerging trends and patterns of Chinese companies going global. Journal: The European Journal of Finance Pages: 625-636 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671786 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671786 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:625-636 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Firth Author-X-Name-First: Michael Author-X-Name-Last: Firth Author-Name: Man Jin Author-X-Name-First: Man Author-X-Name-Last: Jin Author-Name: Yuanyuan Zhang Author-X-Name-First: Yuanyuan Author-X-Name-Last: Zhang Title: Information-based stock trading and managerial incentives: evidence from China's stock market Abstract: This paper uses stock price informativeness, or information-based stock trading, to help explain the pay-performance sensitivity (PPS) of chief executive officer (CEO) compensation in China's listed firms. We argue that higher stock price informativeness, which we measure by the probability of informed trading, helps and encourages shareholders to incentivize the top management team based on stock market performance. The regression results support our argument and show that a higher level of stock price informativeness is associated with higher CEO PPSs. Moreover, the impact of stock price informativeness on CEO incentives is stronger for privately controlled listed firms than it is for state-controlled listed firms. The results also hold when information asymmetry is approximated by the accuracy and dispersion of the earnings forecasts made by financial analysts. Journal: The European Journal of Finance Pages: 637-656 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.672441 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.672441 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:637-656 Template-Type: ReDIF-Article 1.0 Author-Name: Martin J. Conyon Author-X-Name-First: Martin J. Author-X-Name-Last: Conyon Author-Name: Lerong He Author-X-Name-First: Lerong Author-X-Name-Last: He Title: CEO turnover in China: the role of market-based and accounting performance measures Abstract: We investigate the relationship between chief executive officer (CEO) turnover and firm performance in China's publicly traded firms. We provide evidence on the use of accounting and market-based performance measures in CEO turnover decision. We also investigate the moderating roles of noise in performance measures, firm growth opportunities, state-owned enterprises, and corporate governance reform on the weights attached to these performance measures. We observe that Chinese listed firms rely more on accounting performance than on stock market performance when determining CEO turnover. Firms with noisier performance measures and larger growth opportunities rely less on both accounting performance and stock market performance in CEO replacement decision. State-controlled firms are more likely to use accounting performance to determine CEO turnover. Finally, we observe that the weight attached to the accounting performance measure is significantly reduced and the weight attached to the stock market performance measure is significantly increased after the governance reform. We also observe that the reform has different impact on state-owned firms and private firms in terms of the sensitivity of CEO turnover to firm performance. Journal: The European Journal of Finance Pages: 657-680 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.676559 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.676559 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:657-680 Template-Type: ReDIF-Article 1.0 Author-Name: David Greenaway Author-X-Name-First: David Author-X-Name-Last: Greenaway Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Zhihong Yu Author-X-Name-First: Zhihong Author-X-Name-Last: Yu Title: The more the better? Foreign ownership and corporate performance in China Abstract: We examine the relationship between the degree of foreign ownership and performance of recipient firms, using a panel of 21,582 Chinese firms over the period 2000-2005. We find that joint-ventures perform better than wholly foreign-owned and purely domestic firms. Although productivity and profitability initially rise with foreign ownership, they start declining once it reaches a certain point. This suggests that some domestic ownership is necessary to ensure optimal performance. We referred these findings to a model of a joint-venture, where strategic interactions between a foreign and a domestic owner's inputs may lead to an inverted U-shaped ownership-performance relationship. Journal: The European Journal of Finance Pages: 681-702 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671785 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671785 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:681-702 Template-Type: ReDIF-Article 1.0 Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Edward Lee Author-X-Name-First: Edward Author-X-Name-Last: Lee Title: Split Share Structure Reform, corporate governance, and the foreign share discount puzzle in China Abstract: We examine the impact of the Split Share Structure Reform on the well-known foreign share discount puzzle in China. Existing literature confirms that foreign investors are more concerned about insider expropriation because of their information disadvantage relative to domestic investors. The split share structure of the ownership of Chinese listed firms created a conflict of interests between state and private shareholders. Since, before the reform, state shareholders held restricted shares that denied them any wealth effect from share price movements, they had a limited incentive to work with private shareholders to ensure that managers maximized the stock market value of the firm. By abolishing the trading restrictions for state shareholders, this reform has increased the incentive alignment between state and private shareholders, encouraging them to monitor managers. If foreign investors' concerns over the corporate governance implications of the split share structure at least partly contributed to their discounting of Chinese listed firms, then this discount should be reduced following the reform. Indeed, our evidence confirms this prediction, especially among Chinese listed firms with more state ownership or restricted shares. Our findings imply that this significant institutional reform of the Chinese stock market has benefitted minority investors. Journal: The European Journal of Finance Pages: 703-727 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671781 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671781 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:703-727 Template-Type: ReDIF-Article 1.0 Author-Name: Ningyue Liu Author-X-Name-First: Ningyue Author-X-Name-Last: Liu Author-Name: Don Bredin Author-X-Name-First: Don Author-X-Name-Last: Bredin Author-Name: Liming Wang Author-X-Name-First: Liming Author-X-Name-Last: Wang Author-Name: Zhihong Yi Author-X-Name-First: Zhihong Author-X-Name-Last: Yi Title: Domestic and foreign institutional investors' behavior in China Abstract: This paper compares the investment characteristics between foreign funds operating under Qualified Foreign Institutional Investors (QFIIs) in China and domestic Chinese funds and analyzes the firm-level drivers that influence their allocation choices. The analysis reveals that foreign funds have a preference for a range of sectors such as transportation, metals and non-metals, and machinery, as opposed to industries with a requirement for local knowledge. The portfolios of domestic Chinese funds are distributed more evenly than those of the foreign funds. The comparative analysis indicates that foreign funds invest in firms that are significantly different from those favored by domestic funds in terms of size, profit, and compensation of management. Finally, we find that when making investment decisions, foreign funds tend to rely on some corporate governance indicators, which is not consistent with the results obtained from previous studies examining developed markets. In particular, foreign funds have a preference for firms with a high percentage of state-owned shares, while the reverse is the case for domestic funds. These empirical findings highlight the differences between QFII and domestic fund investment preferences and will be of value to policy-makers in emerging markets, and China, in particular, in gauging the important drivers of foreign investment. Journal: The European Journal of Finance Pages: 728-751 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671778 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671778 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:728-751 Template-Type: ReDIF-Article 1.0 Author-Name: Henk Berkman Author-X-Name-First: Henk Author-X-Name-Last: Berkman Author-Name: Rebel A. Cole Author-X-Name-First: Rebel A. Author-X-Name-Last: Cole Author-Name: Lawrence J. Fu Author-X-Name-First: Lawrence J. Author-X-Name-Last: Fu Title: Improving corporate governance where the State is the controlling block holder: evidence from China Abstract: This paper examines changes in values and returns for Chinese firms around announcements of block-share transfers among government agencies, State-owned enterprises and private investors. We find that transfers to all three types of investors result in positive abnormal returns around transfer announcements, even when the transfers do not create a new controlling block holder and when transfers are between State entities. We also find that transfers from State entities to private entities result in larger increases in value and returns than transfers between State-controlled entities - consistent with the superior incentives and expertise of private investors. We conclude that corporate governance can be improved at State-controlled firms by improving incentives and expertise of controlling block holders. Journal: The European Journal of Finance Pages: 752-777 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671784 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671784 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:752-777 Template-Type: ReDIF-Article 1.0 Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Title: Valuation of restricted shares by conflicting shareholders in the Split Share Structure Reform Abstract: The recent Split Share Structure Reform launched by the government in the Chinese stock market terminates trading constraints on restricted shares. In exchange for the consent of freely traded shareholders, restricted shareholders offer them consideration mainly in the form of restricted shares. We estimate the implied discount of restricted shares to be 38.22% on average, which is in line with the empirical and theoretical findings in the literature, suggesting that the consideration is not systematically underpaid and the reform is fair at the market level. At the firm level, however, freely traded shareholders receive less consideration when their bargaining power is weaker. The impact of state shareholders on the size of consideration has been found to be non-monotonic. Consistent with the literature that state shareholders exaggerate the agency problem, they tend to exploit freely traded shareholders by offering less consideration when the latter's bargaining power is weaker. Meanwhile, state shareholders are under political pressure to carry out the reform as quickly as possible and to set a good example for other firms. They therefore refrain from offering underpaid consideration when their freely traded counterparts have strong bargaining power and are more capable of rejecting unfair schemes and substantially delaying the progress of the reform. Journal: The European Journal of Finance Pages: 778-802 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671782 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671782 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:778-802 Template-Type: ReDIF-Article 1.0 Author-Name: Sheng Xiao Author-X-Name-First: Sheng Author-X-Name-Last: Xiao Author-Name: Shan Zhao Author-X-Name-First: Shan Author-X-Name-Last: Zhao Title: How do agency problems affect firm value? - Evidence from China Abstract: Using newly available data, we examine the effects of the agency conflicts between ultimate controlling shareholders and minority shareholders in China's publicly listed firms between 2004 and 2009. We measure the severity of these agency problems by the excess control rights of the ultimate controlling shareholders. We show that higher excess control rights are associated with significantly lower firm value. We identify two channels through which the excess control rights affect firm value: (1) related-party loan guarantees, and (2) legal violations. We find that higher excess control rights are associated with significantly larger amounts of related-party loan guarantees (scaled by assets) for non-state and private firms, but not for state-owned firms. We find that, for non-state and private firms, the excess controls rights are associated with (1) significantly higher probability that the firm will issue value-destroying related-party loan guarantees and (2) significantly worse stock market reactions to the announcements of related-party loan guarantees. However, these results do not hold for state-owned firms. We also find that higher excess control rights are associated with significantly higher probability, frequency and severity of legal violations for non-state and private firms, but not for state-owned firms. Journal: The European Journal of Finance Pages: 803-828 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671783 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671783 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:803-828 Template-Type: ReDIF-Article 1.0 Author-Name: Zhenhua Su Author-X-Name-First: Zhenhua Author-X-Name-Last: Su Author-Name: Jun Ma Author-X-Name-First: Jun Author-X-Name-Last: Ma Author-Name: Mark E. Wohar Author-X-Name-First: Mark E. Author-X-Name-Last: Wohar Title: Sources of the stock price fluctuations in Chinese equity market Abstract: This paper proposes a latent factor approach based on a state-space framework in order to identify which factor, if any, dominates price fluctuations in the Chinese stock markets. We also illustrate the connection of such stock price decomposition with several general equilibrium asset pricing models and show that the decomposition results can potentially offer useful insights with regard to the empirical relevance of asset pricing models. We use quarterly data of the Chinese A-Share equity market over the period 1995Q3-2011Q1 and find that the estimates of the state-space model suggest that the expected return is the primary driving force behind price fluctuations in the Chinese stock market. We show that the time-varying expected returns appear to be counter-cyclical and this result seems to be consistent with the habit formation model of Campbell and Cochrane [1999. By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, no. 2: 205-51.]. However, we also note that there is a great deal of uncertainty with respect to this variance decomposition due to the resulting small signal-to-noise ratio in the estimated state-space model. Journal: The European Journal of Finance Pages: 829-846 Issue: 7-9 Volume: 20 Year: 2014 Month: 9 X-DOI: 10.1080/1351847X.2012.671779 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671779 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:7-9:p:829-846 Template-Type: ReDIF-Article 1.0 Author-Name: Barbara Casu Author-X-Name-First: Barbara Author-X-Name-Last: Casu Author-Name: Daniela Fabbri Author-X-Name-First: Daniela Author-X-Name-Last: Fabbri Author-Name: John O.S. Wilson Author-X-Name-First: John O.S. Author-X-Name-Last: Wilson Title: Emerging issues in financial institutions and markets Journal: The European Journal of Finance Pages: 847-849 Issue: 10 Volume: 20 Year: 2014 Month: 10 X-DOI: 10.1080/1351847X.2013.833531 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.833531 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:847-849 Template-Type: ReDIF-Article 1.0 Author-Name: Saskia E. van Ewijk Author-X-Name-First: Saskia E. Author-X-Name-Last: van Ewijk Author-Name: Ivo J.M. Arnold Author-X-Name-First: Ivo J.M. Author-X-Name-Last: Arnold Title: How bank business models drive interest margins: evidence from US bank-level data Abstract: The two decades prior to the credit crisis witnessed a strategic shift from a traditional, relationships-oriented model (ROM) to a transactions-oriented model (TOM) of financial intermediation in developed countries. A concurrent trend has been a persistent decline in average bank interest margins. In the literature, these phenomena are often explained using a causality that runs from increased competition in traditional segments to lower margins to new activities. Using a comprehensive data set with bank-level data on over 16,000 Federal Deposit Insurance Corporation-insured US commercial banks for a period ranging from 1992 to 2010, this paper qualifies this chain of causality. We find that a bank's business model, measured using a multi-dimensional proxy of relationship banking activity, exerts a strong, positive effect on interest margins. Our results suggest that the strategic shift from ROM to TOM has transformed banks' balance sheets and reduced interest rate margins as a by-product. Journal: The European Journal of Finance Pages: 850-873 Issue: 10 Volume: 20 Year: 2014 Month: 10 X-DOI: 10.1080/1351847X.2013.833532 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.833532 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:850-873 Template-Type: ReDIF-Article 1.0 Author-Name: Ka Kei Chan Author-X-Name-First: Ka Kei Author-X-Name-Last: Chan Author-Name: Alistair Milne Author-X-Name-First: Alistair Author-X-Name-Last: Milne Title: Bank competition, fire-sales and financial stability Abstract: This paper applies a simple liquidity modelling framework and shows that forced asset sales ('fire-sale') provide an alternative theoretical support to the traditional view that bank competition can lead to financial instability. This arises from the fact that in a multi-bank economy, a bank can take advantage of other banks in fire-sale by choosing a riskier funding structure, and the incentive to do so increases as the number of banks in the economy increases. We also discuss the effectiveness of some possible policies to restrain the incentives for excessive risk-taking. Journal: The European Journal of Finance Pages: 874-891 Issue: 10 Volume: 20 Year: 2014 Month: 10 X-DOI: 10.1080/1351847X.2013.836552 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.836552 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:874-891 Template-Type: ReDIF-Article 1.0 Author-Name: José Liñ ares-Zegarra Author-X-Name-First: José Author-X-Name-Last: Liñ ares-Zegarra Author-Name: John O.S. Wilson Author-X-Name-First: John O.S. Author-X-Name-Last: Wilson Title: Credit card interest rates and risk: new evidence from US survey data Abstract: This study uses survey data and instrumental variables' methods to assess whether in the USA the prices of credit cards (annual percentage rates, APRs) reflect the short- and long-term risks of cardholders (measured as unpaid credit card debt in the previous year, outstanding debt and Fair Issac Corporation score). We find a negative relationship between APRs and long-term risk. This effect is pronounced for sub-prime cardholders. This suggests that higher risk consumers shop around more intensively for credit cards offering the best terms and conditions. However, under stressed economic conditions, issuer banks increase APRs to account for short-term risk. Credit card characteristics, including network affiliation and issuer brand, play an important role in the pricing decisions of issuer banks. Journal: The European Journal of Finance Pages: 892-914 Issue: 10 Volume: 20 Year: 2014 Month: 10 X-DOI: 10.1080/1351847X.2013.839461 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.839461 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:892-914 Template-Type: ReDIF-Article 1.0 Author-Name: Daniel Kapp Author-X-Name-First: Daniel Author-X-Name-Last: Kapp Title: The optimal size of the European Stability Mechanism: a cost-benefit analysis Abstract: This study presents a core-periphery model to determine the optimal size of the European Stability Mechanism (ESM), building on Jeanne and Ranciere [2011. "The Optimal Level of International Reserves for Emerging Market Countries: A New Formula and Some Applications." The Economic Journal 121: 905-930]. While the periphery is subject to a probability of losing access to external credit, the core's incentive for setting up an ESM stems exclusively from the spillover effects present in the case of periphery default. The model develops regional best response functions, determining a set of feasible ranges for the total ESM size, given optimal regional contributions. The model is then calibrated to the European Economic and Monetary Union. If costs from default are reasonably high, the probability of the periphery not having access to external credit is sufficiently large, and spillover effects to the core are present, both the core and the periphery have an interest in contributing to the ESM. Calibration and sensitivity analysis suggest that the optimal ESM size is between the current and twice the size of the agreed-upon ESM. Journal: The European Journal of Finance Pages: 915-933 Issue: 10 Volume: 20 Year: 2014 Month: 10 X-DOI: 10.1080/1351847X.2014.880998 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.880998 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:915-933 Template-Type: ReDIF-Article 1.0 Author-Name: Paweł Niszczota Author-X-Name-First: Paweł Author-X-Name-Last: Niszczota Title: Cross-country differences in personality and the foreign bias in international equity portfolios Abstract: In this study, we investigate whether cross-country variation in investors' mean openness to experience - one of the traits of the Five-Factor Model of personality - has an effect on the level of foreign bias present in international equity portfolios. Building on extant research showing a strong relationship between openness to experience and the attitude towards other cultures and risk, we argue that this personality trait is a construct that aggregates aspects of the psyche that influence the propensity to invest abroad. We find support for this hypothesis, showing that the more 'open' the country, the smaller the underrepresentation of foreign assets in its equity portfolio. Our analysis reveals that the impact of openness to experience is the most pronounced while making investments in countries with a weak information environment, or those that culturally or economically differ from the country the investor comes from, and suggests that international asset allocation is to some extent affected by psychological biases. Journal: The European Journal of Finance Pages: 934-956 Issue: 10 Volume: 20 Year: 2014 Month: 10 X-DOI: 10.1080/1351847X.2013.856332 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.856332 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:10:p:934-956 Template-Type: ReDIF-Article 1.0 Author-Name: Panos Xidonas Author-X-Name-First: Panos Author-X-Name-Last: Xidonas Author-Name: George Mavrotas Author-X-Name-First: George Author-X-Name-Last: Mavrotas Title: Multiobjective portfolio optimization with non-convex policy constraints: Evidence from the Eurostoxx 50 Abstract: Our purpose in this paper is to depart from the intrinsic pathology of the typical mean-variance formalism, due to both the restriction of its assumptions and difficulty of implementation. We manage to co-assess a set of sophisticated real-world non-convex investment policy limitations, such as cardinality constraints, buy-in thresholds, transaction costs, particular normative rules, etc., within the frame of complex scenarios, which demand for simultaneous optimization of multiple investment objectives. In such a case, the portfolio selection process reflects a mixed-integer multiobjective portfolio optimization problem. On this basis, we meticulously develop all the corresponding modeling procedures and then solve the underlying problem by use of a new, fast and very effective algorithm. The value of the suggested framework is integrated with the introduction of two novel concepts in the field of multiobjective portfolio optimization, i.e. the security impact plane and the barycentric portfolio. The first represents a measure of each security's impact in the efficient surface of Pareto optimal portfolios. The second serves as the vehicle for implementing a balanced strategy of iterative portfolio tuning. Moreover, a couple of some very informative graphs provide thorough visualization of all empirical testing results. The validity of the attempt is verified through an illustrative application on the Eurostoxx 50. The results obtained are characterized as very encouraging, since a sufficient number of efficient or Pareto optimal portfolios produced by the model, appear to possess superior out-of-sample returns with respect to the underlying benchmark. Journal: The European Journal of Finance Pages: 957-977 Issue: 11 Volume: 20 Year: 2014 Month: 11 X-DOI: 10.1080/1351847X.2012.733718 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.733718 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:11:p:957-977 Template-Type: ReDIF-Article 1.0 Author-Name: G. Rubbaniy Author-X-Name-First: G. Author-X-Name-Last: Rubbaniy Author-Name: I. P.P. van Lelyveld Author-X-Name-First: I. P.P. Author-X-Name-Last: van Lelyveld Author-Name: W. F.C. Verschoor Author-X-Name-First: W. F.C. Author-X-Name-Last: Verschoor Title: Home bias and Dutch pension funds' investment behavior Abstract: Using a panel data set of more than 600 Dutch pension funds (PFs) between 1992 and 2006, we investigate asset allocation behavior of Dutch PFs across multiple asset classes. We find that domestic investments, also known as home bias, in portfolio choices of Dutch institutional investors have fallen. We also find that the introduction of the euro, the dot-com crisis (1999-2001) and individual PF's characteristics are significant determinants of home bias. Overall, mature PFs' portfolios are diversified internationally, whereas large PFs seem to prefer to only scale up their foreign, less-risky positions at the expense of domestic fixed-income positions. The effect of the dot-com crisis is more pronounced for domestic bonds, whereas the introduction of the euro was more important for domestic equities. Journal: The European Journal of Finance Pages: 978-993 Issue: 11 Volume: 20 Year: 2014 Month: 11 X-DOI: 10.1080/1351847X.2013.784206 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.784206 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:11:p:978-993 Template-Type: ReDIF-Article 1.0 Author-Name: José Soares da Fonseca Author-X-Name-First: José Author-X-Name-Last: Soares da Fonseca Title: Stochastic durations, the convexity effect, and the impact of interest rate changes Abstract: This article shows that the equilibrium models of bond pricing do not preclude arbitrage opportunities caused by convexity. Consequently, stochastic durations derived from these models are limited in their ability to act as interest rate risk measures. The research of the present article makes use of an intertemporal utility maximization framework to determine the conditions under which duration is an adequate interest rate risk measure. Additionally, we show that zero coupon bonds satisfy those equilibrium conditions, whereas coupon bonds or bond portfolios do not as a result of the convexity effect. The results are supported by empirical evidence, which confirms the influence of convexity on the deviation of coupon bond returns from equilibrium. Journal: The European Journal of Finance Pages: 994-1007 Issue: 11 Volume: 20 Year: 2014 Month: 11 X-DOI: 10.1080/1351847X.2013.791631 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.791631 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:11:p:994-1007 Template-Type: ReDIF-Article 1.0 Author-Name: Jérôme Hubler Author-X-Name-First: Jérôme Author-X-Name-Last: Hubler Author-Name: Christine Louargant Author-X-Name-First: Christine Author-X-Name-Last: Louargant Author-Name: Jean-Noël Ory Author-X-Name-First: Jean-Noël Author-X-Name-Last: Ory Author-Name: Philippe Raimbourg Author-X-Name-First: Philippe Author-X-Name-Last: Raimbourg Title: Do rating agencies' decisions impact stock risks? Evidence from European markets Abstract: This article analyses the effect of rating agencies' decisions on stock risks for European issuers concerning five kinds of events. Our approach is an extension of dummy variable regression event study methodology, using a GARCH(1,1) estimation to capture simultaneously the impact on both systematic and specific stock risks. This new methodology allows us to obtain both global results by categories of rating decisions and individual results, event by event. We document, globally, a positive impact of upgrading on systematic risk, a negative impact of rating confirmation on specific risk, and no significant impact in all other cases. Regarding event-by-event results, the proportion of rating actions exhibiting a significant effect on risk is almost always observed between 20% and 30%. The weak evidence of a global effect on systematic risk may be due to the lack of informational content of the rating decisions on the stocks' risk, or the existence of rebalancing effects between systematic and idiosyncratic risks. Furthermore, it should be noticed that the decline in volatility in case of a rating affirmed is an insight of the certification role played by the agencies. Journal: The European Journal of Finance Pages: 1008-1036 Issue: 11 Volume: 20 Year: 2014 Month: 11 X-DOI: 10.1080/1351847X.2013.815125 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.815125 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:11:p:1008-1036 Template-Type: ReDIF-Article 1.0 Author-Name: Alexander Schulz Author-X-Name-First: Alexander Author-X-Name-Last: Schulz Author-Name: Jelena Stapf Author-X-Name-First: Jelena Author-X-Name-Last: Stapf Title: Price discovery on traded inflation expectations: does the financial crisis matter? Abstract: We analyze contributions of different markets, related by an approximate arbitrage relationship, to price discovery on traded inflation expectations and how it changed during the financial crisis. We use a new high-frequency data-set on inflation-indexed and nominal government bonds as well as inflation swaps to calculate information shares of break-even inflation rates in the euro area and the USA. In the euro area, for maturities up to 5 years new information comes from both the swap and the bond markets. For longer maturities, the swap market provides less and less information in the euro area. In the USA, the bond market dominates the price discovery process for all maturities. The severe financial crisis that spread out in Autumn 2008 drove a wedge between bond and swap break-even inflation rates in both currencies. Price discovery ceased to take place on the swap market. Disruptions coming from the short-end of the market even separated price formation on both segments for maturities of up to 6 years in the USA. Against the backdrop of the most severe financial crisis in decades, contributions to price formation concentrated a lot more on the presumably safest financial instrument: government bonds. Journal: The European Journal of Finance Pages: 1037-1063 Issue: 11 Volume: 20 Year: 2014 Month: 11 X-DOI: 10.1080/1351847X.2012.736872 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.736872 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:11:p:1037-1063 Template-Type: ReDIF-Article 1.0 Author-Name: P. Simmons Author-X-Name-First: P. Author-X-Name-Last: Simmons Author-Name: N. Tantisantiwong Author-X-Name-First: N. Author-X-Name-Last: Tantisantiwong Title: Equilibrium moment restrictions on asset returns: normal and crisis periods Abstract: Empirically, the covariance between stock returns varies with their volatility. We seek a robust theoretical explanation of this. With minimal assumptions, we model stochastic properties of equilibrium returns which result from the interaction between inter-temporal traders and noisy, price-sensitive short-term traders. The inter-temporal traders can have arbitrary investment rules, preferences and information. In all cases we find a set of restrictions between second moments of equilibrium returns. With two assets there is also a bound on the correlation between asset returns. Estimation with second moments of global stock returns supports our theoretical framework. Higher volatility in at least one market can increase comovement among markets. With globalization, covariances between two stock markets can also affect covariances between two other stock markets. We also find that the changes in trader behavior between normal and crisis periods lead to changes in the moment restrictions between asset returns. Journal: The European Journal of Finance Pages: 1064-1089 Issue: 11 Volume: 20 Year: 2014 Month: 11 X-DOI: 10.1080/1351847X.2012.742024 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.742024 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:11:p:1064-1089 Template-Type: ReDIF-Article 1.0 Author-Name: John Doukas Author-X-Name-First: John Author-X-Name-Last: Doukas Author-Name: Halit Gonenc Author-X-Name-First: Halit Author-X-Name-Last: Gonenc Author-Name: Auke Plantinga Author-X-Name-First: Auke Author-X-Name-Last: Plantinga Title: Private acquisition gains: A contingent claims explanation Abstract: This paper studies announcement returns of Western European acquisitions of private and public targets. It uses a contingent claims perspective to offer a new explanation for the difference in abnormal returns between acquirers of private and public targets. In this context, an acquisition is analogous to buying a call option and the value of the acquirer increases with uncertainty about its growth prospects (options). We test this idea by studying the relation between announcement returns and acquirer's characteristics that proxy for the existence of growth options. Consistent with the contingent claims hypothesis, the private acquisition gains are associated with the combined effects of growth options (having higher runup before the acquisition announcement) with low level of leverage (near-all equity capital) and with uncertainty (measured by age and analyst coverage of acquirers). Journal: The European Journal of Finance Pages: 1090-1113 Issue: 12 Volume: 20 Year: 2014 Month: 12 X-DOI: 10.1080/1351847X.2012.742025 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.742025 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1090-1113 Template-Type: ReDIF-Article 1.0 Author-Name: Sok Gee Chan Author-X-Name-First: Sok Gee Author-X-Name-Last: Chan Author-Name: Mohd Zaini Abd Karim Author-X-Name-First: Mohd Zaini Abd Author-X-Name-Last: Karim Author-Name: Bruce Burton Author-X-Name-First: Bruce Author-X-Name-Last: Burton Author-Name: Bora Aktan Author-X-Name-First: Bora Author-X-Name-Last: Aktan Title: Efficiency and risk in commercial banking: empirical evidence from East Asian countries Abstract: This paper analyses the effects of off-balance sheet (OBS) activities and various types of risks on the cost and profit efficiencies of banks in seven East Asian countries between 2001 and 2008. Cost and profit efficiency scores are estimated using the data envelopment analysis approach. The results of this analysis are then used to identify the impact of OBS activities and risk exposures on cost and profit efficiencies using a Tobit regression. Bank insolvency risk (as measured by z-scores) is positively related to profit efficiency, while interest sensitivity, size, equity to total assets and OBS exposures all impact on cost efficiency. The analysis of the impact of input and output slacks illustrates that in around 1 in 5 cases banks' cost efficiency can be improved by adjusting the former variables, whereas in only around 1 in 100 cases a similar outcome is possible for profit efficiency. Journal: The European Journal of Finance Pages: 1114-1132 Issue: 12 Volume: 20 Year: 2014 Month: 12 X-DOI: 10.1080/1351847X.2012.745008 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.745008 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1114-1132 Template-Type: ReDIF-Article 1.0 Author-Name: Hato Schmeiser Author-X-Name-First: Hato Author-X-Name-Last: Schmeiser Author-Name: Joël Wagner Author-X-Name-First: Joël Author-X-Name-Last: Wagner Author-Name: Alexandra Zemp Author-X-Name-First: Alexandra Author-X-Name-Last: Zemp Title: Proposal for a capital market-based guaranty scheme for the financial industry Abstract: In this paper, we introduce a capital market-based financial guaranty system as an alternative to current insurance guaranty funds and deposit insurance systems. The guaranty system secures clients' claims for the event of default by the financial company using a special purpose vehicle which issues bonds to investors. The proposed system, analogous to a credit-linked note, consists of one guaranty vehicle for each financial company. In a first step, we present equations in order to derive the two main input parameters of the special purpose vehicle: the premium and the principal. Subsequently, we analyze the impact of different investment actions taken by the financial companies protected by the guaranty vehicle on various shortfall measures. We find that it will be necessary to restrict the investment volume of investors from the financial industry in order to avoid systematic risk within the proposed guaranty scheme. By deriving practical implications, we show that the capital market-based solution has some key benefits compared to current deposit insurance and insurance guaranty schemes. Journal: The European Journal of Finance Pages: 1133-1160 Issue: 12 Volume: 20 Year: 2014 Month: 12 X-DOI: 10.1080/1351847X.2012.745007 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.745007 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1133-1160 Template-Type: ReDIF-Article 1.0 Author-Name: Argyro Panaretou Author-X-Name-First: Argyro Author-X-Name-Last: Panaretou Title: Corporate risk management and firm value: evidence from the UK market Abstract: The paper evaluates the effect of corporate risk management activities on firm value, using a sample of large UK non-financial firms. Following recent changes in financial reporting standards, we are able to collect detailed information on risk management activities from audited financial reports. This enables us to gain a better understanding of risk management practices and to investigate value implications of different types of hedging. Overall 86.88% of the firms in the sample use derivatives to manage at least one type of price risk. The hedging premium is statistically and economically significant for foreign currency derivative users, while we provide weak evidence that interest rate hedging increases firm value. The extent of hedging and the hedging horizon have an impact on the hedging premium, whereas operational risk management activities do not significantly influence the market value of the firm. Journal: The European Journal of Finance Pages: 1161-1186 Issue: 12 Volume: 20 Year: 2014 Month: 12 X-DOI: 10.1080/1351847X.2013.766625 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.766625 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1161-1186 Template-Type: ReDIF-Article 1.0 Author-Name: Tsangyao Chang Author-X-Name-First: Tsangyao Author-X-Name-Last: Chang Author-Name: Chien-Chiang Lee Author-X-Name-First: Chien-Chiang Author-X-Name-Last: Lee Author-Name: Chi-Hung Chang Author-X-Name-First: Chi-Hung Author-X-Name-Last: Chang Title: Does insurance activity promote economic growth? Further evidence based on bootstrap panel Granger causality test Abstract: This study applies the bootstrap panel Granger causality test to test whether insurance activity promotes economic growth, using data from 10 OECD countries over the period of 1979-2006. Empirical results indicate that one-way Granger causality running from all insurance activities to economic growth for France, Japan, Netherlands, Switzerland, and the UK, and economic growth Granger causes insurance activities in Canada (for life insurance), Italy (for total and life insurance) and the USA (for total and non-life insurance). There is a two-way Granger causality between life insurance activity and economic growth in the USA, while no causality between insurance activities and economic growth is found in Belgium (for all insurance), Canada (for total and non-life insurance), Italy (for non-life insurance) and Sweden (for life insurance). Our results also confirm the finding of Ward and Zurbruegg [Does insurance promote economic growth? Evidence from OECD economies. Journal of Risk and Insurance 67, no. 4: 489-506] showing that the insurance-growth nexus varies across countries, since their paper have previously demonstrated heterogeneity in this vein. In an analysis of a broader, though overlapping 17-country sample and taking into account banking activities, the results suggest the importance of including banking activities when investigating the insurance-growth relationship. Journal: The European Journal of Finance Pages: 1187-1210 Issue: 12 Volume: 20 Year: 2014 Month: 12 X-DOI: 10.1080/1351847X.2012.757555 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.757555 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1187-1210 Template-Type: ReDIF-Article 1.0 Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: George Dotsis Author-X-Name-First: George Author-X-Name-Last: Dotsis Author-Name: Xiaoquan Liu Author-X-Name-First: Xiaoquan Author-X-Name-Last: Liu Author-Name: Jia Zhai Author-X-Name-First: Jia Author-X-Name-Last: Zhai Title: Investor sentiment and value and growth stock index options Abstract: The paper examines the relationship between both individual and institutional investor sentiment measures and the risk-neutral skewness (RNS) of seven stock index options comprising either growth or value stocks. It provides novel evidence that growth index option prices are affected by sentiment measures. The regression results indicate a significantly positive relationship between sentiment measures and the RNS estimated from four growth index options and a negative relationship with two value index options. The results are economically significant since an associated long-short trading strategy yields high abnormal returns with a Sharpe ratio of up to 1.1 and zero exposure to systematic risk. These high abnormal returns provide evidence of a value premium type anomaly in the index options markets. Journal: The European Journal of Finance Pages: 1211-1229 Issue: 12 Volume: 20 Year: 2014 Month: 12 X-DOI: 10.1080/1351847X.2013.779290 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.779290 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1211-1229 Template-Type: ReDIF-Article 1.0 Author-Name: Daniella Acker Author-X-Name-First: Daniella Author-X-Name-Last: Acker Author-Name: Nigel Duck Author-X-Name-First: Nigel Author-X-Name-Last: Duck Title: Inflation illusion and the dividend yield: evidence from the UK Abstract: We report evidence that the UK dividend yield and expected inflation are positively correlated from 1962 to 1997, but negatively correlated subsequently. Using a commonly used VAR (vector auto-regression)-based procedure we find strong evidence that the positive correlation is caused both by inflation illusion and the effect of inflation on required rates of return. We also find some evidence that it is caused by inflation rationally reducing expected real dividend growth. We find that Chen and Zhao's (2009. "Return Decomposition." Review of Financial Studies 22 (12): 5213-5249) criticism of the VAR-based procedure has little empirical relevance but that the procedure can be highly sensitive to the choice of data period. Journal: The European Journal of Finance Pages: 1230-1245 Issue: 12 Volume: 20 Year: 2014 Month: 12 X-DOI: 10.1080/1351847X.2013.784207 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.784207 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:20:y:2014:i:12:p:1230-1245 Template-Type: ReDIF-Article 1.0 Author-Name: Bert D'Espallier Author-X-Name-First: Bert Author-X-Name-Last: D'Espallier Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Title: Does the investment opportunities bias affect the investment-cash flow sensitivities of unlisted SMEs? Abstract: Using a panel of 5999 Belgian small- and medium-sized enterprises (SMEs) over the period 2002-2008, we employ a Bayesian approach to derive firm-varying investment-cash flow sensitivities (ICFS) from reduced-form investment equations which include different measures of investment opportunities suitable for unlisted firms. We find that all our models yield similar ICFS, which are significantly related to a wide set of proxies for financing constraints and orthogonal to our measures of investment opportunities. These findings suggest that the ICFS of SMEs do not simply reflect investment opportunities. The investment opportunities bias may therefore have been overstated in previous literature. Journal: The European Journal of Finance Pages: 1-25 Issue: 1 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2012.752398 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.752398 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:1:p:1-25 Template-Type: ReDIF-Article 1.0 Author-Name: Domenico Curcio Author-X-Name-First: Domenico Author-X-Name-Last: Curcio Author-Name: Iftekhar Hasan Author-X-Name-First: Iftekhar Author-X-Name-Last: Hasan Title: Earnings and capital management and signaling: the use of loan-loss provisions by European banks Abstract: This paper investigates the relationship between loan-loss provisions (LLPs) and earnings management in the context of the capital adequacy of Euro Area (EA) banks versus non-EA credit institutions. This paper also examines whether LLPs signal managements' expectations concerning future bank profits to investors. Additionally, this paper traces the role of bank regulations and creditor protection systems in explaining income smoothing. Evidence drawn from the 1996 to 2006 period indicates that LLPs do reflect changes in the expected quality of a bank's loan portfolio for both groups of banks, and that earnings management is an important determinant of LLPs for EA intermediaries, whereas non-EA credit institutions use LLPs to signal private information to outsiders. The paper also finds that higher protection of creditors' rights significantly reduces the incentives to smooth earnings for EA banks. During the recent financial crisis, EA bank managers are much more concerned with their credit portfolio quality and do not use LLPs for discretionary purposes, whereas LLPs at non-EA banks are used to smooth income more than for the purposes of managing capital ratios or conveying private information about future performance to the market. Journal: The European Journal of Finance Pages: 26-50 Issue: 1 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2012.762408 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.762408 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:1:p:26-50 Template-Type: ReDIF-Article 1.0 Author-Name: Lieven De Moor Author-X-Name-First: Lieven Author-X-Name-Last: De Moor Author-Name: Piet Sercu Author-X-Name-First: Piet Author-X-Name-Last: Sercu Title: The smallest stocks are not just smaller: global evidence Abstract: Using an international Thomson Reuters Datastream database, where size coverage is unusually wide and data errors have been reduced to a low level, we show that some specification decisions, and especially those related to size, may have a significant impact on asset-pricing test results. We also show that, in data with wider coverage with respect to size, the Fama and French factor portfolios need to be adjusted and their number increased. Specifically, (i) standard asset-pricing models leave pricing errors for the 10% smallest stocks, and (ii) two additional risk factors (i.e. one micro-stock factor and one extreme book-to-market factor) are needed to capture this mispricing. This holds both in USA and international data. Further research is needed to measure the separate relevance of the possible economic interpretations and to identify more economic explanations for the additional risks associated with the smallest stocks. Journal: The European Journal of Finance Pages: 51-70 Issue: 1 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2013.769889 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.769889 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:1:p:51-70 Template-Type: ReDIF-Article 1.0 Author-Name: Nida Abdioglu Author-X-Name-First: Nida Author-X-Name-Last: Abdioglu Author-Name: Arif Khurshed Author-X-Name-First: Arif Author-X-Name-Last: Khurshed Author-Name: Konstantinos Stathopoulos Author-X-Name-First: Konstantinos Author-X-Name-Last: Stathopoulos Title: Firm innovation and institutional investment: the role of the Sarbanes-Oxley Act Abstract: This paper investigates the effect of the Sarbanes-Oxley Act (SOX) on the relation between institutional ownership (IO) and firm innovation. We find that US firms investing in innovation attract more institutional capital post-SOX. Prior literature identifies two SOX effects on the average US firm that could drive this relation, that is, a decreased level of information asymmetry (direct effect) and the consequent increased market liquidity (indirect effect). Our findings overwhelmingly support the direct effect. In particular, we find that the positive relation between IO and innovation post-SOX is mainly driven by passive and dedicated institutional investors. These investors benefit greatly from a reduction in the firm's information asymmetry but receive little gain from improvements in market liquidity, given their long-term trading horizon. Our results are robust to different model specifications, including difference-in-differences tests, which alleviate concerns about the impact of confounding effects on our conclusions. Taken together, our findings indicate an important policy effect of SOX, namely, the strengthening of institutional investor support for firm innovation. Journal: The European Journal of Finance Pages: 71-92 Issue: 1 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2013.769890 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.769890 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:1:p:71-92 Template-Type: ReDIF-Article 1.0 Author-Name: Xiaoquan Liu Author-X-Name-First: Xiaoquan Author-X-Name-Last: Liu Author-Name: Jing-Ming Kuo Author-X-Name-First: Jing-Ming Author-X-Name-Last: Kuo Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Title: A pricing kernel approach to valuing options on interest rate futures Abstract: This paper builds on existing asset pricing models in an intertemporal capital asset pricing model framework to investigate the pricing of options on interest rate futures. It addresses the issues of selecting the preferred pricing kernel model by employing the second Hansen-Jagannathan distance criterion. This criterion restricts the set of admissible models to those with a positive stochastic discount factor that ensures the model is arbitrage-free. The results indicate that the three-term polynomial pricing kernel with three non-wealth-related state variables, namely the real interest rate, maximum Sharpe ratio, and implied volatility, clearly dominates the other candidates. This pricing kernel is always strictly positive and everywhere monotonically decreasing in market returns in conformity with economic theory. Journal: The European Journal of Finance Pages: 93-110 Issue: 2 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2013.779289 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.779289 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:2:p:93-110 Template-Type: ReDIF-Article 1.0 Author-Name: Andrea Cipollini Author-X-Name-First: Andrea Author-X-Name-Last: Cipollini Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Hyunchul Lee Author-X-Name-First: Hyunchul Author-X-Name-Last: Lee Title: The European sovereign debt market: from integration to segmentation Abstract: This paper investigates the impact of European Monetary Union (EMU) and of the recent financial and fiscal crisis on the integration of the European sovereign debt market using annual data 1992-2010. The panel regression dependent variable is time-varying market linkages computed from daily realised correlations between sovereign bond returns for 13 European economies and Germany. The results indicate that the elimination of currency risk following the implementation of EMU led to a fundamental and significant one-off increase in integration. The net impact of fiscal fundamentals was negligible up until 2009 as the markets seemed to be pricing in a potential bailout for member states in crisis and not fully pricing default risk. However, by 2010 the parlous situation of the peripheral economies lead the markets to price default risk and heralded a return to segmentation. The related increase in peripheral economy sovereign spreads has exacerbated the problem of fiscal imbalances which pose a major challenge for policy-makers. Journal: The European Journal of Finance Pages: 111-128 Issue: 2 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2013.788535 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.788535 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:2:p:111-128 Template-Type: ReDIF-Article 1.0 Author-Name: Ian Davidson Author-X-Name-First: Ian Author-X-Name-Last: Davidson Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: Time varying costs of capital and the expected present value of future cash flows Abstract: The use of an inter-temporally constant discount rate or cost of capital is a strong assumption in many ex ante models of finance and in applied procedures such as capital budgeting. We investigate how robust this assumption is by analysing the implications of allowing the cost of capital to vary stochastically over time. We use the Feynman-Kac functional to demonstrate how there will, in general, be systematic differences between present values computed on the assumption that the currently prevailing cost of capital will last indefinitely into the future and present values determined by discounting cash flows at the expected costs of capital that apply up until the point in time at which cash flows are to be received. Our analysis is based on three interpretations of the Feynman-Kac functional. The first assumes that the cost of capital evolves in terms of a state variable characterised by an Uhlenbeck and Ornstein ("On the Theory of the Brownian Motion." Physical Review 36(5): 823-841) process. The second and third interpretations of the Feynman-Kac functional are based on the continuous time branching process. The first of these assumes that the state variable tends to drift upwards over time, whilst the second assumes that there is no drift in the state variable. Our analysis shows that for all three stochastic processes there are significant differences between present values computed under the assumption that the currently prevailing cost of capital will last indefinitely into the future and present values determined by discounting cash flows at the expected costs of capital that apply up until the point in time at which cash flows are to be received. Comparisons are also made with the environmental economics literature where similar problems have been addressed by invoking a 'gamma discounting' methodology. Journal: The European Journal of Finance Pages: 129-146 Issue: 2 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2013.802248 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.802248 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:2:p:129-146 Template-Type: ReDIF-Article 1.0 Author-Name: Xiuping Hua Author-X-Name-First: Xiuping Author-X-Name-Last: Hua Author-Name: Laixiang Sun Author-X-Name-First: Laixiang Author-X-Name-Last: Sun Author-Name: Tianyi Wang Author-X-Name-First: Tianyi Author-X-Name-Last: Wang Title: Impact of exchange rate regime reform on asset returns in China Abstract: Employing monthly data over the period 1999-2010, this paper examines the impact of China's exchange rate regime reform in July 2005 on three major asset markets: house, land, and stocks. We test whether the reform, which switches from a fixed exchange rate regime to a managed floating one, has brought forward structural changes to asset return dynamics. The results suggest that the exchange rate regime switch exerted the most significant impact on house and land returns at the national level, in terms of both returns and their volatilities. In contrast, its impact on China's stock market was moderate, with no structural change being detected in its returns and only weak structural change being found in the dynamics of its volatility. We also find that in comparison with other popular explanatory variables, broad money supply and inflation have the largest explanatory power on housing and land returns in China after the policy reform. Journal: The European Journal of Finance Pages: 147-171 Issue: 2 Volume: 21 Year: 2015 Month: 1 X-DOI: 10.1080/1351847X.2013.838183 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.838183 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:2:p:147-171 Template-Type: ReDIF-Article 1.0 Author-Name: Frank J. Fabozzi Author-X-Name-First: Frank J. Author-X-Name-Last: Fabozzi Author-Name: Dennis Vink Author-X-Name-First: Dennis Author-X-Name-Last: Vink Title: The information content of three credit ratings: the case of European residential mortgage-backed securities Abstract: We assess the information content of three credit ratings for tranches of newly issued European residential mortgage-backed securities. We find that tranches rated by three credit rating agencies where the rating by Standard & Poor's (S&P's) Ratings Service or Fitch is inferior to Moody's lead to higher funding costs and reflects what we refer to as rating risk. Our results suggest that market participants do not view credit ratings by Fitch and S&P's as redundant despite the fact that both employ the same rating approach. Journal: The European Journal of Finance Pages: 172-194 Issue: 3 Volume: 21 Year: 2015 Month: 2 X-DOI: 10.1080/1351847X.2013.862838 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.862838 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:3:p:172-194 Template-Type: ReDIF-Article 1.0 Author-Name: Marti Sagarra Author-X-Name-First: Marti Author-X-Name-Last: Sagarra Author-Name: Cecilio Mar-Molinero Author-X-Name-First: Cecilio Author-X-Name-Last: Mar-Molinero Author-Name: Miguel García-Cestona Author-X-Name-First: Miguel Author-X-Name-Last: García-Cestona Title: Spanish savings banks in the credit crunch: could distress have been predicted before the crisis? A multivariate statistical analysis Abstract: Spanish savings banks (Cajas de Ahorro) have had a long and distinguished history over more than 100 years of existence. They have served well the community and small businesses. However, they have been heavily affected by the 2007 banking crisis and they are on the verge of disappearing. Some of them had to merge with other institutions or had to be rescued, while others became banks. We show that there was statistical evidence to identify, before the crisis, structural differences between successful Cajas and those that had to be rescued. The technical approach is based on multidimensional scaling (MDS) analysis. MDS has the advantage that the main characteristics of the study can be presented in a visual form, and thus facilitate communication of the results with regulators, politicians, and the community at large. We complete the study with the time path of four institutions: two that survived and two that had to be rescued. Journal: The European Journal of Finance Pages: 195-214 Issue: 3 Volume: 21 Year: 2015 Month: 2 X-DOI: 10.1080/1351847X.2013.784208 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.784208 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:3:p:195-214 Template-Type: ReDIF-Article 1.0 Author-Name: Guy Kaplanski Author-X-Name-First: Guy Author-X-Name-Last: Kaplanski Author-Name: Haim Levy Author-X-Name-First: Haim Author-X-Name-Last: Levy Title: Value-at-risk capital requirement regulation, risk taking and asset allocation: a mean-variance analysis Abstract: In this study, the mean-variance framework is employed to analyze the impact of the Basel value-at-risk (VaR) market risk regulation on the institution's optimal investment policy, the stockholders' welfare, as well as the tendency of the institution to change the risk profile of the held portfolio. It is shown that with the VaR regulation, the institution faces a new regulated capital market line, which induces resource allocation distortion in the economy. Surprisingly, only when a riskless asset is available does VaR regulation induce the institution to reduce risk. Otherwise, the regulation may induce higher risk, accompanied by asset allocation distortion. On the positive side, the regulation implies an upper bound on the risk the institution takes and it never induces the firm to select an inefficient portfolio. Moreover, when the riskless asset is available, tightening the regulation always increases the amount of maintained eligible capital and decreases risk. Journal: The European Journal of Finance Pages: 215-241 Issue: 3 Volume: 21 Year: 2015 Month: 2 X-DOI: 10.1080/1351847X.2013.802249 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.802249 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:3:p:215-241 Template-Type: ReDIF-Article 1.0 Author-Name: Elena Beccalli Author-X-Name-First: Elena Author-X-Name-Last: Beccalli Author-Name: Saverio Bozzolan Author-X-Name-First: Saverio Author-X-Name-Last: Bozzolan Author-Name: Andrea Menini Author-X-Name-First: Andrea Author-X-Name-Last: Menini Author-Name: Philip Molyneux Author-X-Name-First: Philip Author-X-Name-Last: Molyneux Title: Earnings management, forecast guidance and the banking crisis Abstract: This paper studies earnings management (EM) and forecast guidance (FG) activities of European banks between 2004 and 2008. Using 22,564 analyst forecasts for 55 banks, we find that the proportion of banks hitting or beating analyst consensus fell from 68.22% pre-crisis to 28.13% during the crisis. Banks enjoy higher cumulative adjusted returns (CARs) when they hit analyst consensus only in the crisis. EM is evident pre- but not during the crisis - it has no CAR effects. FG increases the probability of hitting benchmark earnings and during the crisis yields higher CARs. EM and FG act as complements in the crisis period. Journal: The European Journal of Finance Pages: 242-268 Issue: 3 Volume: 21 Year: 2015 Month: 2 X-DOI: 10.1080/1351847X.2013.809548 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.809548 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:3:p:242-268 Template-Type: ReDIF-Article 1.0 Author-Name: Franziska Becker Author-X-Name-First: Franziska Author-X-Name-Last: Becker Author-Name: Marc Gürtler Author-X-Name-First: Marc Author-X-Name-Last: Gürtler Author-Name: Martin Hibbeln Author-X-Name-First: Martin Author-X-Name-Last: Hibbeln Title: Markowitz versus Michaud: portfolio optimization strategies reconsidered Abstract: Several attempts have been made to reduce the impact of estimation errors on the optimal portfolio composition. On the one hand, improved estimators of the necessary moments have been developed, and on the other hand, heuristic methods have been generated to enhance the portfolio performance, for instance, the 'resampled efficiency' of Michaud [1998. Efficient Asset Management: A Practical Guide to Stock Portfolio Optimization and Asset Allocation. Boston: Harvard Business School Press]. We compare the out-of-sample performance of traditional mean-variance optimization by Markowitz [1952. "Portfolio Selection." Journal of Finance 7 (1): 77-91] with Michaud's resampled efficiency in a comprehensive simulation study for a large number of relevant estimators appearing in the literature. In addition, we perform an empirical study to confirm the simulation results. Within the framework of the analyses we consider different estimation periods as well as unconstrained and constrained portfolio optimization problems. The main findings are that Markowitz outperforms Michaud on average but the impact of different estimators and constraints is significantly larger. Precisely, in most situations, the estimator of Frost and Savarino [1988. "For Better Performance: Constrain Portfolio Weights." Journal of Portfolio Management 15 (1): 29-34] proves to work excellent. However, if the variance of estimators is large, for example, for short observation periods or large samples, it is recommendable to additionally implement constraints or to use the estimator of Ledoit and Wolf [2003. "Improved Estimation of the Covariance Matrix of Stock Returns with an Application to Portfolio Selection." Journal of Empirical Finance 10 (5): 603-622]. Journal: The European Journal of Finance Pages: 269-291 Issue: 4 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2013.830138 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.830138 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:4:p:269-291 Template-Type: ReDIF-Article 1.0 Author-Name: Klaus Mayer Author-X-Name-First: Klaus Author-X-Name-Last: Mayer Author-Name: Thomas Schmid Author-X-Name-First: Thomas Author-X-Name-Last: Schmid Author-Name: Florian Weber Author-X-Name-First: Florian Author-X-Name-Last: Weber Title: Modeling electricity spot prices: combining mean reversion, spikes, and stochastic volatility Abstract: With the liberalization of electricity trading, the electricity market has grown rapidly over the last decade. However, while spot and future markets are currently rather liquid, option trading is still limited. One of the potential reasons for this is that the electricity spot price process remains a puzzle to researchers and practitioners. In this paper, we propose an approach to model electricity spot prices that combines mean reversion, spikes, negative prices, and stochastic volatility. Thereby, we use different mean reversion rates for 'normal' and 'extreme' (spike) periods. Furthermore, all model parameters can easily be estimated using historical data. Consequently, we argue that this model does not only extend the academic literature on electricity spot price modeling, but is also suitable for practical purposes, such as an underlying price model for option pricing. Journal: The European Journal of Finance Pages: 292-315 Issue: 4 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2012.716775 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.716775 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:4:p:292-315 Template-Type: ReDIF-Article 1.0 Author-Name: Georgios Sermpinis Author-X-Name-First: Georgios Author-X-Name-Last: Sermpinis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Christian L. Dunis Author-X-Name-First: Christian L. Author-X-Name-Last: Dunis Title: Modelling commodity value at risk with Psi Sigma neural networks using open-high-low-close data Abstract: The motivation for this paper is to investigate the use of a promising class of neural network models, Psi Sigma (PSI), when applied to the task of forecasting the one-day ahead value at risk (VaR) of the oil Brent and gold bullion series using open-high-low-close data. In order to benchmark our results, we also consider VaR forecasts from two different neural network designs, the multilayer perceptron and the recurrent neural network, a genetic programming algorithm, an extreme value theory model along with some traditional techniques such as an ARMA-Glosten, Jagannathan, and Runkle (1,1) model and the RiskMetrics volatility. The forecasting performance of all models for computing the VaR of the Brent oil and the gold bullion is examined over the period September 2001-August 2010 using the last year and half of data for out-of-sample testing. The evaluation of our models is done by using a series of backtesting algorithms such as the Christoffersen tests, the violation ratio and our proposed loss function that considers not only the number of violations but also their magnitude. Our results show that the PSI outperforms all other models in forecasting the VaR of gold and oil at both the 5% and 1% confidence levels, providing an accurate number of independent violations with small magnitude. Journal: The European Journal of Finance Pages: 316-336 Issue: 4 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2012.744763 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.744763 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:4:p:316-336 Template-Type: ReDIF-Article 1.0 Author-Name: Patrick O'Sullivan Author-X-Name-First: Patrick Author-X-Name-Last: O'Sullivan Author-Name: David Edelman Author-X-Name-First: David Author-X-Name-Last: Edelman Title: Adaptive universal portfolios Abstract: In this article, we consider Cover's universal portfolio and the problem of multi-period investment in a nonparametric setting. We show that Cover's universal portfolio is equivalent to a Bayes estimator of the optimal growth portfolio. However, as noted by Cover, it can take a long time for the universal portfolio to produce significant growth. Therefore, we propose the adaptive universal portfolio, which retains much of the qualitative nature of Cover's universal portfolio while enhancing early performance. An empirical study is carried out over a range of exchange traded funds over a 5 year period, which exhibits the enhanced early performance generated by the adaptive universal portfolio. Journal: The European Journal of Finance Pages: 337-351 Issue: 4 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2013.788534 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.788534 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:4:p:337-351 Template-Type: ReDIF-Article 1.0 Author-Name: Christian L. Dunis Author-X-Name-First: Christian L. Author-X-Name-Last: Dunis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Peter W. Middleton Author-X-Name-First: Peter W. Author-X-Name-Last: Middleton Author-Name: Andreas Karathanasopoulos Author-X-Name-First: Andreas Author-X-Name-Last: Karathanasopoulos Title: Trading and hedging the corn/ethanol crush spread using time-varying leverage and nonlinear models Abstract: In contribution to Dunis et al. [Modelling and Trading the Corn/Ethanol Crush Spread with Neural Networks. CIBEF Working Paper. Liverpool Business School. www.cibef.com], this investigation endeavours to expand the selection of forecasting applications by delving further into the realm of artificial intelligence and nonlinear modelling. The performances of a multilayer perceptron (MLP) neural network and higher order neural network (HONN) are gauged against a genetic programming algorithm (GPA). Further to this, a time-varying volatility filter is applied by leveraging during lower volatility regimes in order to enhance the trading performance of the spread while avoiding trading completely during times of high volatility. This paper models the corn/ethanol crush spread over a six-year period commencing on 23 March 2005 (when the ethanol futures contract was first traded on Chicago Board of Trade) through to 31 December 2010. The spread acts as a good indicator of an ethanol producer's profit margin, with corn being the principal raw ingredient used in a process called 'corn crushing' to produce ethanol as a means for alternative energy. Without leveraging, the GPA achieves the highest risk-adjusted returns followed by the HONN model. Once a time-varying leverage strategy is introduced, the ranking is maintained as GPA continues to be the most profitable model with the HONN registering the second best risk-adjusted returns, followed by the MLP neural network. On that basis, and without the benefit of hindsight as in the real world, a fund manager would have selected the GPA model regardless of whether he decides to leverage or not. Furthermore, it is also observed that the time-varying leveraging strategy significantly improves annualised returns as well as reducing maximum drawdowns, two desirable outcomes for trading and hedging. Journal: The European Journal of Finance Pages: 352-375 Issue: 4 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2013.830140 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.830140 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:4:p:352-375 Template-Type: ReDIF-Article 1.0 Author-Name: Yuanyuan Zhang Author-X-Name-First: Yuanyuan Author-X-Name-Last: Zhang Author-Name: Taufiq Choudhry Author-X-Name-First: Taufiq Author-X-Name-Last: Choudhry Title: Forecasting the daily dynamic hedge ratios by GARCH models: evidence from the agricultural futures markets Abstract: This paper investigates the forecasting ability of six different generalized autoregressive conditional heteroskedasticity (GARCH) models; bivariate GARCH, BEKK GARCH, GARCH-X, BEKK-X, Q-GARCH and GARCH-GJR based on two different distributions (normal and student-t). Forecast errors based on four agricultural commodities' futures portfolio return forecasts (based on forecasted hedge ratio) are employed to evaluate the out-of-sample forecasting ability of the six GARCH models. The four commodities under investigation are two storable commodities: wheat and soybean, and two non-storable commodities: live cattle and live hogs. We apply the rolling forecasting method and the Model Confidence Set approach to evaluate and compare the forecasting ability of the six GARCH models. Our results show that the forecasting performances of the six GARCH models are different for storable and non-storable agricultural commodities. We find that the BEKK-type models perform the best in the case of storable products, while the asymmetric GARCH models dominate in the case of non-storable commodities. These results are regardless of the forecast horizon and residual distributions. Journal: The European Journal of Finance Pages: 376-399 Issue: 4 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2013.794744 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.794744 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:4:p:376-399 Template-Type: ReDIF-Article 1.0 Author-Name: Sovan Mitra Author-X-Name-First: Sovan Author-X-Name-Last: Mitra Title: The relationship between conditional value at risk and option prices with a closed-form solution Abstract: Options and CVaR (conditional value at risk) are significant areas of research in their own right; moreover, both are important to risk management and understanding of risk. Despite the importance and the overlap of interests in CVaR and options, the literature relating the two is virtually non-existent. In this paper we derive a model-free, simple and closed-form analytic equation that determines the CVaR associated with a put option. This relation is model free and is applicable in complete and incomplete markets. We show that we can account for implied volatility effects using the CVaR risk of options. We show how the relation between options and CVaR has important risk management implications, particularly in terms of integrated risk management and preventing arbitrage opportunities. We conduct numerical experiments to demonstrate obtaining CVaR from empirical options data. Journal: The European Journal of Finance Pages: 400-425 Issue: 5 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2013.830141 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.830141 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:5:p:400-425 Template-Type: ReDIF-Article 1.0 Author-Name: Dimitris K. Chronopoulos Author-X-Name-First: Dimitris K. Author-X-Name-Last: Chronopoulos Author-Name: Hong Liu Author-X-Name-First: Hong Author-X-Name-Last: Liu Author-Name: Fiona J. McMillan Author-X-Name-First: Fiona J. Author-X-Name-Last: McMillan Author-Name: John O.S. Wilson Author-X-Name-First: John O.S. Author-X-Name-Last: Wilson Title: The dynamics of US bank profitability Abstract: We examine the determinants of profitability for a large sample of US banks over the period 1984-2010. Specifically, we assess the extent to which short-run profits persist, and whether such persistence is affected by changes in regulation and the recent financial crisis. Our findings suggest that the competitive process reduces positions of abnormal profitability, albeit this is not immediate. There is also evidence that changes in regulation enacted during the 1990s affected both the level and persistence of bank profitability. The financial crisis of 2007-2010 appears to have resulted in an increase in the persistence of bank profitability. Journal: The European Journal of Finance Pages: 426-443 Issue: 5 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2013.838184 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.838184 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:5:p:426-443 Template-Type: ReDIF-Article 1.0 Author-Name: Andi Duqi Author-X-Name-First: Andi Author-X-Name-Last: Duqi Author-Name: Aziz Jaafar Author-X-Name-First: Aziz Author-X-Name-Last: Jaafar Author-Name: Giuseppe Torluccio Author-X-Name-First: Giuseppe Author-X-Name-Last: Torluccio Title: Mispricing and risk of R&D investment in European firms Abstract: We study whether R&D-intensive firms earn superior stock returns compared to matched size and book-to-market portfolios across several financial markets in Europe. Mispricing can arise if investors are not able to correctly estimate the long-term benefits of R&D investment or whether R&D firms are more risky than others. The results confirm that more innovative firms can earn future excess returns. Stocks listed on continental Europe markets and operating in high-tech sectors are more prone to undervaluation. This can be caused in the first case by information asymmetries that are more severe in bank-based countries. No evidence is found for a different risk pattern of R&D-intensive stocks. Journal: The European Journal of Finance Pages: 444-465 Issue: 5 Volume: 21 Year: 2015 Month: 3 X-DOI: 10.1080/1351847X.2013.838185 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.838185 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:5:p:444-465 Template-Type: ReDIF-Article 1.0 Author-Name: Andros Gregoriou Author-X-Name-First: Andros Author-X-Name-Last: Gregoriou Title: Market quality of dealer versus hybrid markets for illiquid securities: new evidence from the FTSE AIM Index Abstract: This paper explores liquidity effects following the introduction of electronic limit-order trading for 48 illiquid stocks listed on the FTSE AIM Index. We find evidence of a sustained increase in the liquidity of the stocks as a result of limit-order trading. Furthermore, the enhancement in the liquidity of the stocks is due to a decrease in the direct cost of trading as opposed to a reduction in the asymmetric information cost of transacting. The empirical findings suggest that a hybrid market with a limit-order book and voluntary dealers outperforms a dealership market with obligatory market makers for illiquid stocks. Journal: The European Journal of Finance Pages: 466-485 Issue: 6 Volume: 21 Year: 2015 Month: 4 X-DOI: 10.1080/1351847X.2013.838186 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.838186 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:6:p:466-485 Template-Type: ReDIF-Article 1.0 Author-Name: Jung-Bin Su Author-X-Name-First: Jung-Bin Author-X-Name-Last: Su Title: How candlestick features affect the performance of volatility forecasts: evidence from the stock market Abstract: In this study, we used asymmetric GJR-X models to investigate how the return and volatility estimates in the stock market on any given day are affected by the features of the preceding day's candlestick. Empirical results show that, first, for symmetric volatility specification, the upper and lower shadows of yesterday can, respectively, lower and raise the return today, whereas both upper and lower shadows of yesterday can increase today's volatility. Notably, the upper and lower shadows elicited asymmetric responses in the sizes of the volatility and return increments. Conversely, for asymmetric volatility specification, leverage effect may affect the asymmetric response and prevent the upper shadow from influencing the return and volatility. Second, for symmetric volatility specification, the black and white real bodies of yesterday can, respectively, augment and abate today's return and volatility, indicating that the black real body produces a distinct type of leverage effect to influence volatility. Importantly, for asymmetric specification, the effects of the black and white real bodies appear the same as for the symmetric specification, but are less significant. Lastly, the real bodies (or, respectively, asymmetric volatility specification) influenced the accuracy of volatility forecasts more strongly than the upper and lower shadows (or, respectively, symmetric volatility specification). Journal: The European Journal of Finance Pages: 486-506 Issue: 6 Volume: 21 Year: 2015 Month: 4 X-DOI: 10.1080/1351847X.2013.850440 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.850440 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:6:p:486-506 Template-Type: ReDIF-Article 1.0 Author-Name: Nelson Areal Author-X-Name-First: Nelson Author-X-Name-Last: Areal Author-Name: Benilde Oliveira Author-X-Name-First: Benilde Author-X-Name-Last: Oliveira Author-Name: Raquel Sampaio Author-X-Name-First: Raquel Author-X-Name-Last: Sampaio Title: When times get tough, gold is golden Abstract: We investigate the dynamic behaviour of conditional correlations between the US market, gold and two gold financial proxies using a multivariate dynamic conditional correlation model over different market regimes. A comprehensive period of time is analysed covering approximately 37 years of daily data, from August 1976 to March 2013, as well as a shorter period, of about 15 years, from September 1998 to March 2013. Both periods include the recent sub-prime financial crisis. Market regimes are defined using bull/bear states and alternatively using volatility regimes from a three-state Markov-switching variance model. An index of US mining companies and a value-weighted portfolio of US gold mutual funds are treated as potential proxies for an investment in gold. Two important conclusions emerge from our study. The first is that, even in the context of a dynamic correlation analysis, gold is always a safe haven; negatively correlated with the stock market under adverse market conditions. The second is that, although the gold proxies considered here exhibit a low correlation with the stock market and therefore offer diversification benefits, they cannot be considered perfect substitutes of gold due to their lack of negative correlations with the market in times of turmoil. Journal: The European Journal of Finance Pages: 507-526 Issue: 6 Volume: 21 Year: 2015 Month: 4 X-DOI: 10.1080/1351847X.2013.854821 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.854821 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:6:p:507-526 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Breuer Author-X-Name-First: Wolfgang Author-X-Name-Last: Breuer Author-Name: Moritz Felde Author-X-Name-First: Moritz Author-X-Name-Last: Felde Title: Wealth effects of the Securities and Exchange Commission's 'terror tool' Abstract: In summer 2007, the Securities and Exchange Commission published an online tool with information on firms doing business in State Sponsor of Terrorism countries. We take sides with those arguing that for moral reasons, investors will have traded on the information provided in the tool by selling stocks of mentioned firms. Contrary to our expectation, we find no evidence of a negative stock price reaction during the time the tool was posted online but do find such reaction subsequent to the tool's publication. Additionally, we provide evidence for the notion that stigmatisation is not transitory. Journal: The European Journal of Finance Pages: 527-547 Issue: 7 Volume: 21 Year: 2015 Month: 5 X-DOI: 10.1080/1351847X.2013.856331 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.856331 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:7:p:527-547 Template-Type: ReDIF-Article 1.0 Author-Name: Kostas Andriosopoulos Author-X-Name-First: Kostas Author-X-Name-Last: Andriosopoulos Author-Name: Nikos Nomikos Author-X-Name-First: Nikos Author-X-Name-Last: Nomikos Title: Risk management in the energy markets and Value-at-Risk modelling: a hybrid approach Abstract: This paper proposes a set of Value-at-Risk (VaR) models appropriate to capture the dynamics of energy prices and subsequently quantify energy price risk by calculating VaR and expected shortfall measures. Amongst the competing VaR methodologies evaluated in this paper, besides the commonly used benchmark models, a Monte Carlo (MC) simulation approach and a hybrid MC with historical simulation approach, both assuming various processes for the underlying spot prices, are also being employed. All VaR models are empirically tested on eight spot energy commodities that trade futures contracts on the New York Mercantile Exchange (NYMEX) and the constructed Spot Energy Index. A two-stage evaluation and selection process is applied, combining statistical and economic measures, to choose amongst the competing VaR models. Finally, both long and short trading positions are considered as it is of utmost importance for energy traders and risk managers to be able to capture efficiently the characteristics of both tails of the distributions. Journal: The European Journal of Finance Pages: 548-574 Issue: 7 Volume: 21 Year: 2015 Month: 5 X-DOI: 10.1080/1351847X.2013.862173 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.862173 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:7:p:548-574 Template-Type: ReDIF-Article 1.0 Author-Name: Ivo J.M. Arnold Author-X-Name-First: Ivo J.M. Author-X-Name-Last: Arnold Title: One index fits none: the conundrum of euro area inflation-linked bonds Abstract: Recent empirical research has questioned the added value of inflation-linked bonds (ILBs) in a diversified portfolio, especially in the euro area. This paper relates this finding to the choice of price index. Euro area issuers of ILBs can choose between linking to a euro area or a national price index. We theoretically show that bonds linked to euro area inflation are less useful for diversification purposes than nationally ILBs. We also show that bonds linked to national price indices are imperfect hedges for national inflation. The latter finding is counterintuitive and arises because of monetary union. Our findings suggest that euro area governments may better service international investors with ILBs linked to their national price indices. Journal: The European Journal of Finance Pages: 575-583 Issue: 7 Volume: 21 Year: 2015 Month: 5 X-DOI: 10.1080/1351847X.2013.865102 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.865102 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:7:p:575-583 Template-Type: ReDIF-Article 1.0 Author-Name: Soosung Hwang Author-X-Name-First: Soosung Author-X-Name-Last: Hwang Author-Name: Alexandre Rubesam Author-X-Name-First: Alexandre Author-X-Name-Last: Rubesam Title: The disappearance of momentum Abstract: We investigate the dynamics of the momentum premium in the USA. The momentum premium is significantly positive only during certain periods, notably from the 1940s to the mid-1960s and from the mid-1970s to the late 1990s, and it has disappeared since the late 1990s. Our results further suggest that momentum profits have slowly disappeared since the early 1990s, in a process which was delayed by the occurrence of the high-tech and telecom stock bubble of the late 1990s. In particular, we estimate that the bubble accounted for at least 50% of momentum profits during the period from 1994 to 2000. Journal: The European Journal of Finance Pages: 584-607 Issue: 7 Volume: 21 Year: 2015 Month: 5 X-DOI: 10.1080/1351847X.2013.865654 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.865654 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:7:p:584-607 Template-Type: ReDIF-Article 1.0 Author-Name: Susanne Espenlaub Author-X-Name-First: Susanne Author-X-Name-Last: Espenlaub Author-Name: Arif Khurshed Author-X-Name-First: Arif Author-X-Name-Last: Khurshed Author-Name: Abdulkadir Mohamed Author-X-Name-First: Abdulkadir Author-X-Name-Last: Mohamed Title: VC investments and global exits Abstract: This paper examines exits of UK venture capital backers (VCs) from portfolio companies around the world. Mergers and acquisitions (M&A) are the most frequently used exit route for all investments, both in the UK and abroad. Exit through M&A is particularly common for investments in the UK while the probability of an exit through an initial public offering (IPO) is substantially lower for investments made in the UK than abroad. We are able to explain these country differences in terms of variations in the characteristics of VCs, portfolio companies, legal systems and market conditions. Portfolio companies backed by experienced VCs have high probabilities of exits through M&A or IPO. A successful exit is more likely when a VC syndicate includes an experienced member. The likelihood of a successful exit through M&A, IPO or management buyouts is high in countries with, and at times of, high stock market liquidity. Legal systems that provide more investor protection facilitate exits through IPO or M&A. Journal: The European Journal of Finance Pages: 608-628 Issue: 7 Volume: 21 Year: 2015 Month: 5 X-DOI: 10.1080/1351847X.2013.871736 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.871736 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:7:p:608-628 Template-Type: ReDIF-Article 1.0 Author-Name: Stefan Reitz Author-X-Name-First: Stefan Author-X-Name-Last: Reitz Author-Name: Markus A. Schmidt Author-X-Name-First: Markus A. Author-X-Name-Last: Schmidt Author-Name: Mark P. Taylor Author-X-Name-First: Mark P. Author-X-Name-Last: Taylor Title: Financial intermediation and the role of price discrimination in the foreign exchange market Abstract: Foreign exchange trading is performed in opaque and decentralized markets. The two-tier market structure consisting of a customer segment and an interdealer segment to which only market makers have access gives rise to the possibility of price discrimination. We develop a theoretical pricing model that accounts for market-power considerations and analyze a database of the trades of a foreign exchange market maker. We find that the market maker generally exerts low bargaining power vis-á-vis customers. The dealer earns lower average spreads on trades with financial customers than commercial customers, even though the former are perceived to convey exchange-rate-relevant information. Journal: The European Journal of Finance Pages: 629-645 Issue: 8 Volume: 21 Year: 2015 Month: 6 X-DOI: 10.1080/1351847X.2013.830139 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.830139 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:8:p:629-645 Template-Type: ReDIF-Article 1.0 Author-Name: Dionysia Dionysiou Author-X-Name-First: Dionysia Author-X-Name-Last: Dionysiou Title: Timing, earnings management and over-reaction around pure placings Abstract: This paper provides new evidence about firms conducting pure placings in the UK. It examines their abnormal performance (stock and operating), earnings management (accrual and real activities) and abnormal growth prospects for up to three years surrounding the event. It questions whether (i) timing, (ii) earnings management and/or (iii) over-reaction hypotheses can explain these performance, earnings quality and growth paths. The results document that pure placing firms have high earnings quality and abnormally high growth opportunities at the announcement. For this reason, the market is overenthusiastic. It expects more than what is eventually fulfilled, in line with the over-reaction hypothesis. Weak evidence that placing firms may exploit market timing is noted, whilst there is no supportive evidence of earnings management. These findings distinguish the earnings quality and growth opportunities of pure placing firms from that of firms conducting open offers, firm commitment offers and other seasoned equity offerings (SEO) that are not private placements, for which prior evidence reports mainly timing and/or earnings management prior to the event. This paper facilitates a better understanding of UK SEO. Journal: The European Journal of Finance Pages: 646-671 Issue: 8 Volume: 21 Year: 2015 Month: 6 X-DOI: 10.1080/1351847X.2013.833128 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.833128 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:8:p:646-671 Template-Type: ReDIF-Article 1.0 Author-Name: Dimitris Andriosopoulos Author-X-Name-First: Dimitris Author-X-Name-Last: Andriosopoulos Author-Name: Michael Steliaros Author-X-Name-First: Michael Author-X-Name-Last: Steliaros Author-Name: Dylan C. Thomas Author-X-Name-First: Dylan C. Author-X-Name-Last: Thomas Title: The short-term impact of director trading in UK closed-end funds Abstract: Most closed-end funds are transparent entities that hold securities that are actively traded in liquid markets. In such a setting, the argument that director transactions mitigate information asymmetry has very limited applicability. Our results provide support for the theory of Barber and Odean [2008. "All that Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors." Review of Financial Studies 21: 785-818]: retail investor decision-making is influenced by attention-grabbing events. Director purchases are one such attention-grabbing event and are associated with significant positive price returns - the magnitudes of which are linked to the size of the purchase, the size of the fund, and the investment mandate. Trading volumes increase at the time of the purchase but most of the initial price responses and trading volumes dissipate over the following 15 days. Journal: The European Journal of Finance Pages: 672-690 Issue: 8 Volume: 21 Year: 2015 Month: 6 X-DOI: 10.1080/1351847X.2013.867522 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.867522 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:8:p:672-690 Template-Type: ReDIF-Article 1.0 Author-Name: Otto Loistl Author-X-Name-First: Otto Author-X-Name-Last: Loistl Title: Emergence of macro-variables by evaluation and clustering of micro- activities Abstract: Recent finance and economic forecasting and risk calculation failures made obvious that macro-modelling without micro-foundation may be treacherous. Reliable macro-modelling requires the consistent bundling of individual actions into intermediate and macro-variables exploiting the individual actions' coordination and its dynamics. The degree of coordination may range from chaos - absence of coordination - to determined situations caused by macro-level equilibrium dictating any agent's actions and inhibiting interactions. Coordination clusters individual actions into real decision units such as companies, political parties and unions. It structures the emergent intermediate and macro-level situations vitally.The paper presents first a centennial history of prominent scholars' quotes questioning the equilibrium paradigm, a short survey of prevailing paradigm's deficiencies laid bare once again by the latest financial crises.It proposes second discrete choice (DC) - successfully applied in different fields - to model the individual agent's decision. DCs innovative integration into a Markov process provides a steady foundation to model interactions of individual agents consistently.The final section justifies the actions' proposed interactive bundling by referring to recent advances in data processing and network topology. The dynamic modelling of the actions' and interactions' coordination breaks fresh grounds both with regards to mathematical, computational and economic modeling requirements. The combination of latest developments in data processing like Big Data and the recently (re)discovered network topology capabilities may cope with these challenges. Journal: The European Journal of Finance Pages: 691-713 Issue: 9 Volume: 21 Year: 2015 Month: 7 X-DOI: 10.1080/1351847X.2013.871737 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.871737 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:9:p:691-713 Template-Type: ReDIF-Article 1.0 Author-Name: Emanuele Bajo Author-X-Name-First: Emanuele Author-X-Name-Last: Bajo Author-Name: Massimiliano Barbi Author-X-Name-First: Massimiliano Author-X-Name-Last: Barbi Author-Name: Silvia Romagnoli Author-X-Name-First: Silvia Author-X-Name-Last: Romagnoli Title: A generalized approach to optimal hedging with option contracts Abstract: In this paper, we develop a theoretical model in which a firm hedges a spot position using options in the presence of both quantity (production) and basis risks. Our optimal hedge ratio is fairly general, in that the dependence structure is modeled through a copula function representing the quantiles of the hedged position, and hence any quantile risk measure can be employed. We study the sensitivity of the exercise price which minimizes the risk of the hedged portfolio to the relevant parameters, and we find that the subjective risk aversion of the firm does not play any role. The only trade-off is between the effectiveness and cost of the hedging strategy. Journal: The European Journal of Finance Pages: 714-733 Issue: 9 Volume: 21 Year: 2015 Month: 7 X-DOI: 10.1080/1351847X.2013.875050 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.875050 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:9:p:714-733 Template-Type: ReDIF-Article 1.0 Author-Name: Markus Baltzer Author-X-Name-First: Markus Author-X-Name-Last: Baltzer Author-Name: Oscar Stolper Author-X-Name-First: Oscar Author-X-Name-Last: Stolper Author-Name: Andreas Walter Author-X-Name-First: Andreas Author-X-Name-Last: Walter Title: Home-field advantage or a matter of ambiguity aversion? Local bias among German individual investors Abstract: This paper investigates whether familiarity induced by ambiguity aversion can help explaining the local bias phenomenon among individual investors. Using geographic closeness as a proxy for investor familiarity, we find that investors pull out of (unfamiliar) remote stocks and pour into (familiar) local stocks during times of increased market uncertainty. Moreover, the magnitude of this 'flight to familiarity' increases in the spread of an investor's ambiguity (about expected returns) between local and remote stocks. Our results prove robust to a number of alternative explanations of local bias. Specifically, we rule out a 'home-field advantage', where investors are able to translate information advantages about nearby companies into excess returns on their local stockholdings. We conclude that individual investors' local bias is induced by ambiguity aversion in the portfolio selection process rather than a trading strategy based on superior information about local companies. Journal: The European Journal of Finance Pages: 734-754 Issue: 9 Volume: 21 Year: 2015 Month: 7 X-DOI: 10.1080/1351847X.2013.877514 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.877514 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:9:p:734-754 Template-Type: ReDIF-Article 1.0 Author-Name: André Betzer Author-X-Name-First: André Author-X-Name-Last: Betzer Author-Name: Markus Doumet Author-X-Name-First: Markus Author-X-Name-Last: Doumet Author-Name: Marc Goergen Author-X-Name-First: Marc Author-X-Name-Last: Goergen Title: Disentangling the link between stock and accounting performance in acquisitions Abstract: We study the accounting and stock performance of 4547 US acquisitions during 1989 and 2008. We categorise acquisitions into four types based on the four possible combinations of positive or negative abnormal stock performance and abnormal accounting performance. First, we compare the bidder, bid and target characteristics across the four types of acquisitions. We find significant differences. Second, with the help of existing theories we explain these differences in bidder, bid and target characteristics by differences in the acquisition motives. Journal: The European Journal of Finance Pages: 755-771 Issue: 9 Volume: 21 Year: 2015 Month: 7 X-DOI: 10.1080/1351847X.2014.890633 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.890633 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:9:p:755-771 Template-Type: ReDIF-Article 1.0 Author-Name: Chiara Coluzzi Author-X-Name-First: Chiara Author-X-Name-Last: Coluzzi Author-Name: Annalisa Ferrando Author-X-Name-First: Annalisa Author-X-Name-Last: Ferrando Author-Name: Carmen Martinez-Carrascal Author-X-Name-First: Carmen Author-X-Name-Last: Martinez-Carrascal Title: Financing obstacles and growth: an analysis for euro area non-financial firms Abstract: This paper investigates the determinants of financing obstacles (FOs) and their impact on firm growth. For this purpose, we rely on both balance sheet data and survey data for a sample of non-financial firms in the euro area. The latter allows us to devise a direct measure of the firms' probability of facing FOs. First, our results indicate that FOs are linked to characteristics such as the age of the firm, its size, its sales level or the sector in which it operates. Second, we find that, though based on few variables, our measure of FOs appears to be relevant in explaining firm growth in four out of the five countries considered; likewise, growth is found to be positively linked to cash flow. Journal: The European Journal of Finance Pages: 773-790 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2012.664154 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.664154 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:773-790 Template-Type: ReDIF-Article 1.0 Author-Name: Gualter Couto Author-X-Name-First: Gualter Author-X-Name-Last: Couto Author-Name: Cláudia Nunes Author-X-Name-First: Cláudia Author-X-Name-Last: Nunes Author-Name: Pedro Pimentel Author-X-Name-First: Pedro Author-X-Name-Last: Pimentel Title: High-speed rail transport valuation and conjecture shocks Abstract: In this paper, we derive the optimal investment policy in a high-speed rail transport (HSR) project. We assume that the source of uncertainty comes from the annual demand, and that it follows a geometric Brownian motion with jumps of random magnitude, occurring in random times, according to a Poisson process. We assess the impact of these shocks on the demand threshold, along with the investment opportunity value and option to differ. We consider several distributions for these jumps, and we compare with the no-jumps case. Numerical results are presented, showing the importance of assumptions about the underlying stochastic process. Journal: The European Journal of Finance Pages: 791-805 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2012.665377 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.665377 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:791-805 Template-Type: ReDIF-Article 1.0 Author-Name: Ricardo M. Sousa Author-X-Name-First: Ricardo M. Author-X-Name-Last: Sousa Title: Linking wealth and labour income with stock returns and government bond yields Abstract: In this paper, I assess the predictive ability of the ratio of asset wealth to labour income for both stock returns and government bond yields. Using data for 16 Organization for Economic Co-operation and Development (OECD) countries, I show that when the wealth-to-income ratio falls, investors demand a higher stock risk premium. A similar link can be found for government bond yields when agents behave in a non-Ricardian manner or see government bonds as complements for stocks. In contrast, when investors display a Ricardian behaviour or perceive stocks and government bonds as good substitutes, a fall in the wealth-to-income ratio is associated with a fall in future bond premium. Journal: The European Journal of Finance Pages: 806-825 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2012.676993 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.676993 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:806-825 Template-Type: ReDIF-Article 1.0 Author-Name: Xiaoxiang Zhang Author-X-Name-First: Xiaoxiang Author-X-Name-Last: Zhang Author-Name: Jenifer Piesse Author-X-Name-First: Jenifer Author-X-Name-Last: Piesse Author-Name: Igor Filatotchev Author-X-Name-First: Igor Author-X-Name-Last: Filatotchev Title: Family control, multiple institutional block-holders, and informed trading Abstract: This paper investigates how large family shareholders and institutional block-holders jointly influence informed trading and firm valuation in the Hong Kong stock market. It combines market microstructure research with studies on the governance roles of multiple block-holders and finds that institutional block-holders rely on their relative controlling power vis-à-vis family owners to mitigate problems associated with informed trading. They also use their ownership rights to improve the structure of informed trading. However, these governance roles are predominantly exercised by pressure-resistant institutional block-holders. Informed trading reduces firm valuation, while an improvement in its structure increases valuation. Therefore, the governance roles of controlling families and pressure-resistant institutional block-holders may have different implications in terms of investors' perceptions of private information risk. Journal: The European Journal of Finance Pages: 826-847 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2012.696549 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.696549 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:826-847 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Bartholdy Author-X-Name-First: Jan Author-X-Name-Last: Bartholdy Author-Name: Cesario Mateus Author-X-Name-First: Cesario Author-X-Name-Last: Mateus Author-Name: Dennis Olson Author-X-Name-First: Dennis Author-X-Name-Last: Olson Title: Do Portuguese private firms follow pecking order financing? Abstract: This paper tests for pecking order behavior in medium-sized private Portuguese firms. In contrast to the usual split between internal funds, debt, and external equity, we separate debt into four components - cheap trade credits (CTC), bank loans (BL), other loans, and expensive credits (EC). We use breakpoint tests to identify when firms switch between funding sources by examining the change in each funding source based on the financing deficit remaining after the previous pecking order funding source has been used. Our tests indicate that Portuguese companies generally move from lower cost to higher cost financing sources, but they do not exhaust each type of debt before moving on to the next funding source in the pecking order. Such behavior is consistent with a loose interpretation of pecking order financing, but not a strict interpretation of the theory. Instead, Portuguese firms may be balancing pecking order financing with a need to maintain some degree of financing flexibility. Journal: The European Journal of Finance Pages: 848-866 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2012.706815 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.706815 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:848-866 Template-Type: ReDIF-Article 1.0 Author-Name: Jörg Dockendorf Author-X-Name-First: Jörg Author-X-Name-Last: Dockendorf Author-Name: Dean A. Paxson Author-X-Name-First: Dean A. Author-X-Name-Last: Paxson Title: Sequential real rainbow options Abstract: We develop two models to value European sequential rainbow options. The first model is a sequential option on the better of two stochastic assets, where these assets follow correlated geometric Brownian motion processes. The second model is a sequential option on the mean-reverting spread between two assets, which is applicable if the assets are co-integrated. We provide numerical solutions in the form of finite difference frameworks and compare these with Monte Carlo simulations. For the sequential option on a mean-reverting spread, we also provide a closed-form solution. Sensitivity analysis provides the interesting results that in particular circumstances, the sequential rainbow option value is negatively correlated with the volatility of one of the two assets, and that the sequential option on the spread does not necessarily increase in value with a longer time to maturity. With given maturity dates, it is preferable to have less time until expiry of the sequential option if the current spread level is way above the long-run mean. Journal: The European Journal of Finance Pages: 867-892 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2012.719531 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.719531 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:867-892 Template-Type: ReDIF-Article 1.0 Author-Name: Crina Pungulescu Author-X-Name-First: Crina Author-X-Name-Last: Pungulescu Title: Real effects of financial market integration: does lower home bias lead to welfare benefits? Abstract: This paper proposes equity home bias as a proxy for financial integration in the ongoing empirical debate on the impact of financial integration on economic growth. In integrated markets, investors are expected to take full advantage of the potential for international diversification. The extent of equity home bias (i.e. overinvesting in domestic stocks and foregoing gains from international diversification) provides a relevant quantity-based measure of financial integration. Using different techniques to compute home bias, this paper investigates whether countries with lower home bias experience faster economic growth. Additionally, the analysis extends to the link between (decreasing) home bias and international risk sharing and income inequality. The results suggest that financial integration, proxied by the decreasing equity home bias, is positively associated with economic growth and international risk sharing. At the same time, it appears that higher financial integration pairs with higher income inequality. Journal: The European Journal of Finance Pages: 893-911 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2012.744762 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.744762 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:893-911 Template-Type: ReDIF-Article 1.0 Author-Name: Milagros Vivel Búa Author-X-Name-First: Milagros Author-X-Name-Last: Vivel Búa Author-Name: Luis Otero González Author-X-Name-First: Luis Author-X-Name-Last: Otero González Author-Name: Sara Fernández López Author-X-Name-First: Sara Author-X-Name-Last: Fernández López Author-Name: Pablo Durán Santomil Author-X-Name-First: Pablo Author-X-Name-Last: Durán Santomil Title: Is value creation consistent with currency hedging? Abstract: This paper analyzes value creation through currency hedging in the Spanish market. The results show that the hedging with derivatives generated an average premium of 1.53% and that foreign currency debt generated 7.52%, with respect to company value approximated by Tobin's Q, while operational hedging does not affect company value. Moreover, in half of the observations corresponding to companies that hedged with derivatives, the value premium was between 0.08% and 0.99%. In the case of foreign currency debt, the range was between 1.79% and 10.37%. It demonstrates that the contribution of currency hedging to company value fluctuates considerable according to the volume of financial hedging. Thus, an empirical study of this aspect which only analyses the decision to hedge through dummy variables to define financial hedging, as empirical previous studies, can lead to biased results in terms of estimated premium amounts, because it assumes a homogenous treatment of companies regardless of hedging volumes. Journal: The European Journal of Finance Pages: 912-945 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2013.773262 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.773262 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:912-945 Template-Type: ReDIF-Article 1.0 Author-Name: David Brookfield Author-X-Name-First: David Author-X-Name-Last: Brookfield Author-Name: Chen Su Author-X-Name-First: Chen Author-X-Name-Last: Su Author-Name: Kenbata Bangassa Author-X-Name-First: Kenbata Author-X-Name-Last: Bangassa Title: Investment style positioning of UK unit trusts Abstract: We investigate the investment style positioning of UK equity unit trusts (mutual funds) over the 24-year period from 1987 to 2010 and assess if fund manager claims to follow a particular style strategy are evidenced in practice. Generally, UK unit trusts do not, in fact, consistently track declared styles but subject their funds to style switching or rotation. Nor do funds switch to become simple index trackers, as has widely been reported, but exhibit a mix of behaviour that we refer to as 'market-momentum styling'. Our contribution is to offer a coherent, end-to-end picture of the evolution of investment styles over an economic cycle. In so doing we evidence that fund style positioning is subject to rotation and becomes subordinated to past portfolio performance or style momentum. Even this result is conditional as we go on to demonstrate that style investment is very likely to be driven by broader economic conditions, thereby creating market-momentum styling by default. This is arguably not a style at all and calls into question the intent behind fund 'strategies'. Journal: The European Journal of Finance Pages: 946-970 Issue: 10-11 Volume: 21 Year: 2015 Month: 8 X-DOI: 10.1080/1351847X.2013.788533 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.788533 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:10-11:p:946-970 Template-Type: ReDIF-Article 1.0 Author-Name: Ruipeng Liu Author-X-Name-First: Ruipeng Author-X-Name-Last: Liu Author-Name: Thomas Lux Author-X-Name-First: Thomas Author-X-Name-Last: Lux Title: Non-homogeneous volatility correlations in the bivariate multifractal model Abstract: In this paper, we consider an extension of the recently proposed bivariate Markov-switching multifractal model of Calvet, Fisher, and Thompson [2006. "Volatility Comovement: A Multifrequency Approach." Journal of Econometrics 131: 179-215]. In particular, we allow correlations between volatility components to be non-homogeneous with two different parameters governing the volatility correlations at high and low frequencies. Specification tests confirm the added explanatory value of this specification. In order to explore its practical performance, we apply the model for computing value-at-risk statistics for different classes of financial assets and compare the results with the baseline, homogeneous bivariate multifractal model and the bivariate DCC-GARCH of Engle [2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models." Journal of Business & Economic Statistics 20 (3): 339-350]. As it turns out, the multifractal model with heterogeneous volatility correlations provides more reliable results than both the homogeneous benchmark and the DCC-GARCH model. Journal: The European Journal of Finance Pages: 971-991 Issue: 12 Volume: 21 Year: 2015 Month: 9 X-DOI: 10.1080/1351847X.2014.897960 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.897960 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:12:p:971-991 Template-Type: ReDIF-Article 1.0 Author-Name: Sumon Kumar Bhaumik Author-X-Name-First: Sumon Kumar Author-X-Name-Last: Bhaumik Author-Name: Subal C. Kumbhakar Author-X-Name-First: Subal C. Author-X-Name-Last: Kumbhakar Author-Name: Kai Sun Author-X-Name-First: Kai Author-X-Name-Last: Sun Title: A note on a semiparametric approach to estimating financing constraints in firms Abstract: In this paper, we present a novel approach to modeling financing constraints of firms. Specifically, we adopt an approach in which firm-level investment is a nonparametric function of some relevant firm characteristics, cash flow in particular. This enables us to generate firm-year specific measures of cash flow sensitivity of investment. We are therefore able to draw conclusions about financing constraints of individual firms as well as cohorts of firms without having to split our sample on an ad hoc basis. This is a significant improvement over the stylized approach that is based on comparison of point estimates of cash flow sensitivity of investment of the average firm of ad hoc sub-samples of firms. We use firm-level data from India to highlight the advantages of our approach. Our results suggest that the estimates generated by this approach are meaningful from an economic point of view and are consistent with the literature. Journal: The European Journal of Finance Pages: 992-1004 Issue: 12 Volume: 21 Year: 2015 Month: 9 X-DOI: 10.1080/1351847X.2014.906068 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.906068 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:12:p:992-1004 Template-Type: ReDIF-Article 1.0 Author-Name: Sergio Mayordomo Author-X-Name-First: Sergio Author-X-Name-Last: Mayordomo Author-Name: Juan Ignacio Peña Author-X-Name-First: Juan Ignacio Author-X-Name-Last: Peña Author-Name: Eduardo S. Schwartz Author-X-Name-First: Eduardo S. Author-X-Name-Last: Schwartz Title: Towards a common Eurozone risk free rate Abstract: We present a tentative estimate of a common risk free rate for the Eurozone (EZ) countries from January 2004 to November 2009. In a first stage, we analyse the determinants of EZ sovereign yield spreads and find significant effects of the credit quality, macro, correlation, liquidity, and interaction variables. Based on these results we estimate the yield a common EZ bond would provide. Finally, we compute potential savings in financing costs for countries participating in the scheme under a number of different scenarios. Although positive on average, these savings are dependent on market conditions and present substantial variation over time and across countries. Journal: The European Journal of Finance Pages: 1005-1022 Issue: 12 Volume: 21 Year: 2015 Month: 9 X-DOI: 10.1080/1351847X.2014.912670 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.912670 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:12:p:1005-1022 Template-Type: ReDIF-Article 1.0 Author-Name: Ekaterini Panopoulou Author-X-Name-First: Ekaterini Author-X-Name-Last: Panopoulou Author-Name: Theologos Pantelidis Author-X-Name-First: Theologos Author-X-Name-Last: Pantelidis Title: Regime-switching models for exchange rates Abstract: This study provides evidence of periodically collapsing bubbles in the British pound to US dollar exchange rate in the post-1973 period. We develop two- and three-state regime-switching (RS) models that relate the expected exchange rate return to the bubble size and to an additional explanatory variable. Specifically, we consider six alternative explanatory variables that have been proposed in the literature as early warning indicators of a currency crisis. Our findings suggest that the RS models are, in general, more accurate than the Random Walk model in terms of both statistical and especially economic evaluation criteria for exchange rate forecasts. Our three-state RS model outperforms the two-state models and among the variables considered in our analysis, the short-term interest rate is the optimal variable, closely followed by imports. Results are more promising for one-month predictions and are qualitatively robust over sample spans. However, various robustness checks based on other exchange rates show that the optimal bubble measures and optimal predictors critically depend on the exchange rate. Journal: The European Journal of Finance Pages: 1023-1069 Issue: 12 Volume: 21 Year: 2015 Month: 9 X-DOI: 10.1080/1351847X.2014.904240 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.904240 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:12:p:1023-1069 Template-Type: ReDIF-Article 1.0 Author-Name: Antonios Siganos Author-X-Name-First: Antonios Author-X-Name-Last: Siganos Author-Name: Marco Papa Author-X-Name-First: Marco Author-X-Name-Last: Papa Title: FT coverage and UK target price run-ups Abstract: We focus on the market expectation hypothesis to explain the increase in share prices and trading volume of target firms before their merger announcements that have conventionally been attributed to either insider trading or market expectation. We use Financial Times (FT) coverage as a proxy of merger expectation and search for relevant articles for 783 UK target firms between 1998 and 2010. We identify a total of 1049 rumour articles and find that the FT market expectation proxy explains a small percentage of the target price run-ups. Results are strong during the sample period, even though the magnitude for both returns and trading volume tends to decrease within recent years. There is also a strong contemporaneous relation between abnormal returns and trading volume. Unexplained increases in target prices and trading volume may be attributed to insider trading. Journal: The European Journal of Finance Pages: 1070-1089 Issue: 12 Volume: 21 Year: 2015 Month: 9 X-DOI: 10.1080/1351847X.2014.924077 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.924077 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:12:p:1070-1089 Template-Type: ReDIF-Article 1.0 Author-Name: Masanobu Taniguchi Author-X-Name-First: Masanobu Author-X-Name-Last: Taniguchi Author-Name: Alexandre Petkovic Author-X-Name-First: Alexandre Author-X-Name-Last: Petkovic Author-Name: Takehiro Kase Author-X-Name-First: Takehiro Author-X-Name-Last: Kase Author-Name: Thomas DiCiccio Author-X-Name-First: Thomas Author-X-Name-Last: DiCiccio Author-Name: Anna Clara Monti Author-X-Name-First: Anna Clara Author-X-Name-Last: Monti Title: Robust portfolio estimation under skew-normal return processes Abstract: In this paper, we study issues related to the optimal portfolio estimators and the local asymptotic normality (LAN) of the return process under the assumption that the return process has an infinite moving average (MA) (∞) representation with skew-normal innovations. The paper consists of two parts. In the first part, we discuss the influence of the skewness parameter δ of the skew-normal distribution on the optimal portfolio estimators. Based on the asymptotic distribution of the portfolio estimator ĝ for a non-Gaussian dependent return process, we evaluate the influence of δ on the asymptotic variance V(δ) of ĝ. We also investigate the robustness of the estimators of a standard optimal portfolio via numerical computations. In the second part of the paper, we assume that the MA coefficients and the mean vector of the return process depend on a lower-dimensional set of parameters. Based on this assumption, we discuss the LAN property of the return's distribution when the innovations follow a skew-normal law. The influence of δ on the central sequence of LAN is evaluated both theoretically and numerically. Journal: The European Journal of Finance Pages: 1091-1112 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2011.640341 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.640341 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1091-1112 Template-Type: ReDIF-Article 1.0 Author-Name: Giovanni De Luca Author-X-Name-First: Giovanni Author-X-Name-Last: De Luca Author-Name: Nicola Loperfido Author-X-Name-First: Nicola Author-X-Name-Last: Loperfido Title: Modelling multivariate skewness in financial returns: a SGARCH approach Abstract: Skewness of financial time series is a relevant topic, due to its implications for portfolio theory and for statistical inference. In the univariate case, its default measure is the third cumulant of the standardized random variable. It can be generalized to the third multivariate cumulant that is a matrix containing all centered moments of order three which can be obtained from a random vector. The present paper examines some properties of the third cumulant under the assumptions of the multivariate SGARCH model introduced by De Luca, Genton, and Loperfido [2006. A multivariate skew-GARCH model. Advances in Econometrics 20: 33-57]. In the first place, it allows for parsimonious modelling of multivariate skewness. In the second place, all its elements are either null or negative, consistently with previous empirical and theoretical findings. A numerical example with financial returns of France, Spain and Netherlands illustrates the theoretical results in the paper. Journal: The European Journal of Finance Pages: 1113-1131 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2011.640342 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.640342 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1113-1131 Template-Type: ReDIF-Article 1.0 Author-Name: Donald Lien Author-X-Name-First: Donald Author-X-Name-Last: Lien Author-Name: Yaqin Wang Author-X-Name-First: Yaqin Author-X-Name-Last: Wang Title: Effects of skewness and kurtosis on production and hedging decisions: a skewed t distribution approach Abstract: This paper assumes that the spot price follows a skewed Student t distribution to analyze the effects of skewness and kurtosis on production and hedging decisions for a competitive firm. Under a negative exponential utility function, the firm will not over-hedge (under-hedge) when the spot price is positively (negatively) skewed. The extent of under-hedge (over-hedge) decreases as the forward price increases. Compared with the mean-variance hedger, the producer will hedge more (less) when negative (positive) skewness prevails. In addition, an increase in the skewness reduces the demand for hedging. The effect of the kurtosis, however, depends on the sign of the skewness. When the spot price is positively (negatively) skewed, an increase in kurtosis leads to a smaller (larger) futures position. Journal: The European Journal of Finance Pages: 1132-1143 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2011.644858 File-URL: http://hdl.handle.net/10.1080/1351847X.2011.644858 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1132-1143 Template-Type: ReDIF-Article 1.0 Author-Name: Lei Wu Author-X-Name-First: Lei Author-X-Name-Last: Wu Author-Name: Qingbin Meng Author-X-Name-First: Qingbin Author-X-Name-Last: Meng Author-Name: Julio C. Velazquez Author-X-Name-First: Julio C. Author-X-Name-Last: Velazquez Title: The role of multivariate skew-Student density in the estimation of stock market crashes Abstract: By combining the multivariate skew-Student density with a time-varying correlation GARCH (TVC-GARCH) model, this paper investigates the spread of crashes in the regional stock markets. The regional index series of European, USA, Latin American and Asian markets are modeled jointly, and the maximum likelihood estimates show that a TVC-GARCH model with multivariate skew-Student density outperforms that with multivariate normal density substantially. Depending on the past information set, the conditional 1-day crash probabilities are computed, and the forecast performances of the TVC-GARCH model with both multivariate skew-Student and normal densities are evaluated. In both bilateral and global environments, multivariate skew-Student density has better predictive accuracy than normal density. In global crash probability forecasts, multivariate skew-Student density attains much higher hit rate and Kuipers score than multivariate normal density, thus it can be used to improve early-warning systems. Journal: The European Journal of Finance Pages: 1144-1160 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2012.659748 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.659748 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1144-1160 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Pierdzioch Author-X-Name-First: Christian Author-X-Name-Last: Pierdzioch Author-Name: Georg Stadtmann Author-X-Name-First: Georg Author-X-Name-Last: Stadtmann Title: Skewed exchange-rate forecasts Abstract: We used survey data on exchange-rate forecasts of the dollar/euro exchange rate and the yen/dollar exchange rate to analyze the correlation of the skewness of the distribution of heterogeneous forecasts with movements of the exchange rate. Using various measures of skewness, we found a negative correlation of skewness of 1-month-ahead forecasts with exchange-rate movements. In contrast, the correlation of skewness of 12-months-ahead forecast with exchange-rate movements is positive. The negative correlation arising in the case of 1-month-ahead forecasts is consistent with expected mean reversion in exchange rates. The positive correlation arising in the case of longer term forecasts, in turn, is consistent with longer term bandwagon effects. Journal: The European Journal of Finance Pages: 1161-1175 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2012.671777 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.671777 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1161-1175 Template-Type: ReDIF-Article 1.0 Author-Name: Taras Bodnar Author-X-Name-First: Taras Author-X-Name-Last: Bodnar Author-Name: Arjun K. Gupta Author-X-Name-First: Arjun K. Author-X-Name-Last: Gupta Title: Robustness of the inference procedures for the global minimum variance portfolio weights in a skew-normal model Abstract: In this paper, we study the influence of skewness on the distributional properties of the estimated weights of optimal portfolios and on the corresponding inference procedures derived for the optimal portfolio weights assuming that the asset returns are normally distributed. It is shown that even a simple form of skewness in the asset returns can dramatically influence the performance of the test on the structure of the global minimum variance portfolio. The results obtained can be applied in the small sample case as well. Moreover, we introduce an estimation procedure for the parameters of the skew-normal distribution that is based on the modified method of moments. A goodness-of-fit test for the matrix variate closed skew-normal distribution has also been derived. In the empirical study, we apply our results to real data of several stocks included in the Dow Jones index. Journal: The European Journal of Finance Pages: 1176-1194 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2012.696073 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.696073 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1176-1194 Template-Type: ReDIF-Article 1.0 Author-Name: J. Miguel Marin Author-X-Name-First: J. Miguel Author-X-Name-Last: Marin Author-Name: Genaro Sucarrat Author-X-Name-First: Genaro Author-X-Name-Last: Sucarrat Title: Financial density selection Abstract: We propose and study simple but flexible methods for density selection of skewed versions of the two most popular density classes in finance, the exponential power distribution and the t distribution. For the first type of method, which simply consists of selecting a density by means of an information criterion, the Schwarz criterion stands out since it performs well across density categories, and in particular when the DGP is normal. For the second type of method, general-to-specific density selection, the simulations suggest that it can improve the recovery rate in predictable ways by changing the significance level. This is useful because it enables us to increase (reduce) the recovery rate of non-normal densities by increasing (reducing) the significance level, if one wishes to do so. The third type of method is a generalisation of the second type, such that it can be applied across an arbitrary number of density classes, nested or non-nested. Finally, the methods are illustrated in an empirical application. Journal: The European Journal of Finance Pages: 1195-1213 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2012.706906 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.706906 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1195-1213 Template-Type: ReDIF-Article 1.0 Author-Name: Marc S. Paolella Author-X-Name-First: Marc S. Author-X-Name-Last: Paolella Title: Multivariate asset return prediction with mixture models Abstract: The use of mixture distributions for modeling asset returns has a long history in finance. New methods of demonstrating support for the presence of mixtures in the multivariate case are provided. The use of a two-component multivariate normal mixture distribution, coupled with shrinkage via a quasi-Bayesian prior, is motivated, and shown to be numerically simple and reliable to estimate, unlike the majority of multivariate GARCH models in existence. Equally important, it provides a clear improvement over use of GARCH models feasible for use with a large number of assets, such as constant conditional correlation, dynamic conditional correlation, and their extensions, with respect to out-of-sample density forecasting. A generalization to a mixture of multivariate Laplace distributions is motivated via univariate and multivariate analysis of the data, and an expectation-maximization algorithm is developed for its estimation in conjunction with a quasi-Bayesian prior. It is shown to deliver significantly better forecasts than the mixed normal, with fast and numerically reliable estimation. Crucially, the distribution theory required for portfolio theory and risk assessment is developed. Journal: The European Journal of Finance Pages: 1214-1252 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2012.760167 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.760167 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1214-1252 Template-Type: ReDIF-Article 1.0 Author-Name: Christopher Adcock Author-X-Name-First: Christopher Author-X-Name-Last: Adcock Author-Name: Martin Eling Author-X-Name-First: Martin Author-X-Name-Last: Eling Author-Name: Nicola Loperfido Author-X-Name-First: Nicola Author-X-Name-Last: Loperfido Title: Skewed distributions in finance and actuarial science: a review Abstract: That the returns on financial assets and insurance claims are not well described by the multivariate normal distribution is generally acknowledged in the literature. This paper presents a review of the use of the skew-normal distribution and its extensions in finance and actuarial science, highlighting known results as well as potential directions for future research. When skewness and kurtosis are present in asset returns, the skew-normal and skew-Student distributions are natural candidates in both theoretical and empirical work. Their parameterization is parsimonious and they are mathematically tractable. In finance, the distributions are interpretable in terms of the efficient markets hypothesis. Furthermore, they lead to theoretical results that are useful for portfolio selection and asset pricing. In actuarial science, the presence of skewness and kurtosis in insurance claims data is the main motivation for using the skew-normal distribution and its extensions. The skew-normal has been used in studies on risk measurement and capital allocation, which are two important research fields in actuarial science. Empirical studies consider the skew-normal distribution because of its flexibility, interpretability, and tractability. This paper comprises four main sections: an overview of skew-normal distributions; a review of skewness in finance, including asset pricing, portfolio selection, time series modeling, and a review of its applications in insurance, in which the use of alternative distribution functions is widespread. The final section summarizes some of the challenges associated with the use of skew-elliptical distributions and points out some directions for future research. Journal: The European Journal of Finance Pages: 1253-1281 Issue: 13-14 Volume: 21 Year: 2015 Month: 11 X-DOI: 10.1080/1351847X.2012.720269 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.720269 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:13-14:p:1253-1281 Template-Type: ReDIF-Article 1.0 Author-Name: Thorben Manfred Lubnau Author-X-Name-First: Thorben Manfred Author-X-Name-Last: Lubnau Author-Name: Neda Todorova Author-X-Name-First: Neda Author-X-Name-Last: Todorova Title: The calm after the storm: implied volatility and future stock index returns Abstract: This article explores the predictive power of five implied volatility indices for subsequent returns on the corresponding underlying stock indices from January 2000 through October 2013. Contrary to previous research, very low volatility levels appear to be followed by significantly positive average returns over the next 20, 40 or 60 trading days. Rolling trading simulations show that positive adjusted excess returns can be achieved when long positions in the stock indices are taken on days of very low implied volatility. This may be a hint that market inefficiencies exist in some markets, especially outside the USA. The excess returns measured against a buy and hold benchmark are significant for the German and Japanese market when tested with a bootstrap methodology. The results are robust against a broad spectrum of specifications. Journal: The European Journal of Finance Pages: 1282-1296 Issue: 15 Volume: 21 Year: 2015 Month: 12 X-DOI: 10.1080/1351847X.2014.935872 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.935872 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:15:p:1282-1296 Template-Type: ReDIF-Article 1.0 Author-Name: Patrick Kampkötter Author-X-Name-First: Patrick Author-X-Name-Last: Kampkötter Title: Non-executive compensation in German and Swiss banks before and after the financial crisis Abstract: We provide an extensive overview of the determinants of compensation schemes for non-executive employees in the German and Swiss financial services industry. We analyze how pay systems adjust in the aftermath of the financial crisis and find that the crisis had a deep impact on short-term bonus payments. Our results indicate that restrictions on bonus payments may lead to higher fixed salaries and, hence, to a lower performance sensitivity of compensation. We also show that fixed compensation packages are highly standardized between banks, whereas bonus payments are more strongly related to differences between individuals. In Germany, bonuses vary to a higher extent across companies, whereas in Swiss banks, the differences are almost negligible when adding firm controls. Journal: The European Journal of Finance Pages: 1297-1316 Issue: 15 Volume: 21 Year: 2015 Month: 12 X-DOI: 10.1080/1351847X.2014.947002 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.947002 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:15:p:1297-1316 Template-Type: ReDIF-Article 1.0 Author-Name: Joakim Westerlund Author-X-Name-First: Joakim Author-X-Name-Last: Westerlund Author-Name: Paresh Narayan Author-X-Name-First: Paresh Author-X-Name-Last: Narayan Title: A sequential purchasing power parity test for panels of large cross-sections and implications for investors Abstract: In this paper we use monthly time series data for not less than 64 countries and a new sequential approach to test for purchasing power parity (PPP). The results are strong in that the evidence in favor of PPP is very weak. In fact, for the US-dollar-based exchange rates the evidence is basically non-existent. In order to eliminate the effect of the base currency, we also apply the sequential PPP test to all pairs of exchange rates, and find similarly weak evidence of PPP. However, for those rates where evidence is found, using a technical trading rule, we find evidence of significant profits. The predictability of the stationary pairs is therefore important for investors. Journal: The European Journal of Finance Pages: 1317-1333 Issue: 15 Volume: 21 Year: 2015 Month: 12 X-DOI: 10.1080/1351847X.2014.948216 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.948216 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:15:p:1317-1333 Template-Type: ReDIF-Article 1.0 Author-Name: Juan Carlos Matallín-Sáez Author-X-Name-First: Juan Carlos Author-X-Name-Last: Matallín-Sáez Author-Name: David Moreno Author-X-Name-First: David Author-X-Name-Last: Moreno Author-Name: Rosa Rodríguez Author-X-Name-First: Rosa Author-X-Name-Last: Rodríguez Title: Why is timing perverse? Abstract: The existence of negative market timing, even for passive portfolios, poses a relevant puzzle when assessing portfolio management. In this paper, we develop a simple theoretical model so as to explain why such perverse market timing might occur and why those stocks with the lowest beta in upward markets exhibit pronounced negative timing. Our explanation is based on the existence of higher correlations of stocks in down markets than in up markets. We find that changes in beta, which drives timing, has four components; however, just two of these, mean covariance shift and covariances dispersion map, serve to explain the asymmetric behavior across stocks. We find that a high percentage of the negative market timing ability identified for mutual funds in the literature could be explained by this bias. Journal: The European Journal of Finance Pages: 1334-1356 Issue: 15 Volume: 21 Year: 2015 Month: 12 X-DOI: 10.1080/1351847X.2014.935870 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.935870 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:15:p:1334-1356 Template-Type: ReDIF-Article 1.0 Author-Name: Pierre Chaigneau Author-X-Name-First: Pierre Author-X-Name-Last: Chaigneau Title: Risk aversion, prudence, and compensation Abstract: In a standard principal-agent setting, we use a comparative approach to study the incentives provided by different types of compensation contracts, and their valuation by managers with utility function u who are risk averse (u′>0) and prudent (u′′>0). We show that concave contracts tend to provide more incentives to risk averse managers, while convex contracts tend to be more valued by prudent managers. This is because concave contracts concentrate incentives where the marginal utility of risk averse managers is highest, while convex contracts protect against downside risk. Thus, managerial prudence can contribute to explain the prevalence of stock-options in executive compensation. However, convex contracts are not optimal when the principal is sufficiently prudent relative to the manager. Journal: The European Journal of Finance Pages: 1357-1373 Issue: 15 Volume: 21 Year: 2015 Month: 12 X-DOI: 10.1080/1351847X.2014.954049 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.954049 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:21:y:2015:i:15:p:1357-1373 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Bessler Author-X-Name-First: Wolfgang Author-X-Name-Last: Bessler Author-Name: Lawrence Kryzanowski Author-X-Name-First: Lawrence Author-X-Name-Last: Kryzanowski Author-Name: Philipp Kurmann Author-X-Name-First: Philipp Author-X-Name-Last: Kurmann Author-Name: Peter Lückoff Author-X-Name-First: Peter Author-X-Name-Last: Lückoff Title: Capacity effects and winner fund performance: the relevance and interactions of fund size and family characteristics Abstract: This study analyzes the existence of capacity effects and performance persistence for US equity mutual funds for the period from 1992 to 2007. We focus on winner funds and distinguish between capacity effects from both size and inflows and explore their interactions with two measures of family size, i.e. family total net assets under management (family TNA) and the number of funds at the family level (family breadth). The differentiation of family size allows us to analyze competing effects at the family level such as economies of scale as well as organizational complexity costs and conflicts of interest. Our empirical results confirm diseconomies of scale at the winner fund level and indicate that only small winner funds with low inflows significantly outperform the four-factor benchmark on a net return basis. There are no universal benefits from economies of scale at the family level, but our findings suggest the existence of conflicts of interest in families offering a relatively large number of funds. Small winner funds in families offering a small number of funds significantly outperform while economies of scale only materialize among extremely small winner funds. We provide detailed robustness checks for our empirical results. Overall, simply conditioning on fund size is not sufficient for selecting future outperforming funds. The results indicate that fund investors may earn positive abnormal returns when combining information on fund size with information on fund flows or fund family affiliations in their asset allocation decisions. Journal: The European Journal of Finance Pages: 1-27 Issue: 1 Volume: 22 Year: 2016 Month: 1 X-DOI: 10.1080/1351847X.2014.899732 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.899732 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:1:p:1-27 Template-Type: ReDIF-Article 1.0 Author-Name: Lidija Lovreta Author-X-Name-First: Lidija Author-X-Name-Last: Lovreta Title: Demand-supply imbalances in the credit default swap market: empirical evidence Abstract: This paper empirically examines demand-supply imbalances in the credit default swap (CDS) market and provides evidence of its effect on the CDS spread dynamics. Analysis is conducted on a large and homogenous data set of the 92 non-financial European companies with the most quoted Euro-denominated CDS contracts during the 2002-2008 period. Main findings indicate that short-term CDS price movements, not related to fundamentals, are positively affected by demand-supply imbalances when protection buyers outstrip protection sellers. Results illustrate that CDS spreads reflect not only the price of credit protection, but also a liquidity premium for the anticipated cost of unwinding the position of protection sellers, especially during stress periods. Journal: The European Journal of Finance Pages: 28-58 Issue: 1 Volume: 22 Year: 2016 Month: 1 X-DOI: 10.1080/1351847X.2014.935868 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.935868 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:1:p:28-58 Template-Type: ReDIF-Article 1.0 Author-Name: Zélia Serrasqueiro Author-X-Name-First: Zélia Author-X-Name-Last: Serrasqueiro Author-Name: Paulo Ma çãs Nunes Author-X-Name-First: Paulo Ma çãs Author-X-Name-Last: Nunes Author-Name: Manuel da Rocha Armada Author-X-Name-First: Manuel Author-X-Name-Last: da Rocha Armada Title: Capital structure decisions: old issues, new insights from high-tech small- and medium-sized enterprises Abstract: Using panel data models and this study analyses the capital structure decisions of high-tech small- and medium-sized enterprises (SMEs) and non-high-tech SMEs. The results suggest that the capital structure decisions of high-tech SMEs are closer to what is predicted by the Pecking Order Theory. However, the results also suggest a modified version of the Pecking Order Theory for high-tech SMEs that have relied on venture capital. These firms prefer equity issues to debt, when internal finance is exhausted. The empirical evidence suggests that problems relating to information asymmetry as well as technological and market uncertainty influence the capital structure decisions of high-tech SMEs. Journal: The European Journal of Finance Pages: 59-79 Issue: 1 Volume: 22 Year: 2016 Month: 1 X-DOI: 10.1080/1351847X.2014.946068 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.946068 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:1:p:59-79 Template-Type: ReDIF-Article 1.0 Author-Name: Ingmar Nolte Author-X-Name-First: Ingmar Author-X-Name-Last: Nolte Author-Name: Sandra Nolte Author-X-Name-First: Sandra Author-X-Name-Last: Nolte Title: The information content of retail investors' order flow Abstract: In this paper, we provide evidence that the trading activity of small retail investors carries significant genuine information that can be exploited for the short-term out-of-sample forecasting of foreign exchange rates. Our findings are based on a unique dataset of around 2000 retail investors from the OANDA FXTrade electronic trading platform. Our results are consistent with the view that in the foreign exchange market private information is highly dispersed, but can be extracted by observing customer order flow. Previous studies, however, focused on the information content of costumer order flow of dealers in the interbank market, whose clients are themselves large institutional and professional investors. Our study is the first that analyzes a crowd of small retail investors and shows that even the trading activity of these investors contains, on aggregate, important non-public information that can be exploited for short-term exchange rate forecasting. Our findings lead us to conjecture that retail investors (on aggregate) are not pure noise traders but process dispersed information at least partially in a similar way as large institutional investors and hence place their orders accordingly. Journal: The European Journal of Finance Pages: 80-104 Issue: 2 Volume: 22 Year: 2016 Month: 1 X-DOI: 10.1080/1351847X.2014.963633 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.963633 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:2:p:80-104 Template-Type: ReDIF-Article 1.0 Author-Name: Alasdair Brown Author-X-Name-First: Alasdair Author-X-Name-Last: Brown Title: The distribution of information in speculative markets: a natural experiment Abstract: We use a unique natural experiment to shed light on the distribution of information in speculative markets. In June 2011, Betfair - a UK betting exchange - levied a tax of up to 60% on all future profits accrued by the top 0.1% of profitable traders. Such a move appears to have driven at least some of these traders off the exchange, taking their information with them. We investigate the effect of the new tax on the forecasting capacity of the exchange (our measure of the market's incorporation of information into the price). We find that there was scant decline in the forecasting capacity of the exchange - relative to a control market - suggesting that the bulk of information had hitherto been held by the majority of traders, rather than the select few affected by the rule change. This result is robust to the choice of forecasting measure, the choice of forecasting interval, and the choice of race type. This provides evidence that more than a few traders are typically involved in the price discovery process in speculative markets. Journal: The European Journal of Finance Pages: 105-119 Issue: 2 Volume: 22 Year: 2016 Month: 1 X-DOI: 10.1080/1351847X.2014.972423 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.972423 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:2:p:105-119 Template-Type: ReDIF-Article 1.0 Author-Name: Gbenga Ibikunle Author-X-Name-First: Gbenga Author-X-Name-Last: Ibikunle Author-Name: Andros Gregoriou Author-X-Name-First: Andros Author-X-Name-Last: Gregoriou Author-Name: Naresh R. Pandit Author-X-Name-First: Naresh R. Author-X-Name-Last: Pandit Title: Price impact of block trades: the curious case of downstairs trading in the EU emissions futures market Abstract: Using high-frequency data from the European Climate Exchange (ECX), we examine the determinants of price impact of €21 billion worth of block trades during 2008-2011 in the European carbon market. We find that wider bid-ask spreads and volatility are characterised by a smaller price impact. Larger levels of price impact are more likely to occur during the middle of the trading day, specifically the four-hour period between 11 a.m. and 3 p.m., than during the first or final hours. Purchase block trades induce a relatively smaller price impact on price run-up, while sell block trades exhibit a larger price impact on price run-up. We conclude that block trades on the ECX induce less price impact than in equity or conventional futures markets, and that a significant proportion of the effects contradict findings on block trades in those markets; thus, we provide the first evidence of the curious bent to block trading in the European Union emissions trading scheme. Journal: The European Journal of Finance Pages: 120-142 Issue: 2 Volume: 22 Year: 2016 Month: 1 X-DOI: 10.1080/1351847X.2014.935871 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.935871 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:2:p:120-142 Template-Type: ReDIF-Article 1.0 Author-Name: Andreja Bandelj Author-X-Name-First: Andreja Author-X-Name-Last: Bandelj Title: Should banks be geographically diversified? Empirical evidence from cross-country diversification of European banks Abstract: Using a sample of European bank, this paper investigates the impact of banks' geographic diversification on their cost of equity capital. Examining the geographic diversification of European banks gives an insight on the value of cross-border banking. To measure diversification between major geographic areas in which the bank operates, the Herfindahl-Hirschman Index, based on revenues generated at home and abroad is constructed for each bank. To address the problem of endogeneity, system generalized method of moments estimator is used. The main finding of the analysis is that, other things equal, more geographic diversified banks have higher cost of equity capital than geographically focused ones. This result implies that the adverse market valuation effect of geographic diversification (increase in agency problem) dominates the positive ones (increase in efficiency and reduction in risk). Journal: The European Journal of Finance Pages: 143-166 Issue: 2 Volume: 22 Year: 2016 Month: 1 X-DOI: 10.1080/1351847X.2014.960978 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.960978 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:2:p:143-166 Template-Type: ReDIF-Article 1.0 Author-Name: George J. Jiang Author-X-Name-First: George J. Author-X-Name-Last: Jiang Author-Name: Woojin Kim Author-X-Name-First: Woojin Author-X-Name-Last: Kim Title: Evaluating analysts' value: evidence from recommendation revisions around stock price jumps Abstract: Recent studies document that analyst recommendation revisions tend to coincide with important corporate events, but offer mixed evidence on whether these revisions still contain significant information content. In this paper, we use large discontinuous changes, known as jumps, in stock prices as proxy for significant events and examine the information content of analyst revisions. We find that although recommendation revisions are more likely to be clustered around stock price jumps, they still contain significant information, especially those issued prior to jumps. Journal: The European Journal of Finance Pages: 167-194 Issue: 3 Volume: 22 Year: 2016 Month: 2 X-DOI: 10.1080/1351847X.2014.960979 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.960979 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:3:p:167-194 Template-Type: ReDIF-Article 1.0 Author-Name: Elena Ferrer Author-X-Name-First: Elena Author-X-Name-Last: Ferrer Author-Name: Julie Salaber Author-X-Name-First: Julie Author-X-Name-Last: Salaber Author-Name: Anna Zalewska Author-X-Name-First: Anna Author-X-Name-Last: Zalewska Title: Consumer confidence indices and stock markets' meltdowns Abstract: Consumer confidence indices (CCIs) are a closely monitored barometer of countries' economic health and an informative forecasting tool. Using European and US data, we provide a case study of the two recent stock market meltdowns (the post-dotcom bubble correction of 2000-2002 and the 2007-2009 decline at the beginning of the financial crisis) to contribute to the discussion on their appropriateness as proxies for stock markets' investor sentiment. Investor sentiment should positively covary with stock market movements [DeLong, Shleifer, Summers, and Waldmann. 1990. "Noise Trader Risk in Financial Markets." Journal of Political Economy 98 (4): 703-738]; however, we find that the CCI-stock market relationship is not universally positive. We also do not find support for the information effect documented in the previous literature, but identify a more subtle relationship between consumer expectations about future household finances and stock market fluctuations. Journal: The European Journal of Finance Pages: 195-220 Issue: 3 Volume: 22 Year: 2016 Month: 2 X-DOI: 10.1080/1351847X.2014.963634 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.963634 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:3:p:195-220 Template-Type: ReDIF-Article 1.0 Author-Name: Pekka Levi�kangas Author-X-Name-First: Pekka Author-X-Name-Last: Levi�kangas Author-Name: Tuomo Kinnunen Author-X-Name-First: Tuomo Author-X-Name-Last: Kinnunen Author-Name: Aki Aapaoja Author-X-Name-First: Aki Author-X-Name-Last: Aapaoja Title: Infrastructure public-private partnership project ecosystem - financial and economic positioning of stakeholders Abstract: The purpose of this paper is to construct an analytical cash flow-based project model to facilitate project appraisal of both private investors and public sector. With the help of the model that focuses on ecosystem and its stakeholders, it is simpler to identify potential conflicts usually encountered in public-private partnership (PPP) projects. The model construct is based on classical cash flow accounting and cost-benefit analysis. In the model, the flows of cash (private investors) and the flows of costs and benefits (public investors) are integrated in a single framework. The model shows that within the ecosystem the investors' (public vs. private) social, economic and financial targets are not necessarily coinciding. Prospecting of common ground and win-win situations becomes a crucial success factor for any PPP project. The paper discusses the policy and investment strategy implications for successful PPPs. Journal: The European Journal of Finance Pages: 221-236 Issue: 3 Volume: 22 Year: 2016 Month: 2 X-DOI: 10.1080/1351847X.2014.972424 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.972424 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:3:p:221-236 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Willem Van den End Author-X-Name-First: Jan Willem Author-X-Name-Last: Van den End Title: A macroprudential approach to address liquidity risk with the loan-to-deposit ratio Abstract: This paper maps the empirical features of the loan-to-deposit (LTD) ratio with an eye on using it in macroprudential policy to mitigate liquidity risk. We examine the LTD trends and cycles of 11 euro area countries by filtering methods and analyse the interaction between loans and deposits. We propose macroprudential policy to prevent an unsustainable level of the LTD ratio and policy measures to counter destabilizing cyclical developments. Journal: The European Journal of Finance Pages: 237-253 Issue: 3 Volume: 22 Year: 2016 Month: 2 X-DOI: 10.1080/1351847X.2014.983137 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.983137 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:3:p:237-253 Template-Type: ReDIF-Article 1.0 Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Edward Lee Author-X-Name-First: Edward Author-X-Name-Last: Lee Title: Chinese style capitalism: current development and future implications Journal: The European Journal of Finance Pages: 255-258 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2016.1090051 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1090051 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:255-258 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Firth Author-X-Name-First: Michael Author-X-Name-Last: Firth Author-Name: Wei Li Author-X-Name-First: Wei Author-X-Name-Last: Li Author-Name: Steven Shuye Wang Author-X-Name-First: Steven Author-X-Name-Last: Shuye Wang Title: The growth, determinants, and profitability of nontraditional activities of Chinese commercial banks Abstract: Using a panel data set for China's commercial banks between 1998 and 2007, we investigate the relation between a bank's nontraditional income ratio and its operational and financial characteristics after controlling for ownership type, government policy changes, and cross-regional institutional environment differences. We find that banks with narrow net interest margins have stronger incentives to develop nontraditional activities. Moreover, banks located in regions with less local government intervention have fewer nontraditional banking activities. We find evidence that the ownership type of the bank has some influence on the pursuit of nontraditional activities. Nontraditional income has not led to improved bank profitability and we present some conjectures on why this is so. In contrast to the results reported in prior research, we find that the financial performance of the big-four state-owned banks is not inferior to the performance of other banks. Journal: The European Journal of Finance Pages: 259-287 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2013.791632 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.791632 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:259-287 Template-Type: ReDIF-Article 1.0 Author-Name: Nancy Huyghebaert Author-X-Name-First: Nancy Author-X-Name-Last: Huyghebaert Author-Name: Lihong Wang Author-X-Name-First: Lihong Author-X-Name-Last: Wang Title: Institutional development and financing decisions: evidence from a cross-regional study on Chinese listed firms Abstract: In this paper, we empirically investigate how differences in the development of legal and financial institutions across Chinese provinces and municipalities affect the financing decisions of Chinese listed firms. Our results indicate that a stronger regional enforcement of property rights reduces firms’ reliance on bank loans. Conversely, in regions with a larger government expropriation risk, firms raise more and shorter-term bank debt. Active regional bank lending positively impacts the debt ratio and the fraction of bank loans, but shortens loan maturities. The size of the local banking sector, the market capitalization as well as the liquidity of local stocks bear no relation with the capital structure. Overall, these relations do not depend upon the identity of the firm's controlling shareholder. Nonetheless, our results do suggest that state-controlled firms benefit from easier stock market access. Journal: The European Journal of Finance Pages: 288-318 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2013.773263 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.773263 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:288-318 Template-Type: ReDIF-Article 1.0 Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Simona Mateut Author-X-Name-First: Simona Author-X-Name-Last: Mateut Title: External finance and trade credit extension in China: does political affiliation make a difference? Abstract: Using a dataset of 65,706 Chinese firms over the period 2000--2007, we show that politically affiliated firms benefit from easier access to short-term external finance and extend more trade credit than their non-affiliated counterparts. Furthermore, we observe that the sensitivity of trade credit extension to short-term liabilities, which is largest for private firms producing differentiated goods, decreases with the degree of political affiliation. This suggests that gaining political affiliation contributes not only to alleviating individual firms’ financing constraints, but also to reducing the overall level of constraints in the economy through the additional trade credit being made available. Journal: The European Journal of Finance Pages: 319-344 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2012.762030 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.762030 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:319-344 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Author-Name: Xiuping Hua Author-X-Name-First: Xiuping Author-X-Name-Last: Hua Author-Name: Yiping Huang Author-X-Name-First: Yiping Author-X-Name-Last: Huang Title: Are Chinese stock and property markets integrated or segmented? Abstract: This paper explores the empirical question of whether Chinese stock and property markets are integrated or segmented. We find that, at the national level, investment returns in property and the A-share markets were co-integrated in the long run. In the short run, property price Granger caused A-share prices, but not vice versa. However, the B-share prices were negatively correlated with property prices. Furthermore, the linkage between city-level property prices and stock prices showed significant variations across the country. These findings reveal that property and stock markets were integrated at the national level but the property markets were reasonably segmented among cities. They suggest that investment portfolios pursuing risk diversification should include both A and B shares and properties from different cities. Journal: The European Journal of Finance Pages: 345-370 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2013.788537 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.788537 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:345-370 Template-Type: ReDIF-Article 1.0 Author-Name: Zhenyu Wu Author-X-Name-First: Zhenyu Author-X-Name-Last: Wu Author-Name: Yuanshun Li Author-X-Name-First: Yuanshun Author-X-Name-Last: Li Author-Name: Shujun Ding Author-X-Name-First: Shujun Author-X-Name-Last: Ding Author-Name: Chunxin Jia Author-X-Name-First: Chunxin Author-X-Name-Last: Jia Title: A separate monitoring organ and disclosure of firm-specific information Abstract: As the economy is recovering from the recent financial crisis, we explore the appropriateness of a corporate monitoring organ, which is a component separate from the board of directors, to enhance firm-specific information disclosure. Findings of this study, rooted in the evidence from China's stock markets, confirm that having a separate and effective monitoring organ results in a higher level of idiosyncratic risk, as long as the legal environment is sufficiently strong and the functionality of this separate monitoring organ is clearly defined. Effects of regulatory changes and ownership characteristics are addressed to help better understand the corporate governance--idiosyncratic risk relationship. Moreover, this study sheds light on timely global issues about information transparency and supervision, the lack of which becomes one of the major causes of the ongoing financial crisis, and presents an important challenge before corporate governance. Journal: The European Journal of Finance Pages: 371-392 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2012.762410 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.762410 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:371-392 Template-Type: ReDIF-Article 1.0 Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Robert Dixon Author-X-Name-First: Robert Author-X-Name-Last: Dixon Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Edward Lee Author-X-Name-First: Edward Author-X-Name-Last: Lee Title: Media coverage and foreign share discount puzzle in China Abstract: There is growing evidence in the finance literature that media coverage can influence security pricing by facilitating news dissemination and reducing informational frictions even if it does not provide new information. This study examines the role of media coverage in the well-known foreign share discount puzzle in China. We show that differential level of news coverage for the same firm by Chinese and English media is significantly associated with the foreign share discount. Specifically, the discount is greater among firms with relatively more Chinese than English press coverage. We also find this effect more pronounced among firms with less analyst following and less institutional ownership. This implies that media coverage compensates for limitations in analyst coverage and is more influential among less sophisticated investors. Our evidence is robust to controls of other determinants of Chinese foreign share discount documented by previous literature. Despite the widespread belief that the Chinese media is tightly controlled, our study reveals that it still plays an influential role in the capital market. Journal: The European Journal of Finance Pages: 393-412 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2012.762031 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.762031 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:393-412 Template-Type: ReDIF-Article 1.0 Author-Name: Chen Li Author-X-Name-First: Chen Author-X-Name-Last: Li Author-Name: Yaping Wang Author-X-Name-First: Yaping Author-X-Name-Last: Wang Author-Name: Liansheng Wu Author-X-Name-First: Liansheng Author-X-Name-Last: Wu Author-Name: Jason Zezhong Xiao Author-X-Name-First: Jason Zezhong Author-X-Name-Last: Xiao Title: Political connections and tax-induced earnings management: evidence from China Abstract: We use the occasion of a change in tax policy that raised the tax rate for many of the listed companies in China to examine tax-induced earnings management (TEM) from the perspective of political connections. We find that when the tax rate increased, only those affected firms with politically connected management engaged in TEM. This suggests that, in addition to motivation for managing earnings, capability of influencing tax authorities is also an important determinant of TEM. We also find that TEM helped the firms with politically connected management to reduce their tax burden. Journal: The European Journal of Finance Pages: 413-431 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2012.753465 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.753465 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:413-431 Template-Type: ReDIF-Article 1.0 Author-Name: Hong Bo Author-X-Name-First: Hong Author-X-Name-Last: Bo Author-Name: Tao Li Author-X-Name-First: Tao Author-X-Name-Last: Li Author-Name: Yanmei Sun Author-X-Name-First: Yanmei Author-X-Name-Last: Sun Title: Board attributes and herding in corporate investment: evidence from Chinese-listed firms Abstract: We examine whether board attributes, including board age, gender diversity, board independence, CEO duality, and board size, explain investment herding by using a panel of 1155 Chinese-listed non-financial firms during 1999--2004. Investment herding is measured by the absolute value of the difference between the investment ratio of firm i in year t and the average investment ratio of other firms in the same industry excluding firm i in year (t−1). We find that corporate boards that have more young directors, more female directors, more independent directors, a CEO who is not the chairman of the board, and a larger board are more likely to make investment decisions closer to their peers in the same industry. We also provide evidence that investment herding is positively related to firm performance, suggesting that investment herding does not necessarily hurt shareholders in the Chinese context. We identify that herding in making investment decisions is a possible channel through which some board attributes, such as board age diversity, gender diversity, and board independence, contribute to firm performance. Journal: The European Journal of Finance Pages: 432-462 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2013.788536 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.788536 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:432-462 Template-Type: ReDIF-Article 1.0 Author-Name: Zhenzhen Sun Author-X-Name-First: Zhenzhen Author-X-Name-Last: Sun Author-Name: Yaping Wang Author-X-Name-First: Yaping Author-X-Name-Last: Wang Title: Does ownership structure matter? Evidence from firms’ excess cash in China Abstract: We examine the effect of corporate ownership structure on the market value of excess cash in Chinese listed firms. We find that state ownership has a positive effect, as the market value of excess cash is greater in state-owned firms (SOEs) than in privately controlled firms. Furthermore, we show that expropriation by controlling shareholders is significantly higher in privately controlled firms than in SOEs and increases with excess cash. The evidence is consistent with the view that the market believes private controlling shareholders are more likely to extract the private benefits associated with cash reserves. Journal: The European Journal of Finance Pages: 463-483 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2012.762409 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.762409 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:463-483 Template-Type: ReDIF-Article 1.0 Author-Name: James Cordeiro Author-X-Name-First: James Author-X-Name-Last: Cordeiro Author-Name: Lerong He Author-X-Name-First: Lerong Author-X-Name-Last: He Author-Name: Martin Conyon Author-X-Name-First: Martin Author-X-Name-Last: Conyon Author-Name: Tara Shaw Author-X-Name-First: Tara Author-X-Name-Last: Shaw Title: Chinese executive compensation: the role of asymmetric performance benchmarks Abstract: We study asymmetric performance benchmarking in Chinese executive compensation contracts between 2000 and 2010. We predict that while relative performance evaluation criteria are important in executive pay contracts, managerial power and influence will result in a decoupling between pay and performance. We predict that Chinese managers are rewarded for superior performance but not penalized for inferior performance. We test this asymmetric pay-for-performance hypothesis using three performance benchmarks: whether firm performance is positive/negative, above/below industry average, and above/below regional average. We find the sensitivity between executive compensation and firm accounting performance is asymmetric. It is significantly stronger when firm accounting performance is positive or firm performance exceeds industry or regional median benchmarks compared to cases when firm accounting performance is negative or is below industry or regional median benchmarks. We find little evidence that ownership structure and internal governance mechanisms moderate the asymmetric pay-for-performance relationship. Journal: The European Journal of Finance Pages: 484-505 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2013.769892 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.769892 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:484-505 Template-Type: ReDIF-Article 1.0 Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Edward Lee Author-X-Name-First: Edward Author-X-Name-Last: Lee Author-Name: Konstantinos Stathopoulos Author-X-Name-First: Konstantinos Author-X-Name-Last: Stathopoulos Author-Name: Zhenxu Tong Author-X-Name-First: Zhenxu Author-X-Name-Last: Tong Title: Executive compensation and the split share structure reform in China Abstract: The split share structure reform in China enables state shareholders of listed firms to trade their restricted shares. This renders the wealth of state shareholders more strongly related to share price movements. We predict that this reform will create remuneration arrangements that strengthen the relationship between Chinese firms’ executive pay and stock market performance. We confirm this prediction by showing that there is such an effect among state-controlled firms, and especially those where the dominant shareholders have a greater incentive to improve share return performance. Our results indicate that this reform strengthens the accountability of executives to external monitoring by the stock market, and therefore benefits minority shareholders in China. Journal: The European Journal of Finance Pages: 506-528 Issue: 4-6 Volume: 22 Year: 2016 Month: 4 X-DOI: 10.1080/1351847X.2013.802250 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.802250 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:4-6:p:506-528 Template-Type: ReDIF-Article 1.0 Author-Name: Laura Andreu Author-X-Name-First: Laura Author-X-Name-Last: Andreu Author-Name: José Luis Sarto Author-X-Name-First: José Luis Author-X-Name-Last: Sarto Title: Financial consequences of mutual fund mergers Abstract: This study examines the impact of mutual fund mergers on performance and investment flows of target and acquiring funds. Results indicate some improvements in the post-merger performance for target funds shareholders. Results also confirm prior evidence of negative net asset flows in target funds in the pre-merger period as well as negative, but not significant, net asset flows in the years following the merger. However, a more detailed analysis allows us to observe that this lack of significance in the negative reaction of investors to mutual fund mergers is explained by the compensation of abnormally high inflows and outflows in the resultant funds. These substantial flows are significantly above the average in their market segment, especially regarding money flows. This finding provides evidence that investors pay attention to mutual fund mergers, especially institutional investors who are concentrated on the market possibilities resulting from these organizational processes. Journal: The European Journal of Finance Pages: 529-550 Issue: 7 Volume: 22 Year: 2016 Month: 5 X-DOI: 10.1080/1351847X.2013.858055 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.858055 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:7:p:529-550 Template-Type: ReDIF-Article 1.0 Author-Name: Rehez Ahlip Author-X-Name-First: Rehez Author-X-Name-Last: Ahlip Author-Name: Marek Rutkowski Author-X-Name-First: Marek Author-X-Name-Last: Rutkowski Title: Pricing of foreign exchange options under the MPT stochastic volatility model and the CIR interest rates Abstract: We consider an extension of the model proposed by Moretto, Pasquali, and Trivellato [2010. “Derivative Evaluation Using Recombining Trees under Stochastic Volatility.” Advances and Applications in Statistical Sciences 1 (2): 453--480] (referred to as the MPT model) for pricing foreign exchange (FX) options to the case of stochastic domestic and foreign interest rates driven by the Cox, Ingersoll, and Ross dynamics introduced in Cox, Ingersoll, and Ross [1985. “A Theory of Term Structure of Interest Rates.” Econometrica 53(2): 385--408]. The advantage of the MPT model is that it retains some crucial features of Heston's stochastic volatility model but, as demonstrated in Moretto, Pasquali, and Trivellato [2010. “Derivative Evaluation Using Recombining Trees under Stochastic Volatility.” Advances and Applications in Statistical Sciences 1 (2): 453--480], it is better suited for discretization through recombining lattices, and thus it can also be used to value and hedge exotic FX products. In the model examined in this paper, the instantaneous volatility is correlated with the exchange rate dynamics, but the domestic and foreign short-term rates are assumed to be mutually independent and independent of the dynamics of the exchange rate. The main result furnishes a semi-analytical formula for the price of the FX European call option, which hinges on explicit expressions for conditional characteristic functions. Journal: The European Journal of Finance Pages: 551-571 Issue: 7 Volume: 22 Year: 2016 Month: 5 X-DOI: 10.1080/1351847X.2014.912671 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.912671 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:7:p:551-571 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Aussenegg Author-X-Name-First: Wolfgang Author-X-Name-Last: Aussenegg Author-Name: Lukas Götz Author-X-Name-First: Lukas Author-X-Name-Last: Götz Author-Name: Ranko Jelic Author-X-Name-First: Ranko Author-X-Name-Last: Jelic Title: European asset swap spreads and the credit crisis Abstract: We examine time-varying behaviour and determinants of asset swap (ASW) spreads for 23 iBoxx European corporate bond indexes from January 2006 to January 2009. The results of a Markov switching model suggest that ASW spreads exhibit regime-dependent behaviour. The evidence is particularly strong for Financial and Corporates Subordinated indexes. Stock market volatility determines ASW spread changes in turbulent periods, whereas stock returns tend to affect spread changes in calm periods. While market liquidity affects spreads only in turbulent regimes the level of interest rates is an important determinant of spread changes in both regimes. Finally, we identify stock returns, lagged ASW spread levels, and lagged volatility of ASW spreads as major drivers of the regime shifts. The results are robust in the extended sample (January 2006 to October 2013) that includes a post-crisis period. Journal: The European Journal of Finance Pages: 572-600 Issue: 7 Volume: 22 Year: 2016 Month: 5 X-DOI: 10.1080/1351847X.2014.935869 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.935869 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:7:p:572-600 Template-Type: ReDIF-Article 1.0 Author-Name: Gonçalo Faria Author-X-Name-First: Gonçalo Author-X-Name-Last: Faria Author-Name: João Correia-da-Silva Author-X-Name-First: João Author-X-Name-Last: Correia-da-Silva Title: Is stochastic volatility relevant for dynamic portfolio choice under ambiguity? Abstract: Literature on dynamic portfolio choice has been finding that volatility risk has low impact on portfolio choice. For example, using long-run US data, Chacko and Viceira [2005. “Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets.” The Review of Financial Studies 18 (4): 1369--1402] found that intertemporal hedging demand (required by investors for protection against adverse changes in volatility) is empirically small even for highly risk-averse investors. We want to assess if this continues to be true in the presence of ambiguity. Adopting robust control and perturbation theory techniques, we study the problem of a long-horizon investor with recursive preferences that faces ambiguity about the stochastic processes that generate the investment opportunity set. We find that ambiguity impacts portfolio choice, with the relevant channel being the return process. Ambiguity about the volatility process is only relevant if, through a specific correlation structure, it also induces ambiguity about the return process. Using the same long-run US data, we find that ambiguity about the return process may be empirically relevant, much more than ambiguity about the volatility process. Anyway, intertemporal hedging demand is still very low: investors are essentially focused on the short-term risk--return characteristics of the risky asset. Journal: The European Journal of Finance Pages: 601-626 Issue: 7 Volume: 22 Year: 2016 Month: 5 X-DOI: 10.1080/1351847X.2014.958511 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.958511 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:7:p:601-626 Template-Type: ReDIF-Article 1.0 Author-Name: Warren Bailey Author-X-Name-First: Warren Author-X-Name-Last: Bailey Title: Behavioral finance and me, or how I came to see the light Journal: The European Journal of Finance Pages: 627-636 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2012.712922 File-URL: http://hdl.handle.net/10.1080/1351847X.2012.712922 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:627-636 Template-Type: ReDIF-Article 1.0 Author-Name: Mimi Lord Author-X-Name-First: Mimi Author-X-Name-Last: Lord Title: University endowment committees: how a learning orientation and knowledge factors contribute to portfolio diversification and performance Abstract: Institutional investment portfolios with broad portfolio diversification have been correlated with superior performance, but antecedents to investment committees’ asset allocation decisions have received little attention. This research examines the effect of a set of group norms called learning orientation on university endowment committees’ knowledge acquisition and implementation. Greater knowledge implementation, in turn, is found to contribute to greater portfolio diversification and higher risk-adjusted returns over a 5-year period. In addition, committee members’ expertise in diverse asset classes is found to contribute to greater portfolio diversification, having both a direct effect and also an indirect effect via knowledge implementation. Journal: The European Journal of Finance Pages: 637-661 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2013.879536 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.879536 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:637-661 Template-Type: ReDIF-Article 1.0 Author-Name: Vikash Ramiah Author-X-Name-First: Vikash Author-X-Name-Last: Ramiah Author-Name: Yilang Zhao Author-X-Name-First: Yilang Author-X-Name-Last: Zhao Author-Name: Imad Moosa Author-X-Name-First: Imad Author-X-Name-Last: Moosa Author-Name: Michael Graham Author-X-Name-First: Michael Author-X-Name-Last: Graham Title: A behavioural finance approach to working capital management Abstract: This paper documents the behaviour of corporate treasurers who are involved in the decision-making process in the areas of cash, inventory, accounts receivable, accounts payable and risk management during the global financial crisis. Using a survey questionnaire, we attempt to find out if working capital managers are prone to certain heuristic-driven biases, such as loss aversion, high confidence level, anchoring and self-serving biases. Our findings show that these professionals exhibit signs of behavioural biases. Although the biases lead to sub-optimal decisions in certain areas of working capital management (WCM), they can also be desirable attributes in other aspects of WCM. We propose a profile of a good working capital manager. Journal: The European Journal of Finance Pages: 662-687 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2014.883549 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.883549 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:662-687 Template-Type: ReDIF-Article 1.0 Author-Name: Emre Tarim Author-X-Name-First: Emre Author-X-Name-Last: Tarim Title: Situated cognition and narrative heuristic: evidence from retail investors and their brokers Abstract: In this paper, I discuss how a situated cognition perspective can reveal the socially constructed nature of seemingly psychological heuristics and errors in market actors’ judgements and decisions in financial markets. In doing so, I present a complementary approach to the heuristics and biases research in psychology and behavioural finance. More specifically, I draw on the narrative mode of knowing and explanation in real market settings as a framework to understand the content and the process of socially constructed knowledge in financial markets. Here, narratives of market actors and their underlying frames and causal schemas are assumed to function as a judgement heuristic in processing information flows. I then discuss an application of this approach to a sample of brokerage firms and investment advisers serving retail investors in the Istanbul Stock Exchange (ISE). My findings focus on a shared frame and the associated causal schema about the ISE and global financial markets. This observed interpretive model underpinned my interlocutors’ narrative judgements and forecasts about the ISE's movements and constituted a form of representativeness heuristic and anchoring. Journal: The European Journal of Finance Pages: 688-711 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2013.858054 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.858054 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:688-711 Template-Type: ReDIF-Article 1.0 Author-Name: William Patrick Forbes Author-X-Name-First: William Patrick Author-X-Name-Last: Forbes Author-Name: Michael Pogue Author-X-Name-First: Michael Author-X-Name-Last: Pogue Author-Name: Lynn Hodgkinson Author-X-Name-First: Lynn Author-X-Name-Last: Hodgkinson Title: CEO pay in UK FTSE 100: pay inequality, board size and performance Abstract: In this paper we examine the costs of seemingly excessive pay awards to CEOs within the UK FTSE 100 in the last decade and the consequent growth in executive pay inequality. In presenting this evidence we describe variations in the whole distribution of executive pay, rather than invoking some arbitrary cut-off point, to determine how changes in shareholder value match with concurrent changes in the distribution of executive pay. We ask whether the impact of executive pay inequality is a function of board size, rendering the CEO pay slice measure problematic in this context? We then question whether the interaction of board size and corporate performance, as measured by shareholder returns, explain variations in the sensitivity of the pay--performance relationship for UK FTSE 100 executives. We advance the Gini coefficient as a preferable measure of executive pay inequality in order to capture the impact of perceived inequality upon corporate performance. Journal: The European Journal of Finance Pages: 712-731 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2014.885457 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.885457 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:712-731 Template-Type: ReDIF-Article 1.0 Author-Name: Naaguesh Appadu Author-X-Name-First: Naaguesh Author-X-Name-Last: Appadu Author-Name: Anna Faelten Author-X-Name-First: Anna Author-X-Name-Last: Faelten Author-Name: Scott Moeller Author-X-Name-First: Scott Author-X-Name-Last: Moeller Author-Name: Valeriya Vitkova Author-X-Name-First: Valeriya Author-X-Name-Last: Vitkova Title: Assessing market attractiveness for mergers and acquisitions: the M&A Attractiveness Index Score Abstract: This paper presents a new scoring methodology designed to measure a country's capability to attract and sustain business investment activity in the forms of cross-border inflow and domestic mergers and acquisitions (M&A). We compute a theoretically grounded Index of Attractiveness for M&A purposes based on groups of country development factors which have been identified as key drivers of corporate investment activity in economics, finance and management literature. By using the Index, which has been successfully tested against country-level M&A activity in a time series analysis, we show that the drivers of M&A activity differ significantly at different stages of country maturity. Specifically, for mature countries, the quality of their regulatory systems, political stability, socio-economic environment and the sophistication of their physical infrastructure as well as the availability of sizeable assets all determine differences in country-level M&A volume and value activity. For countries at the transitional stage, it is instead their economic and financial health, socio-economic environment, technological developments and the quality of their infrastructure and the availability of sizeable assets which drive M&A activity. We also prove the predictability power of the Index, by a set of Granger causality tests, showing not only how country-level development drives future M&A activity but also how, to some extent, the inverse relationship is also true, i.e. that M&A activity can contribute to country development. Journal: The European Journal of Finance Pages: 732-755 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2014.888362 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.888362 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:732-755 Template-Type: ReDIF-Article 1.0 Author-Name: Maela Giofré Author-X-Name-First: Maela Author-X-Name-Last: Giofré Title: Comparative corporate governance and international portfolios Abstract: The impact of foreign investor protection on portfolio choices negatively depends on the degree of domestic investor protection enjoyed by the investor. The coefficient of foreign countries’ investor protection scaled by world average is therefore not constant across investing countries. The ratio foreign to domestic investor protection rights index is shown instead to be a plausible common driver of international portfolios. Phrased differently, domestic investor protection replaces the world average corporate governance in the construction of the relevant measure driving international portfolio choice. If the weight attached to the domestic factor in the construction of the average measure is large enough it can determine, almost completely, the world average corporate governance. This outcome is consistent with a setting in which the investor, strongly hit by information constraints, places a disproportionally large weight on domestic information considered as more reliable because observed at a higher precision. Journal: The European Journal of Finance Pages: 756-781 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2014.902857 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.902857 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:756-781 Template-Type: ReDIF-Article 1.0 Author-Name: Mario Levis Author-X-Name-First: Mario Author-X-Name-Last: Levis Author-Name: Yaz Gülnur Muradoǧlu Author-X-Name-First: Yaz Gülnur Author-X-Name-Last: Muradoǧlu Author-Name: Kristina Vasileva Author-X-Name-First: Kristina Author-X-Name-Last: Vasileva Title: Home bias persistence in foreign direct investments Abstract: The purpose of this paper is to analyse the issues related to home bias and foreign direct investments (FDIs). We study the role of physical, cultural, and institutional distances from home on FDI decisions taken by corporations to assess whether the globalization of the past two decades has reduced their influence. Using the ‘home bias’ framework from the finance literature and the gravity model from the economics literature, we utilize a large sample of both developed and emerging markets, using FDI flows of 6263 unique bilateral country pairs over a 30-year period. We find strong empirical evidence of persistent home bias in FDI outflows, and we show that not only physical distance but also cultural and institutional similarities between host and source countries remain a decisive factor in foreign corporate investment decisions. We also show that such home bias is persistent over time and is observed around the world. Journal: The European Journal of Finance Pages: 782-802 Issue: 8-9 Volume: 22 Year: 2016 Month: 7 X-DOI: 10.1080/1351847X.2015.1019640 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1019640 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:8-9:p:782-802 Template-Type: ReDIF-Article 1.0 Author-Name: Ji-Eun Choi Author-X-Name-First: Ji-Eun Author-X-Name-Last: Choi Author-Name: Dong Wan Shin Author-X-Name-First: Dong Wan Author-X-Name-Last: Shin Title: Three regime bivariate normal distribution: a new estimation method for co-value-at-risk, CoVaR Abstract: We propose a new distribution for estimation of co-value-at-risk, CoVaR, a financial system risk measure conditional on an institution in a financial distress: a three regime bivariate normal (3RN) distribution which is composed of three bivariate normal distributions with asymmetric variance matrices for the right-tail, left-tail and mid-part corresponding to the return of an institution. The distribution captures explicitly the asymmetric correlation of system return and institution return: usually stronger for bad times than for good times. The 3RN distribution allows simple evaluations of the CoVaR taking full advantage of asymmetric correlation. An implementation for the quasi maximum likelihood estimator (QMLE) is provided. The proposed estimation method is applied to stock price data sets consisting of one financial system and four financial institutions: the US S&P 500 index, Bank of America Corporation, JP Morgan Chase & Co., Goldman Sachs Group, Inc. and Citigroup Inc. The data analysis shows that the proposed method has better in-sample and out-of-sample violation performance than existing methods and some other possible candidates. Journal: The European Journal of Finance Pages: 1817-1833 Issue: 18 Volume: 25 Year: 2019 Month: 12 X-DOI: 10.1080/1351847X.2019.1639208 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1639208 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:18:p:1817-1833 Template-Type: ReDIF-Article 1.0 Author-Name: Wenqiong Liu Author-X-Name-First: Wenqiong Author-X-Name-Last: Liu Author-Name: Wenli Huang Author-X-Name-First: Wenli Author-X-Name-Last: Huang Author-Name: Bo Liu Author-X-Name-First: Bo Author-X-Name-Last: Liu Author-Name: Congming Mu Author-X-Name-First: Congming Author-X-Name-Last: Mu Title: Optimal mortgage contracts with time-inconsistent preferences Abstract: This paper integrates a time-inconsistent preference into the mortgage design problem and studies the corresponding effects on the optimal contract. By assuming exogenous time inconsistency in borrower's preference, we find that the time-inconsistent preference increases the loss in the lender's value and the compensation boundary. We implement the optimal contract using standard securities and option adjustable-rate mortgages (ARMs). The findings show that the time-inconsistent preference increases the default rate, and relative to standard securities, option ARMs increase the total debt capacity, but the borrower's time inconsistency can lead to sudden jumps in the total debt capacity. We also consider the endogenous time inconsistency in the borrower's preference and derive the corresponding mortgage contract; we find that a lender can perfectly offset the effect of a borrower's time inconsistency on the value function and compensation strategy. The liquidation boundary at the low interest rate varies with the degree of time inconsistency, explaining the heterogeneity in mortgage default behaviors observed in practice. Journal: The European Journal of Finance Pages: 1834-1855 Issue: 18 Volume: 25 Year: 2019 Month: 12 X-DOI: 10.1080/1351847X.2019.1649290 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1649290 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:18:p:1834-1855 Template-Type: ReDIF-Article 1.0 Author-Name: Antonella Francesca Cicchiello Author-X-Name-First: Antonella Francesca Author-X-Name-Last: Cicchiello Author-Name: Francesca Battaglia Author-X-Name-First: Francesca Author-X-Name-Last: Battaglia Author-Name: Stefano Monferrà Author-X-Name-First: Stefano Author-X-Name-Last: Monferrà Title: Crowdfunding tax incentives in Europe: a comparative analysis Abstract: Some European countries offer tax incentive schemes to investors and companies in crowdfunding. On one hand, they could be seen as a tool to reduce the system’s dependence on banks and increase the availability of credit for start-ups and Small and Medium Enterprises (SMEs). On the other hand, there is the counterweight of disadvantages that investors may face by investing in crowdfunding (i.e. complex and incomplete laws, and weak protection). This paper is primarily intended as a primer on the use of tax incentives for crowdfunding in Europe. In this study, we first examine the implementation of tax incentive schemes in the United Kingdom, France, Italy, Spain, and Belgium. Then, we analyse and compare the characteristics of such schemes along three dimensions: the incentives structure; the business characteristics; and the type of investor. We find that tax incentive schemes for crowdfunding vary widely in their form and other features of their design. Moreover, the most used forms of tax incentives are those that provide for an up-front tax credit on the amount invested in early-stage ventures. These incentives have an immediate effect on the annual income tax of the investor. A central implication is that the more tax incentive schemes are properly designed and tailored for crowdfunders, the more investors, start-ups and other firms with low liquidity could use crowdfunding as a source of funding. Journal: The European Journal of Finance Pages: 1856-1882 Issue: 18 Volume: 25 Year: 2019 Month: 12 X-DOI: 10.1080/1351847X.2019.1610783 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1610783 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:18:p:1856-1882 Template-Type: ReDIF-Article 1.0 Author-Name: Andrew Marshall Author-X-Name-First: Andrew Author-X-Name-Last: Marshall Author-Name: Helena Pinto Author-X-Name-First: Helena Author-X-Name-Last: Pinto Author-Name: Leilei Tang Author-X-Name-First: Leilei Author-X-Name-Last: Tang Title: Executive compensation in less regulated markets: the impact of debt monitoring Abstract: This paper shows that in the lightly regulated Alternative Investment Market (AIM) voluntary corporate board structures might not reduce agency costs between shareholder and executive directors. In this less regulated market, we find that the extent of debt affects executive pay. In addition, the theoretical determinants of executive pay affect CEO and other executives’ pay and incentives differently in this market. We find no evidence that debt levels affect CEO pay in a matched sample of Main Market firms. Our results suggest that debtholders could be better monitors of executive directors’ actions, in comparison to voluntary governance committees in less regulated markets. Journal: The European Journal of Finance Pages: 1883-1918 Issue: 18 Volume: 25 Year: 2019 Month: 12 X-DOI: 10.1080/1351847X.2019.1668448 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1668448 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:18:p:1883-1918 Template-Type: ReDIF-Article 1.0 Author-Name: Demetris Christodoulou Author-X-Name-First: Demetris Author-X-Name-Last: Christodoulou Author-Name: Stuart McLeay Author-X-Name-First: Stuart Author-X-Name-Last: McLeay Title: The double entry structural constraint on the econometric estimation of accounting variables Abstract: This paper develops a structural system for estimating accounting variables, within which the deterministic relationships inherent in financial statement articulation are clearly defined in the econometric model. The key proposition of the paper lies in the treatment of the financial statements as a matrix of codetermined information constrained by double entry, where the expected value of each of the individual items that comprise the financial statements will be mirrored elsewhere in the system with a different sign. Given that the change in net operating assets shares the same variation as the change in net financial claims, it is shown, by formally identifying the articulation, that empirical application will yield increased precision and improved efficiency by comparison to the more traditional methods that fail to specify the structural double entry property. Journal: The European Journal of Finance Pages: 1919-1935 Issue: 18 Volume: 25 Year: 2019 Month: 12 X-DOI: 10.1080/1351847X.2019.1667847 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1667847 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:18:p:1919-1935 Template-Type: ReDIF-Article 1.0 Author-Name: Laura Ballotta Author-X-Name-First: Laura Author-X-Name-Last: Ballotta Author-Name: Efrem Bonfiglioli Author-X-Name-First: Efrem Author-X-Name-Last: Bonfiglioli Title: Multivariate asset models using Lévy processes and applications Abstract: In this paper, we propose a multivariate asset model based on Lévy processes for pricing of products written on more than one underlying asset. Our construction is based on a two-factor representation of the dynamics of the asset log-returns. We investigate the properties of the model and introduce a multivariate generalization of some processes which are quite common in financial applications, such as subordinated Brownian motions, jump-diffusion processes and time-changed Lévy processes. Finally, we explore the issue of model calibration for the proposed setting and illustrate its robustness on a number of numerical examples. Journal: The European Journal of Finance Pages: 1320-1350 Issue: 13 Volume: 22 Year: 2016 Month: 10 X-DOI: 10.1080/1351847X.2013.870917 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.870917 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:13:p:1320-1350 Template-Type: ReDIF-Article 1.0 Author-Name: Stefano Bonini Author-X-Name-First: Stefano Author-X-Name-Last: Bonini Author-Name: Giuliana Caivano Author-X-Name-First: Giuliana Author-X-Name-Last: Caivano Title: Estimating loss-given default through advanced credibility theory Abstract: The New Basel Accord allows internationally active banking organizations to calculate their credit risk capital requirements using an internal ratings based approach, subject to supervisory review. One of the modeling components is the loss-given default (LGD): it represents the credit loss for a bank when extreme events occur that influence the obligor ability to repay his debts to the bank. Among researchers and practitioners the use of statistical models such as linear regression, Tobit or decision trees is quite common in order to compute LGDs as a forecasting of historical losses. However, these statistical techniques do not seem to provide robust estimation and show low performance. These results could be driven by some factors that make differences in LGD, such as the presence and quality of collateral, timing of the business cycle, workout process management and M&A activity among banks. This paper evaluates an alternative method of modeling LGD using a technique based on advanced credibility theory typically used in actuarial modeling. This technique provides a statistical component to the credit and workout experts’ opinion embedded in the collateral and workout management process and improve the predictive power of forecasting. The model has been applied to an Italian Bank Retail portfolio represented by Overdrafts; the application of credibility theory provides a higher predictive power of LGD estimation and an out-of-time sample backtesting has shown a stable accuracy of estimates with respect to the traditional LGD model. Journal: The European Journal of Finance Pages: 1351-1362 Issue: 13 Volume: 22 Year: 2016 Month: 10 X-DOI: 10.1080/1351847X.2013.870918 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.870918 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:13:p:1351-1362 Template-Type: ReDIF-Article 1.0 Author-Name: Bruno Feunou Author-X-Name-First: Bruno Author-X-Name-Last: Feunou Author-Name: Mohammad R. Jahan-Parvar Author-X-Name-First: Mohammad R. Author-X-Name-Last: Jahan-Parvar Author-Name: Roméo Tédongap Author-X-Name-First: Roméo Author-X-Name-Last: Tédongap Title: Which parametric model for conditional skewness? Abstract: This paper addresses an existing gap in the developing literature on conditional skewness. We develop a simple procedure to evaluate parametric conditional skewness models. This procedure is based on regressing the realized skewness measures on model-implied conditional skewness values. We find that an asymmetric generalized autoregressive conditional heteroscedasticity specification on shape parameters with a skewed generalized error distribution provides the best in-sample fit for the data, as well as reasonable predictions of the realized skewness measure. Our empirical findings imply significant asymmetry with respect to positive and negative news in both conditional asymmetry and kurtosis processes. Journal: The European Journal of Finance Pages: 1237-1271 Issue: 13 Volume: 22 Year: 2016 Month: 10 X-DOI: 10.1080/1351847X.2013.877515 File-URL: http://hdl.handle.net/10.1080/1351847X.2013.877515 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:13:p:1237-1271 Template-Type: ReDIF-Article 1.0 Author-Name: Mike Buckle Author-X-Name-First: Mike Author-X-Name-Last: Buckle Author-Name: Jing Chen Author-X-Name-First: Jing Author-X-Name-Last: Chen Author-Name: Julian M. Williams Author-X-Name-First: Julian M. Author-X-Name-Last: Williams Title: Realised higher moments: theory and practice Abstract: This paper examines the incorporation of higher moments in portfolio selection problems utilising high-frequency data. Our approach combines innovations from the realised volatility literature with a portfolio selection methodology utilising higher moments. We provide an empirical study of the measurement of higher moments from tick by tick data and implement the model for a selection of stocks from the DOW 30 over the time period 2005–2011. We demonstrate a novel estimator for moments and co-moments in the presence of microstructure noise. Journal: The European Journal of Finance Pages: 1272-1291 Issue: 13 Volume: 22 Year: 2016 Month: 10 X-DOI: 10.1080/1351847X.2014.885456 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.885456 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:13:p:1272-1291 Template-Type: ReDIF-Article 1.0 Author-Name: Niloufar Abourashchi Author-X-Name-First: Niloufar Author-X-Name-Last: Abourashchi Author-Name: Iain Clacher Author-X-Name-First: Iain Author-X-Name-Last: Clacher Author-Name: Mark C. Freeman Author-X-Name-First: Mark C. Author-X-Name-Last: Freeman Author-Name: David Hillier Author-X-Name-First: David Author-X-Name-Last: Hillier Author-Name: Malcolm Kemp Author-X-Name-First: Malcolm Author-X-Name-Last: Kemp Author-Name: Qi Zhang Author-X-Name-First: Qi Author-X-Name-Last: Zhang Title: Pension plan solvency and extreme market movements: a regime switching approach Abstract: We develop and test a new approach to assess defined benefit (DB) pension plan solvency risk in the presence of extreme market movements. Our method captures both the ‘fat-tailed’ nature of asset returns and their correlation with discount rate changes. We show that the standard assumption of constant discount rates leads to dramatic underestimation of future projections of pension plan solvency risk. Failing to incorporate leptokurtosis into asset returns also leads to downward biased estimates of risk, but this is less pronounced than the time-varying discount rate effect. Further modifying the model to capture the correlation between asset returns and the discount rate provides additional improvements in the projection of future pension plan solvency. This reduces the perceived future risk of underfunding because of the negative correlation between interest rate changes and asset returns. These results have important implications for those with responsibility for balancing risk against expected return when seeking to improve the current poor funding positions of DB pension schemes. Journal: The European Journal of Finance Pages: 1292-1319 Issue: 13 Volume: 22 Year: 2016 Month: 10 X-DOI: 10.1080/1351847X.2014.946528 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.946528 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:13:p:1292-1319 Template-Type: ReDIF-Article 1.0 Author-Name: Qun Zhang Author-X-Name-First: Qun Author-X-Name-Last: Zhang Author-Name: Didier Sornette Author-X-Name-First: Didier Author-X-Name-Last: Sornette Author-Name: Hao Zhang Author-X-Name-First: Hao Author-X-Name-Last: Zhang Title: Anticipating critical transitions of the housing market: new evidence from China Abstract: We introduce a novel quantitative methodology to detect real estate bubbles and forecast their critical end time, which we apply to the housing markets of China's metropolises. Building on the Log-Periodic Power Law Singularity (LPPLS) model of self-reinforcing feedback loops, we use the quantile regression calibration approach recently introduced by two of us to build confidence intervals and explore possible distinct scenarios. We propose to consolidate the quantile regressions into the arithmetic average of the quantile-based LPPLS Confidence indicator, which accounts for the robustness of the calibration with respect to bootstrapped residuals. We make three main contributions to the literature of real estate bubbles. First, we verify the validity of the arithmetic average of the quantile-based LPPLS Confidence indicator by studying the critical times of historical housing price bubbles in the U.S., Hong Kong, U.K. and Canada. Second, the LPPLS detection methods are applied to provide early warning signals of the housing markets in some metropolises in China. Third, we determine the possible turning points of the markets in Beijing, Shanghai, Shenzhen, Guangzhou, Tianjin and Chengdu and anticipate critical transitions of China's housing markets via our multi-scales and multi-quantiles analyses. Finally, given these projections performed in February 2017, the price trajectories from March 2017 to January 2018 that became available from the time of submission to the time of revision of the present article offer quite unique genuine out-of-sample tests of the performances of our indicators. Journal: The European Journal of Finance Pages: 1251-1276 Issue: 14 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1588763 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1588763 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:14:p:1251-1276 Template-Type: ReDIF-Article 1.0 Author-Name: Alireza Zarei Author-X-Name-First: Alireza Author-X-Name-Last: Zarei Author-Name: Mohamed Ariff Author-X-Name-First: Mohamed Author-X-Name-Last: Ariff Author-Name: M. Ishaq Bhatti Author-X-Name-First: M. Ishaq Author-X-Name-Last: Bhatti Title: The impact of exchange rates on stock market returns: new evidence from seven free-floating currencies Abstract: This paper provides evidence of a significant exchange rate effect on stock index returns using data from seven selected countries practicing free-floating exchange rate regimes. This research uses parity and asset pricing theories, thus placing it within the monetary-cum-economics framework for international asset pricing. In this study, we apply a system of seemingly unrelated regression to control for unobserved heterogeneity and cross-sectional dependence. The findings constitute evidence of a statistically significant exchange rate impact on stock index returns across selected countries. These findings can be considered as falling under the arbitrage pricing approach of the international capital asset pricing model of Solnik who also used the parity-theoretical framework on exchange rate determination. Journal: The European Journal of Finance Pages: 1277-1288 Issue: 14 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1589550 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1589550 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:14:p:1277-1288 Template-Type: ReDIF-Article 1.0 Author-Name: Kaiguo Zhou Author-X-Name-First: Kaiguo Author-X-Name-Last: Zhou Author-Name: Runyu Yan Author-X-Name-First: Runyu Author-X-Name-Last: Yan Author-Name: Yanchu Liu Author-X-Name-First: Yanchu Author-X-Name-Last: Liu Title: Vertical merger, R&D collaboration and innovation Abstract: This paper studies the effects of vertical merger and R&D collaboration activities on firms' innovation decisions and stock returns based on a continuous-time real option model under market and technological uncertainties. Our analysis confirms vertical merger's benefit in amplifying the potential gain from innovation through eliminating inefficiencies. We show that vertical merger boosts innovation incentives in two ways: it reduces the optimal innovation threshold when firms suspend the project and increases R&D investment when firms launch the project. If vertical merger is not possible, R&D collaboration can improve firms' innovation levels as an alternative decision, but inefficiencies still exist which implies less pronounced stimulation effects. Both vertical merger and R&D collaboration can reduce firms' risk when conducting innovation project and weaken the positive R&D-returns relation and financial constraints-returns relation, while these effects of vertical merger are stronger than those of R&D collaboration. Journal: The European Journal of Finance Pages: 1289-1308 Issue: 14 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1589551 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1589551 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:14:p:1289-1308 Template-Type: ReDIF-Article 1.0 Author-Name: Eric J. Pentecost Author-X-Name-First: Eric J. Author-X-Name-Last: Pentecost Author-Name: Wenti Du Author-X-Name-First: Wenti Author-X-Name-Last: Du Author-Name: Graham Bird Author-X-Name-First: Graham Author-X-Name-Last: Bird Author-Name: Thomas Willett Author-X-Name-First: Thomas Author-X-Name-Last: Willett Title: Contagion from the crises in the Euro-zone: where, when and why? Abstract: The prevalence of contagion between the Euro-zone countries and other European countries since the Greek crisis of 2009 is now well – known, but the factors that influence the pattern of this contagion are not well understood. We investigate this question both within Europe and beyond to the USA and Japan, using an asymmetric M-GARCH model that focuses on extreme values of the risk premia on government bonds. We compare these extreme values with news of major events and find that they are highly correlated. We find a different pattern of contagion emanating from Ireland compared to the other crisis countries of Greece, Italy, Portugal and Spain. We also examine the factors that have made countries vulnerable to contagion and find that financial factors are more important than trade ones. However, intra-Euro-zone trade has also been a significant factor between the major Euro-zone economies. There is little evidence that global factors affect contagion between EU member states, but some evidence that nominal exchange rate movements offer a degree of insulation from contagion for the non-Euro zone states. Journal: The European Journal of Finance Pages: 1309-1327 Issue: 14 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1589552 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1589552 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:14:p:1309-1327 Template-Type: ReDIF-Article 1.0 Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Boonlert Jitmaneeroj Author-X-Name-First: Boonlert Author-X-Name-Last: Jitmaneeroj Author-Name: Andrew Wood Author-X-Name-First: Andrew Author-X-Name-Last: Wood Title: Credit default swaps and the UK 2008–09 short sales ban Abstract: Most studies of the short sales ban of UK financial stocks from September 2008 to January 2009 fail to control for the UK’s worst ever banking crisis and the underlying increase in risk. This paper studies the ban’s impact on the 13 large financials with credit default swaps (CDS) and 20 smaller stocks without CDS. The results reveal that returns of banned stocks Granger cause CDS returns in the pre- and post-ban periods, but causality runs from CDS to stock returns during the ban period. Underlying risk proxied by the CDS probability of default increased during the ban and the immediate pre- and post-ban periods which highlights an endogeneity problem ignored in some studies. This increased risk provides a plausible rationale for why CDS and related equity bid-ask spreads - which increased during the ban period – failed to fall significantly in the post-ban period. Panel regression results indicate that probability of default was an important economic determinant of stock bid-ask spreads during the ban period. Finally, our results suggest that the ban offered direct price support for the smaller non-CDS stocks during the ban period and indirect support for CDS stocks from their pre-ban to their post-ban levels. Journal: The European Journal of Finance Pages: 1328-1349 Issue: 14 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1591477 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1591477 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:14:p:1328-1349 Template-Type: ReDIF-Article 1.0 Author-Name: James M. Steeley Author-X-Name-First: James M. Author-X-Name-Last: Steeley Title: The effects of quantitative easing on the integration of UK capital markets Abstract: We examine the effects of quantitative easing (QE) on the volatility of and correlation between stocks, short-term bonds and long-term bonds in the UK. Using a multivariate dynamic conditional correlation generalised autoregressive conditional heteroscedasticity model, we find that volatility in each of the markets experiences a significant increase during the financial crisis that is reversed during the first phase of QE. We find limited effects of the specific occurrence or intensity of QE activity on either the volatility or correlations for these asset classes, but some evidence that volatility persistence experienced temporary shifts during the sample period. We find short-term variability in the correlations between the markets during the crisis and QE periods, but cannot reject the hypothesis that correlations were constant throughout the sample period. Journal: The European Journal of Finance Pages: 999-1024 Issue: 11 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2015.1067635 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1067635 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:11:p:999-1024 Template-Type: ReDIF-Article 1.0 Author-Name: Lin Huang Author-X-Name-First: Lin Author-X-Name-Last: Huang Author-Name: Chenghu Ma Author-X-Name-First: Chenghu Author-X-Name-Last: Ma Author-Name: Hiroyuki Nakata Author-X-Name-First: Hiroyuki Author-X-Name-Last: Nakata Title: w-MPS risk aversion and the shadow CAPM: theory and empirical evidence Abstract: This paper presents the shadow capital asset pricing model (CAPM) of Ma [2011a. Advanced Asset Pricing Theory. London: Imperial College Press] as an intertemporal equilibrium asset pricing model, and tests it empirically. In contrast to the classical CAPM – a single-factor model based on a strong behavioral or distributional assumption – the shadow CAPM can be represented as a two-factor model, and only requires a modest behavioral assumption of weak form mean-preserving spread risk aversion. The empirical tests provide support in favor of the shadow CAPM over the classical CAPM, the consumption CAPM, or the Epstein and Zin [1991. “Substitution, Risk Aversion and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis”. Journal of Political Economy 99, 263–286] model. Moreover, the shadow CAPM provides a consistent explanation for the cross-sectional variations of expected returns on the stocks and for the time-varying equity premium. Journal: The European Journal of Finance Pages: 947-973 Issue: 11 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2015.1082495 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1082495 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:11:p:947-973 Template-Type: ReDIF-Article 1.0 Author-Name: Stefan Graf Author-X-Name-First: Stefan Author-X-Name-Last: Graf Title: Life-cycle funds: Much Ado about Nothing? Abstract: The core idea of life-cycle funds or target-date funds is to decrease the fund's equity exposure and conversely increase its bond exposure towards the fund's target date. Such funds have been gaining significant market share and were recently set as default choice of asset allocation in numerous defined contribution schemes or related old-age provision products in several countries. Hence, an assessment of life-cycle funds’ risk-return profiles – that is, the probability distribution of returns – is essential for sustainable financial planning of a large group of investors. This paper studies the risk-return profile of life-cycle funds in particular compared to simple balanced or lifestyle funds that apply a constant equity portion throughout the fund's term instead. In a Black–Scholes model, we derive balanced funds that reproduce the risk-return profile of an arbitrary life-cycle fund for single and regular contributions. We then analyze the accuracy of our results under more complex asset models with stochastic interest rates, stochastic equity volatility and jumps. We further show that frequently used ‘rule of thumb approximations’ that only take into account the life-cycle fund's average equity portion are not suitable to approximate a life-cycle fund's risk-return profile. Our results on the one hand facilitate sustainable financial planning and on the other hand challenge the very existence of life-cycle funds since appropriately calibrated balanced funds can offer a similar (often dominating) risk-return profile. Journal: The European Journal of Finance Pages: 974-998 Issue: 11 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2016.1151805 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151805 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:11:p:974-998 Template-Type: ReDIF-Article 1.0 Author-Name: Sanjay Sehgal Author-X-Name-First: Sanjay Author-X-Name-Last: Sehgal Author-Name: Priyanshi Gupta Author-X-Name-First: Priyanshi Author-X-Name-Last: Gupta Author-Name: Florent Deisting Author-X-Name-First: Florent Author-X-Name-Last: Deisting Title: Assessing time-varying stock market integration in Economic and Monetary Union for normal and crisis periods Abstract: In this paper, we examine the stock market integration process amongst 17 Economic and Monetary Union (EMU) countries from January 2002 to June 2013 over a normal period as well as for the Global Financial Crisis (GFC) and Eurozone Debt Crisis (EDC) periods. We classify the economies in three groups (A, B and C) based on their GDP to examine whether the economic size influences financial integration. Seven indicators are used for the purpose, namely, beta convergence, sigma convergence, variance ratio, asymmetric DCC, dynamic cointegration, market synchronisation measure and common components approach. The results suggest that large-sized EMU economies (termed as Group A) exhibit strong stock market integration. Moderate integration is observed for middle-sized EMU economies with old membership (termed as Group B). Small-sized economies (termed as Group C) economies seemed to be least integrated within the EMU stock market system. The findings further suggest presence of contagion effects as one moves from normal to crisis periods, which are specifically stronger for more integrated economies of Group A. We recommend institutional, regulatory and other policy reforms for Group B and especially Group C to achieve higher level of integration. Journal: The European Journal of Finance Pages: 1025-1058 Issue: 11 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2016.1158727 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1158727 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:11:p:1025-1058 Template-Type: ReDIF-Article 1.0 Author-Name: Roman Kräussl Author-X-Name-First: Roman Author-X-Name-Last: Kräussl Author-Name: Elizaveta Mirgorodskaya Author-X-Name-First: Elizaveta Author-X-Name-Last: Mirgorodskaya Title: Media, sentiment and market performance in the long run Abstract: This paper investigates the impact of media pessimism on financial market returns and volatility in the long run. We hypothesize that media sentiment translates into investor sentiment. Based on the underreaction and overreaction hypotheses [Barberis, N., A. Shleifer, and R. Vishny. 1998. “A Model of Investor Sentiment.” Journal of Empirical Economics 49 (3): 307–343], we suggest that media pessimism has an effect on market performance after a lag of several months. We construct a monthly media pessimism indicator by taking the ratio of the number of newspaper articles that contain predetermined negative words to the number of newspaper articles that contain predetermined positive words in the headline and in the lead paragraph. Our results indicate that media pessimism is associated with negative (positive) market returns 14–17 (24–25) months in advance and positive market volatilities 1–20 months in advance. Our results are statistically and economically significant. We find evidence for Granger causality of media pessimism on market performance. Our media pessimism indicator possesses additional predictive power for the Baker and Wurgler [2006. “Investor Sentiment and the Cross-section of Stock Returns.” Journal of Finance 61 (4): 1645–1680] investor sentiment index and the Chicago Board Options Exchange Market Volatility Index. Journal: The European Journal of Finance Pages: 1059-1082 Issue: 11 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2016.1226188 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1226188 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:11:p:1059-1082 Template-Type: ReDIF-Article 1.0 Author-Name: Fernando V. Cerezetti Author-X-Name-First: Fernando V. Author-X-Name-Last: Cerezetti Author-Name: Emmanouil N. Karimalis Author-X-Name-First: Emmanouil N. Author-X-Name-Last: Karimalis Author-Name: Ujwal Shreyas Author-X-Name-First: Ujwal Author-X-Name-Last: Shreyas Author-Name: Anannit Sumawong Author-X-Name-First: Anannit Author-X-Name-Last: Sumawong Title: Market liquidity, closeout procedures and initial margin for CCPs Abstract: Closeout procedures enable central counterparties (CCPs) to respond to events that challenge the continuity of their normal operations, most frequently triggered by the default of one or more clearing members. The procedures typically entail three main phases: splitting, hedging, and liquidation. Together, these ensure the regularity of the settlement process through the prudent and orderly liquidation of the defaulters’ portfolios. Traditional approaches to CCPs’ margin requirements typically assume a simple closeout profile, not accounting for the ‘real life’ constraints embedded in the management of a default. The paper proposes an approach to assess how distinct closeout strategies may expose a CCP to different sets of risks and costs taking into account real-life frictions. The proposed approach enables the evaluation of a full spectrum of hedging strategies and the assessment of the trade-offs between the risk-reducing benefits of hedging and the transaction costs associated with it. Using an unexplored set of transactional level data, the proposed framework is evaluated assuming the hypothetical default of a real CCP clearing member. We consider the worst-case loss of a large interest rate swap portfolio observed over the past 10 years (i.e. 2005–2015) and show that an efficient hedging strategy which minimises risk may not be optimal when transaction costs are taken into account. The empirical analysis suggests that transaction costs are a significant factor and should be accounted for when designing a hedging strategy. Specifically, it is shown that the risk-reducing benefits arising from more tailored hedging strategies may introduce higher transaction costs, and therefore may change the effectiveness of the strategies. Journal: The European Journal of Finance Pages: 599-631 Issue: 7 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1496944 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1496944 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:7:p:599-631 Template-Type: ReDIF-Article 1.0 Author-Name: Olga Kolokolova Author-X-Name-First: Olga Author-X-Name-Last: Kolokolova Author-Name: Ming-Tsung Lin Author-X-Name-First: Ming-Tsung Author-X-Name-Last: Lin Author-Name: Ser-Huang Poon Author-X-Name-First: Ser-Huang Author-X-Name-Last: Poon Title: Rating-based CDS curves Abstract: This paper explores the extent to which term structure of individual credit default swap (CDS) spreads can be explained by the firm's rating. Using the Nelson–Siegel model, we construct, for each day, CDS curves from a cross-section of CDS spreads for each rating class. We find that individual CDS deviations from the curve tend to diminish over time and CDS spreads converge towards the fitted curves. The likelihood of convergence increases with the absolute size of the deviation. The convergence is especially stable if CDS spreads are lower relative to the rating-based curve. Trading strategies exploiting the convergence generate an average return of 3.7% (5-day holding period) and 9% (20-day holding period). Journal: The European Journal of Finance Pages: 689-723 Issue: 7 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1511441 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1511441 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:7:p:689-723 Template-Type: ReDIF-Article 1.0 Author-Name: Hossein Jahanshahloo Author-X-Name-First: Hossein Author-X-Name-Last: Jahanshahloo Author-Name: Charlie X. Cai Author-X-Name-First: Charlie X. Author-X-Name-Last: Cai Title: Monitoring the foreign exchange rate benchmark fix Abstract: We develop a Manipulation Index (ManIx) that captures the potential manipulation intention of dealers during the World Markets/Reuters (WMR) benchmark (London Close) period at 4 pm London time through a unique algorithm and simulation. The application of this model (using a dataset with dealers’ identities) can identify banks that are prone to potential manipulative behavior. The results concerning the identified banks are validated by the regulatory investigations. Implementation of this algorithm allows regulators better direct their limited resources towards more targeted in-depth investigation. Journal: The European Journal of Finance Pages: 670-688 Issue: 7 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1518847 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1518847 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:7:p:670-688 Template-Type: ReDIF-Article 1.0 Author-Name: Dimitrios Gounopoulos Author-X-Name-First: Dimitrios Author-X-Name-Last: Gounopoulos Author-Name: Kyriaki Kosmidou Author-X-Name-First: Kyriaki Author-X-Name-Last: Kosmidou Author-Name: Dimitrios Kousenidis Author-X-Name-First: Dimitrios Author-X-Name-Last: Kousenidis Author-Name: Victoria Patsika Author-X-Name-First: Victoria Author-X-Name-Last: Patsika Title: The investigation of the dynamic linkages between real estate market and stock market in Greece Abstract: We use quarterly data from Greece over the period 1997:1–2015:2 and investigate the dynamic linkages between the price of the real estate market and the price of the stock market focusing on two transmission mechanisms, namely the wealth and credit-price effects. The empirical analysis employs advanced methodological techniques and presents evidence supporting the existence of both the wealth effect and the credit effect in the long-run while in the short-run there is a one-way causal effect running from stock market towards house market. Results reveal asymmetric adjustment to equilibrium process and considerably stronger for positive deviations from the equilibrium. Journal: The European Journal of Finance Pages: 647-669 Issue: 7 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1532443 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1532443 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:7:p:647-669 Template-Type: ReDIF-Article 1.0 Author-Name: Samer Adra Author-X-Name-First: Samer Author-X-Name-Last: Adra Author-Name: Leonidas G. Barbopoulos Author-X-Name-First: Leonidas G. Author-X-Name-Last: Barbopoulos Title: Liquidity and information asymmetry considerations in corporate takeovers Abstract: We examine how stock market liquidity and information asymmetry considerations influence the wealth effects of Mergers and Acquisitions (M&As). We present a simple model predicting that M&As of listed targets that have relatively illiquid stocks are profitable for acquirers due to (a) the weak bargaining power of the targets’ shareholders, and (b) the limited information asymmetry concerns when evaluating takeover synergies. Our results show that cash-financed M&As of listed targets that have relatively illiquid stocks are associated with an increase in acquirer risk-adjusted returns. These gains are equivalent to those realized from comparable private target M&As. When engaging in stock-financed listed-target M&As, acquirers with liquid stocks enjoy significant gains when the targets have relatively illiquid stocks. This result holds especially when the deal is announced during periods of deterioration in the overall stock market liquidity. Lastly, we find that liquidity considerations affect the acquirer’s choice of the target firm’s listing status, as well as the M&A method of payment. Journal: The European Journal of Finance Pages: 724-743 Issue: 7 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1543202 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1543202 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:7:p:724-743 Template-Type: ReDIF-Article 1.0 Author-Name: Kyriaki Kosmidou Author-X-Name-First: Kyriaki Author-X-Name-Last: Kosmidou Author-Name: Dimitrios Kousenidis Author-X-Name-First: Dimitrios Author-X-Name-Last: Kousenidis Author-Name: Anestis Ladas Author-X-Name-First: Anestis Author-X-Name-Last: Ladas Author-Name: Christos Negkakis Author-X-Name-First: Christos Author-X-Name-Last: Negkakis Title: Do institutions prevent contagion in financial markets? Evidence from the European debt crisis Abstract: The recent European Sovereign Debt Crisis brought in attention a number of structural problems in the European Union. Part of the effort to correct these problems in the countries that were mostly affected by the crisis were a number of policy responses from the European Union, the European Central Bank, the International Monetary Fund and the Local Governments. In this study, we attempt to assess the success of these responses to constrain the contagion of the crisis from the banking sector to the real economy sectors of the Eurozone countries. Our results show that policy announcements from the EU/ECB/IMF affect the transmission of shocks generated in the banking sector to the market. Moreover, policy responses of the national governments also seem to play a role in the contagion of the crisis. Journal: The European Journal of Finance Pages: 632-646 Issue: 7 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1552171 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1552171 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:7:p:632-646 Template-Type: ReDIF-Article 1.0 Author-Name: Dimitris Andriosopoulos Author-X-Name-First: Dimitris Author-X-Name-Last: Andriosopoulos Author-Name: Robert Faff Author-X-Name-First: Robert Author-X-Name-Last: Faff Author-Name: Krishna Paudyal Author-X-Name-First: Krishna Author-X-Name-Last: Paudyal Title: Financial markets, innovation and regulation Journal: The European Journal of Finance Pages: 595-598 Issue: 7 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2019.1571727 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1571727 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:7:p:595-598 Template-Type: ReDIF-Article 1.0 Author-Name: Gerhard Kling Author-X-Name-First: Gerhard Author-X-Name-Last: Kling Title: A theory of operational cash holding, endogenous financial constraints, and credit rationing Abstract: This paper develops a theory of operational cash holding. Liquidity shocks due to delayed payments must be financed using cash or short-term debt. Debt holders provide an irrevocable credit line given a firm's expected insolvency risk, and equity holders select optimum cash holding. The model demonstrates the trade-off between cash holding and investing in fixed assets. Introducing uncertain cash flows leads to precautionary cash holding if debt holders impose financial constraints. Precautionary cash holding, in turn, reduces insolvency risk enhancing access to short-term finance. The theory shows that credit rationing can occur in the absence of market frictions. Using U.S. data from 1998 to 2012, empirical findings suggest that the decline in credit lines has contributed to the increase in cash holding in line with theoretical predictions. Journal: The European Journal of Finance Pages: 59-75 Issue: 1 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2016.1225590 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1225590 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:1:p:59-75 Template-Type: ReDIF-Article 1.0 Author-Name: Mercedes Alda Author-X-Name-First: Mercedes Author-X-Name-Last: Alda Title: Pension fund manager skills over the economic cycle: the (non-)specialization cost Abstract: We study whether pension fund managers, as professionals of important social and financial products, are able to add value for their clients and adapt to economic changes. To this end, we analyze the performance and skills (market timing and stock picking) over the economic cycle from both pension fund and manager perspectives. This double analysis allows examining whether skills reside in managers and/or funds and control for manager substitutions. Despite the long-term nature of pension funds, we find that both fund and manager skills vary with market conditions, showing better evidence of stock-picking in booms, and of market timing in recessions. Nonetheless, top (bottom) funds and managers exhibit both (incorrect) skills in booms and in recessions. Some of the top (bottom) funds and managers are the best (worst) in both abilities in the same periods, but not in different periods, showing that not all managers have the ability to adapt to market conditions. Additionally, managers with limited skills tend to specialize because diversification requires multi-task skills and the non-specialization of these managers usually results in incorrect skills. Journal: The European Journal of Finance Pages: 36-58 Issue: 1 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2016.1239585 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1239585 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:1:p:36-58 Template-Type: ReDIF-Article 1.0 Author-Name: Fearghal Kearney Author-X-Name-First: Fearghal Author-X-Name-Last: Kearney Author-Name: Mark Cummins Author-X-Name-First: Mark Author-X-Name-Last: Cummins Author-Name: Finbarr Murphy Author-X-Name-First: Finbarr Author-X-Name-Last: Murphy Title: Forecasting implied volatility in foreign exchange markets: a functional time series approach Abstract: We utilise novel functional time series (FTS) techniques to characterise and forecast implied volatility in foreign exchange markets. In particular, we examine the daily implied volatility curves of FX options, namely; Euro/United States Dollar, Euro/British Pound, and Euro/Japanese Yen. The FTS model is shown to produce both realistic and plausible implied volatility shapes that closely match empirical data during the volatile 2006–2013 period. Furthermore, the FTS model significantly outperforms implied volatility forecasts produced by traditionally employed parametric models. The evaluation is performed under both in-sample and out-of-sample testing frameworks with our findings shown to be robust across various currencies, moneyness segments, contract maturities, forecasting horizons, and out-of-sample window lengths. The economic significance of the results is highlighted through the implementation of a simple trading strategy. Journal: The European Journal of Finance Pages: 1-18 Issue: 1 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2016.1271441 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1271441 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:1:p:1-18 Template-Type: ReDIF-Article 1.0 Author-Name: Yasheng Huang Author-X-Name-First: Yasheng Author-X-Name-Last: Huang Author-Name: Meijun Qian Author-X-Name-First: Meijun Author-X-Name-Last: Qian Title: How gradualist are Chinese reforms? Evidence from rural income determinants Abstract: Gradualist reform (GR) is a strategy that implements partial and incremental reforms at the beginning but gradually deepens the reforms over time. Using income determinants in rural China as the measure of the GR hypothesis, this paper provides a direct test of the widely accepted claim that China has followed a GR strategy. In the sense that reform deepens, production factors should become more important income determinants over time. Our difference-in-difference analysis, based on a large panel dataset from fixed-site rural surveys conducted between 1986 and 2002, shows that the efficiency of return to production factors deteriorated over time instead. Households that had more production resources, such as land and labor, or that devoted more labor and time to entrepreneurial activities experienced better income growth in the 1980s, but households with better political status did so in the 1990s. Further difference-in-difference analyses show that these income patterns are related to an inefficient credit allocation due to government interference in the 1990s compared to market mechanisms in the 1980s. Overall, the empirical evidence on the income determinants and on rural finance does not support the GR hypothesis on China's reform path. Journal: The European Journal of Finance Pages: 19-35 Issue: 1 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2017.1290669 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1290669 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:1:p:19-35 Template-Type: ReDIF-Article 1.0 Author-Name: John van der Burg Author-X-Name-First: John Author-X-Name-Last: van der Burg Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: A hyperbolic model of optimal cash balances Abstract: We develop a hyperbolic cash management model based on the Pearson Type IV probability density which minimises extreme variations in firm cash balances. Since the moments for the Type IV probability density are in general undefined and maximum likelihood estimation is compromised by the non-algebraic nature of the Type IV normalising constant, parameter estimation is implemented using the $ {\chi ^2} $ χ2 minimum method. Empirical analysis shows that the Type IV density is highly compatible with the quarterly cash flow data of a randomly selected sample of 100 large U.S. corporations. In contrast, around 60% of the 100 corporations return Jarque–Bera test statistics which are incompatible with the Gaussian probability density. Journal: The European Journal of Finance Pages: 101-115 Issue: 2 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1482834 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1482834 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:2:p:101-115 Template-Type: ReDIF-Article 1.0 Author-Name: Yunfeng Fan Author-X-Name-First: Yunfeng Author-X-Name-Last: Fan Author-Name: Sudipto Sarkar Author-X-Name-First: Sudipto Author-X-Name-Last: Sarkar Author-Name: Chuanqian Zhang Author-X-Name-First: Chuanqian Author-X-Name-Last: Zhang Title: The investment decision with technological and market uncertainties Abstract: This paper examines how technological uncertainty affects current investment; specifically, what is the impact on a firm’s investment in an existing technology when an improved technology might arrive in the future. The firm can invest in the current technology and upgrade to the new technology after its arrival (sequential investing), or it can bypass the current technology and invest directly in the new technology (leapfrogging). The main result is that, in the presence of market risk, future technological uncertainty has a non-monotonic effect on investment, with the investment trigger being a U-shaped function of the expected speed of arrival of the new technology. In this U-shaped relationship, the investment trigger starts rising later if the new technology is more attractive and also when volatility and interest rate are high and growth rate low; thus, technological uncertainty is more likely to have a positive effect on investment under these conditions. Finally, we apply the model to the sequential versus leapfrog investment decision, and find that leapfrogging becomes more attractive relative to sequential investment when interest rate and new technology earnings enhancement are higher, and when market volatility, growth rate and new technology investment cost are lower. Journal: The European Journal of Finance Pages: 116-138 Issue: 2 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1486865 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1486865 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:2:p:116-138 Template-Type: ReDIF-Article 1.0 Author-Name: Dimitris K. Chronopoulos Author-X-Name-First: Dimitris K. Author-X-Name-Last: Chronopoulos Author-Name: David G. McMillan Author-X-Name-First: David G. Author-X-Name-Last: McMillan Author-Name: Fotios I. Papadimitriou Author-X-Name-First: Fotios I. Author-X-Name-Last: Papadimitriou Author-Name: Manouchehr Tavakoli Author-X-Name-First: Manouchehr Author-X-Name-Last: Tavakoli Title: Insider trading and future stock returns in firms with concentrated ownership levels Abstract: We investigate the relationship between insider trading and stock returns in firms with concentrated ownership. To this end, we employ data from East Asian countries which span the period January 2003 to May 2012. Consistent with the previous literature, we find a significantly negative relation between the selling activity of insiders and stock returns. However, contrary to studies which focus on highly developed markets, we find that the buying activity of insiders is also inversely related to future stock returns. Our analysis shows that top directors with higher ownership levels drive this result, suggesting that the trading activity of insiders is not always associated with profit-making motives and can be explained by their level of ownership. Furthermore, we demonstrate that a trading strategy which focuses solely on purchases made by top directors with high ownership levels yields negative returns. The paper has important implications for outside investors who mimic the trading activity of insiders with the aim to realise profits. Journal: The European Journal of Finance Pages: 139-154 Issue: 2 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1487312 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1487312 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:2:p:139-154 Template-Type: ReDIF-Article 1.0 Author-Name: Carmen López-Andión Author-X-Name-First: Carmen Author-X-Name-Last: López-Andión Author-Name: Ana Iglesias-Casal Author-X-Name-First: Ana Author-X-Name-Last: Iglesias-Casal Author-Name: Maria Celia López-Penabad Author-X-Name-First: Maria Celia Author-X-Name-Last: López-Penabad Author-Name: Jose Manuel Maside-Sanfiz Author-X-Name-First: Jose Manuel Author-X-Name-Last: Maside-Sanfiz Title: Securitization and financial solvency: empirical evidence from Portugal Abstract: This paper analyses the effect of securitization issues on the solvency of Portuguese financial institutions. For this purpose, we use an unbalanced panel model estimated using GMM methods and find that securitization has a slightly positive impact on the soundness of the issuing entity. We study 35 financial entities and 60 traditional securitizations issued by 9 originators between 2001 and 2013. The analysis reveals that the financial entities’ soundness improved slightly, showing that securitization enhanced the quality of the originators’ portfolios and increased the regulatory capital requirements. We also found that efficiency and profitability improve the risk-adjusted ROAA and that efficiency increases regulatory capital requirements. The robustness analysis confirms the positive effect of securitization on solvency, where both credit quality and liquidity are shown to be significant variables. Journal: The European Journal of Finance Pages: 155-166 Issue: 2 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1492948 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1492948 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:2:p:155-166 Template-Type: ReDIF-Article 1.0 Author-Name: Miguel Á. Peña-Cerezo Author-X-Name-First: Miguel Á. Author-X-Name-Last: Peña-Cerezo Author-Name: Arturo Rodríguez-Castellanos Author-X-Name-First: Arturo Author-X-Name-Last: Rodríguez-Castellanos Author-Name: Francisco J. Ibáñez-Hernández Author-X-Name-First: Francisco J. Author-X-Name-Last: Ibáñez-Hernández Title: Multi-tranche securitisation structures: more than just a zero-sum game? Abstract: This paper explains multi-tranche structuring and the yield that securitisation bonds offer by incorporating several factors into a comprehensive model. Results indicate that the degree of complexity of multi-tranche securitisation structures is related to market completeness and solving information asymmetry problems. We also find that the complexity of multi-tranche structure enables the yield offered by triple-A bonds to be reduced but not the average yield, concluding that tranching is a zero-sum game. This research uses a database comprising of all the MBS and ABS issues (1993–2011) in Spain, one of the world’s main securitisation markets. Analysing this long period has allowed us, for the first time, to contrast the Great Financial Crisis (GFC) disruptive effect on the analysed relationships in the securitisation market. Journal: The European Journal of Finance Pages: 167-189 Issue: 2 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1505648 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1505648 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:2:p:167-189 Template-Type: ReDIF-Article 1.0 Author-Name: Rangan Gupta Author-X-Name-First: Rangan Author-X-Name-Last: Gupta Author-Name: Tahir Suleman Author-X-Name-First: Tahir Author-X-Name-Last: Suleman Author-Name: Mark E. Wohar Author-X-Name-First: Mark E. Author-X-Name-Last: Wohar Title: Exchange rate returns and volatility: the role of time-varying rare disaster risks Abstract: This paper provides empirical evidence to the theoretical claim that rare disaster risks have predictability for exchange rate returns and volatility using a nonparametric quantile-based methodology. Using dollar-based exchange rates for Brazil, Russia, India, China, and South Africa, the quantile-causality test shows that indeed rare disaster-risks affects both returns and volatility over the majority of their respective conditional distributions. In addition, these effects are much stronger when compared to those using the British pound, especially in terms of currency returns. Journal: The European Journal of Finance Pages: 190-203 Issue: 2 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1534750 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1534750 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:2:p:190-203 Template-Type: ReDIF-Article 1.0 Author-Name: Genaro Sucarrat Author-X-Name-First: Genaro Author-X-Name-Last: Sucarrat Author-Name: Alvaro Escribano Author-X-Name-First: Alvaro Author-X-Name-Last: Escribano Title: Estimation of log-GARCH models in the presence of zero returns Abstract: A critique that has been directed towards the log-GARCH model is that its log-volatility specification does not exist in the presence of zero returns. A common ‘remedy’ is to replace the zeros with a small (in the absolute sense) non-zero value. However, this renders estimation asymptotically biased if the true return is equal to zero with probability zero. Here, we propose a solution. If the zero probability is zero, then zero returns may be observed because of non-trading, measurement error (e.g. due to rounding), missing values and other data issues. The algorithm we propose treats the zeros as missing values and handles these by estimation via the ARMA representation. An extensive number of simulations verify the conjectured properties of the bias-correcting algorithm, and several empirical applications illustrate that it can make a substantial difference in practice. Journal: The European Journal of Finance Pages: 809-827 Issue: 10 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1336452 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1336452 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:10:p:809-827 Template-Type: ReDIF-Article 1.0 Author-Name: Eva Ferreira Author-X-Name-First: Eva Author-X-Name-Last: Ferreira Author-Name: Susan Orbe Author-X-Name-First: Susan Author-X-Name-Last: Orbe Title: Why are there time-varying comovements in the European stock market? Abstract: This paper analyzes the dynamics of pair comovements between different domestic European stock market returns (Spain, France, Germany, Switzerland and the United Kingdom) seeking to check whether there is a unique source of risk driving those dynamics. Once it is shown that the comovements are time-varying, the question is to find whether a global index such as the Euro Stoxx can be considered the main source of risk. To that end we estimate and test for time-varying global pair covariances and for time-varying remaining pair covariances once the effect of the Euro Stoxx is removed. The empirical results are obtained considering locally stationary variables, a family that includes variables with first and second time-varying moments. Under that framework time-varying means and covariances can be estimated using a spline-based procedure and Wald-type statistics can be computed to test for time-variations. A simulation study shows that the role of the mean estimation part is crucial to the good performance of the tests for second moments. The empirical results evidence that all global pair covariances for the European countries analyzed are time-varying, but also that the Euro Stoxx can be considered as the driving source of risk for these time-varying dynamics. This conclusion is very useful for modeling purpose and financial strategies. Finally, we repeat the analysis considering the Nasdaq as an alternative global index and find that it explains only a small part of the dynamics in the European pair comovements. Journal: The European Journal of Finance Pages: 828-848 Issue: 10 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1339622 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1339622 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:10:p:828-848 Template-Type: ReDIF-Article 1.0 Author-Name: Konstantinos Tolikas Author-X-Name-First: Konstantinos Author-X-Name-Last: Tolikas Title: The lead-lag relation between the stock and the bond markets Abstract: I examine the relative informational efficiency of bonds and the underlying stocks through the lead-lag relation between their daily returns. I find that stock returns lead the returns of high yield bonds but not those of investment grade bonds, which indicates that the stock market is relatively more informational efficient than the bond market. The findings imply trading opportunities for the bonds that are highly sensitive to the release of new information. I also find that stocks detect impending defaults earlier than bonds, which implies that bond holders may have enough time to protect their capital. Journal: The European Journal of Finance Pages: 849-866 Issue: 10 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1340320 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1340320 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:10:p:849-866 Template-Type: ReDIF-Article 1.0 Author-Name: Philipp Lechner Author-X-Name-First: Philipp Author-X-Name-Last: Lechner Author-Name: Nadine Gatzert Author-X-Name-First: Nadine Author-X-Name-Last: Gatzert Title: Determinants and value of enterprise risk management: empirical evidence from Germany Abstract: Enterprise risk management (ERM) has become increasingly relevant in recent years, especially due to an increasing complexity of risks and the further development of regulatory frameworks. The aim of this paper is to empirically analyze firm characteristics that determine the implementation of an ERM system and to study the impact of ERM on firm value. We focus on companies listed at the German stock exchange, which to the best of our knowledge is the first empirical study with a cross-sectional analysis for Germany and one of the first for a European country. Our findings show that size, international diversification and the industry sector (banking, insurance, energy) positively impact the implementation of an ERM system, and financial leverage is negatively related to ERM engagement. In addition, our results confirm a significant positive impact of ERM on shareholder value. Journal: The European Journal of Finance Pages: 867-887 Issue: 10 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1347100 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1347100 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:10:p:867-887 Template-Type: ReDIF-Article 1.0 Author-Name: Laura Ballotta Author-X-Name-First: Laura Author-X-Name-Last: Ballotta Author-Name: Russell Gerrard Author-X-Name-First: Russell Author-X-Name-Last: Gerrard Author-Name: Ioannis Kyriakou Author-X-Name-First: Ioannis Author-X-Name-Last: Kyriakou Title: Hedging of Asian options under exponential Lévy models: computation and performance Abstract: In this paper we consider the problem of hedging an arithmetic Asian option with discrete monitoring in an exponential Lévy model by deriving backward recursive integrals for the price sensitivities of the option. The procedure is applied to the analysis of the performance of the delta and delta–gamma hedges in an incomplete market; particular attention is paid to the hedging error and the impact of model error on the quality of the chosen hedging strategy. The numerical analysis shows the impact of jump risk on the hedging error of the option position, and the importance of including traded options in the hedging portfolio for the reduction of this risk. Journal: The European Journal of Finance Pages: 297-323 Issue: 4 Volume: 23 Year: 2017 Month: 3 X-DOI: 10.1080/1351847X.2015.1066694 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1066694 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:4:p:297-323 Template-Type: ReDIF-Article 1.0 Author-Name: Emmanouil Platanakis Author-X-Name-First: Emmanouil Author-X-Name-Last: Platanakis Author-Name: Charles Sutcliffe Author-X-Name-First: Charles Author-X-Name-Last: Sutcliffe Title: Asset–liability modelling and pension schemes: the application of robust optimization to USS Abstract: This paper uses a novel numerical optimization technique – robust optimization – that is well suited to solving the asset–liability management (ALM) problem for pension schemes. It requires the estimation of fewer stochastic parameters, reduces estimation risk and adopts a prudent approach to asset allocation. This study is the first to apply it to a real-world pension scheme, and the first ALM model of a pension scheme to maximize the Sharpe ratio. We disaggregate pension liabilities into three components – active members, deferred members and pensioners, and transform the optimal asset allocation into the scheme's projected contribution rate. The robust optimization model is extended to include liabilities and used to derive optimal investment policies for the Universities Superannuation Scheme (USS), benchmarked against the Sharpe and Tint, Bayes–Stein and Black–Litterman models as well as the actual USS investment decisions. Over a 144-month out-of-sample period, robust optimization is superior to the four benchmarks across 20 performance criteria and has a remarkably stable asset allocation – essentially fix-mix. These conclusions are supported by six robustness checks. Journal: The European Journal of Finance Pages: 324-352 Issue: 4 Volume: 23 Year: 2017 Month: 3 X-DOI: 10.1080/1351847X.2015.1071714 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1071714 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:4:p:324-352 Template-Type: ReDIF-Article 1.0 Author-Name: Jacinto Marabel Romo Author-X-Name-First: Jacinto Author-X-Name-Last: Marabel Romo Title: Pricing volatility options under stochastic skew with application to the VIX index Abstract: In recent years, there has been a remarkable growth of volatility options. In particular, VIX options are among the most actively trading contracts at Chicago Board Options Exchange. These options exhibit upward sloping volatility skew and the shape of the skew is largely independent of the volatility level. To take into account these stylized facts, this article introduces a novel two-factor stochastic volatility model with mean reversion that accounts for stochastic skew consistent with empirical evidence. Importantly, the model is analytically tractable. In this sense, I solve the pricing problem corresponding to standard-start, as well as to forward-start European options through the Fast Fourier Transform. To illustrate the practical performance of the model, I calibrate the model parameters to the quoted prices of European options on the VIX index. The calibration results are fairly good indicating the ability of the model to capture the shape of the implied volatility skew associated with VIX options. Journal: The European Journal of Finance Pages: 353-374 Issue: 4 Volume: 23 Year: 2017 Month: 3 X-DOI: 10.1080/1351847X.2015.1092165 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1092165 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:4:p:353-374 Template-Type: ReDIF-Article 1.0 Author-Name: Thanos Verousis Author-X-Name-First: Thanos Author-X-Name-Last: Verousis Author-Name: Owain ap Gwilym Author-X-Name-First: Owain Author-X-Name-Last: ap Gwilym Author-Name: XiaoHua Chen Author-X-Name-First: XiaoHua Author-X-Name-Last: Chen Title: The intraday determination of liquidity in the NYSE LIFFE equity option markets Abstract: We exploit an extensive high-frequency data set of all individual equity options trading at New York Stock Exchange London International Financial Futures and Options Exchange (Amsterdam, London and Paris) in order to study the determination of liquidity during the trading day. In particular, we focus on two main aspects of option liquidity: (i) the intraday behaviour of equity option liquidity and its determinants and (ii) the influence of macroeconomic events and commonality on intraday equity option liquidity. Inventory management models cannot explain the intraday variation in option spreads and depths. Instead, we show that the option liquidity measures are strongly correlated with option volatility. Increases in volatility are associated with decreases in liquidity, a finding that is in line with information asymmetry models and the derivatives hedging theory. However, the relationship between spreads and volume varies across the three markets. Option liquidity reacts strongly to macroeconomic news announcements, especially US events. The average systematic liquidity component is 12% for Amsterdam, 14% for London and 16% for Paris. Journal: The European Journal of Finance Pages: 1164-1188 Issue: 12 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2015.1019642 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1019642 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1164-1188 Template-Type: ReDIF-Article 1.0 Author-Name: Andreas Karathanasopoulos Author-X-Name-First: Andreas Author-X-Name-Last: Karathanasopoulos Author-Name: Konstantinos Athanasios Theofilatos Author-X-Name-First: Konstantinos Athanasios Author-X-Name-Last: Theofilatos Author-Name: Georgios Sermpinis Author-X-Name-First: Georgios Author-X-Name-Last: Sermpinis Author-Name: Christian Dunis Author-X-Name-First: Christian Author-X-Name-Last: Dunis Author-Name: Sovan Mitra Author-X-Name-First: Sovan Author-X-Name-Last: Mitra Author-Name: Charalampos Stasinakis Author-X-Name-First: Charalampos Author-X-Name-Last: Stasinakis Title: Stock market prediction using evolutionary support vector machines: an application to the ASE20 index Abstract: The main motivation for this paper is to introduce a novel hybrid method for the prediction of the directional movement of financial assets with an application to the ASE20 Greek stock index. Specifically, we use an alternative computational methodology named evolutionary support vector machine (ESVM) stock predictor for modeling and trading the ASE20 Greek stock index extending the universe of the examined inputs to include autoregressive inputs and moving averages of the ASE20 index and other four financial indices. The proposed hybrid method consists of a combination of genetic algorithms with support vector machines modified to uncover effective short-term trading models and overcome the limitations of existing methods. For comparison purposes, the trading performance of the ESVM stock predictor is benchmarked with four traditional strategies (a naïve strategy, a buy and hold strategy, a moving average convergence/divergence and an autoregressive moving average model), and a multilayer perceptron neural network model. As it turns out, the proposed methodology produces a higher trading performance, even during the financial crisis period, in terms of annualized return and information ratio, while providing information about the relationship between the ASE20 index and DAX30, NIKKEI225, FTSE100 and S&P500 indices. Journal: The European Journal of Finance Pages: 1145-1163 Issue: 12 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2015.1040167 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1040167 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1145-1163 Template-Type: ReDIF-Article 1.0 Author-Name: Patrick OSullivan Author-X-Name-First: Patrick Author-X-Name-Last: OSullivan Author-Name: David Edelman Author-X-Name-First: David Author-X-Name-Last: Edelman Title: Optimal derivatives: portfolios, payoffs and preferences Abstract: This article presents an extension to the growth optimal derivative that can accommodate risk preferences differing from those of logarithmic utility. Analysis of the optimal derivative provides interesting insights into the behaviour of power investors. We show that power investors under the real-world probability can be viewed as logarithmic investors under the myopic probability of Guasoni and Robertson [(2012). “Portfolios and Risk Premia for the Long Run.” Annals of Applied Probability, 22 (1), 239–284]. Furthermore, this intuition provides criteria for establishing whether fractional Kelly betting is optimal for power investors. Finally, the Black–Scholes model is used to demonstrate how the optimal derivative can be implemented and we show that our approach is consistent with classical techniques. Journal: The European Journal of Finance Pages: 1224-1236 Issue: 12 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2016.1151807 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151807 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1224-1236 Template-Type: ReDIF-Article 1.0 Author-Name: Thanos Verousis Author-X-Name-First: Thanos Author-X-Name-Last: Verousis Author-Name: Owain ap Gwilym Author-X-Name-First: Owain Author-X-Name-Last: ap Gwilym Author-Name: Nikolaos Voukelatos Author-X-Name-First: Nikolaos Author-X-Name-Last: Voukelatos Title: Commonality in equity options liquidity: evidence from European Markets Abstract: This paper examines commonality in liquidity for individual equity options trading in European markets. We use high-frequency data to construct a novel index of liquidity commonality. The approach is able to explain a substantial proportion of the liquidity variation across individual options. The explanatory power of the common liquidity factor is more pronounced during periods of higher market-wide implied volatility. The common factor's impact on individual options' liquidity depends on options' idiosyncratic characteristics. There is some evidence of systematic liquidity spillover effects across these European exchanges. Journal: The European Journal of Finance Pages: 1204-1223 Issue: 12 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2016.1188836 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1188836 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1204-1223 Template-Type: ReDIF-Article 1.0 Author-Name: Csaba Csávás Author-X-Name-First: Csaba Author-X-Name-Last: Csávás Title: Covered interest parity with default risk Abstract: In this paper we derive a simple model of covered interest parity (CIP) with the assumption that interbank money market rates are risky. The model assumes that the default risk of uncollateralised loans can be hedged perfectly by credit default swap contracts. We show that the no-arbitrage condition is satisfied by a band. The location of this no-arbitrage band depends on the relative riskiness of the two counterparties in the CIP trade. We present evidence on the performance of the model for developed currency pairs in 2008–2011. We find that FX swap spreads (CIP deviations calculated from interbank interest rates of two countries) either fluctuated within the no-arbitrage bands or were close to the edges of the no-arbitrage bands. Journal: The European Journal of Finance Pages: 1130-1144 Issue: 12 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2014.924076 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.924076 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1130-1144 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang K. Härdle Author-X-Name-First: Wolfgang K. Author-X-Name-Last: Härdle Author-Name: Piotr Majer Author-X-Name-First: Piotr Author-X-Name-Last: Majer Title: Yield curve modeling and forecasting using semiparametric factor dynamics Abstract: Using a dynamic semiparametric factor model (DSFM) we investigate the term structure of interest rates. The proposed methodology is applied to monthly interest rates for four southern European countries: Greece, Italy, Portugal and Spain from the introduction of the Euro to the recent European sovereign-debt crisis. Analyzing this extraordinary period, we compare our approach with the standard market method – dynamic Nelson–Siegel model. Our findings show that two nonparametric factors capture the spatial structure of the yield curve for each of the bond markets separately. We attributed both factors to the slope of the yield curve. For panel term structure data, three nonparametric factors are necessary to explain 95% variation. The estimated factor loadings are unit root processes and reveal high persistency. In comparison with the benchmark model, the DSFM technique shows superior short-term forecasting in times of financial distress. Journal: The European Journal of Finance Pages: 1109-1129 Issue: 12 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2014.926281 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.926281 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1109-1129 Template-Type: ReDIF-Article 1.0 Author-Name: Yuxin Xie Author-X-Name-First: Yuxin Author-X-Name-Last: Xie Author-Name: Athanasios A. Pantelous Author-X-Name-First: Athanasios A. Author-X-Name-Last: Pantelous Author-Name: Chris Florackis Author-X-Name-First: Chris Author-X-Name-Last: Florackis Title: Disappointment aversion and the equity premium puzzle: new international evidence Abstract: Drawing upon the seminal study of Ang, Bekaert, and Liu [2005. “Why Stock May Disappoint?” Journal of Financial Economics 76 (3): 471–508], we incorporate disappointment aversion (DA, that is, aversion to outcomes that are worse than prior expectations) within a simple theoretical portfolio-choice model. Based on the results of this model, we then empirically address the portfolio allocation problem of an investor who chooses between a risky and a risk-free asset using international data from 19 countries. Our findings strongly support the view that DA leads investors to reduce their exposure to the stock market (i.e. DA significantly depresses the portfolio weights on equities in all cases considered). Overall, our study shows that in addition to risk aversion, DA plays an important role in explaining the equity premium puzzle around the world. Journal: The European Journal of Finance Pages: 1189-1203 Issue: 12 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2014.946529 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.946529 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1189-1203 Template-Type: ReDIF-Article 1.0 Author-Name: Oscar Stålnacke Author-X-Name-First: Oscar Author-X-Name-Last: Stålnacke Title: Individual investors’ information use, subjective expectations, and portfolio risk and return Abstract: What information do individual investors use when making their financial decisions and how is it related to their stock market expectations, their confidence in these expectations, and the risk and return of their stock portfolios? I study these questions by combining survey data on the information usage among individual investors in Sweden with detailed registry data on their stock portfolios. I find that investors use filtered financial information (e.g. information packaged by a professional intermediary) more frequently than they use unfiltered financial information (e.g. information from annual reports and financial statements). Investors who frequently use filtered financial information are, however, more confident in their stock market expectations and take larger risks in their stock portfolios. Investors that instead use unfiltered financial information take lower portfolio risks and obtain higher portfolio returns. The findings in this paper thus suggest that investors can improve their financial decisions by using more unfiltered financial information rather than filtered financial information when they make their financial decisions. Journal: The European Journal of Finance Pages: 1351-1376 Issue: 15 Volume: 25 Year: 2019 Month: 10 X-DOI: 10.1080/1351847X.2019.1592769 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1592769 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:15:p:1351-1376 Template-Type: ReDIF-Article 1.0 Author-Name: Marco Lamieri Author-X-Name-First: Marco Author-X-Name-Last: Lamieri Author-Name: Ilaria Sangalli Author-X-Name-First: Ilaria Author-X-Name-Last: Sangalli Title: The propagation of liquidity imbalances in manufacturing supply chains: evidence from a spatial auto-regressive approach Abstract: The number of distressed firms increased sharply during the last recessionary phase. The scope of the paper is to analyze determinants of distress by focusing the attention on trade-credit chains as the key source of contagion effects in 2009–2013. Financial and liquidity imbalances propagate along the supply chain: firms respond to late payments from customers by defaulting on payments to suppliers. The novelty of our approach consists of applying spatial econometric techniques to assess spillover effects of trade debt. We employ a representative sample of around 12,000 Italian manufacturing firms that combines balance sheet items with information collected in the Credit Register of the Italian central bank. Our proxy for supply-chain interconnections is a matrix of firm-to firm transactions which mirrors the networked structure of the industrial system. Estimates show that trade debt has been affected by spillover effects during the great crisis of 2009–2013. Moreover, trade debt and financial indebtedness exerted an impact of almost identical magnitude on firms' distress likelihoods. This evidence sheds light on the importance to move away from a static view of the trade-credit phenomenon, and to integrate solvency models with detailed information on firm-to-firm transactions which is increasingly available through big data collection. Journal: The European Journal of Finance Pages: 1377-1401 Issue: 15 Volume: 25 Year: 2019 Month: 10 X-DOI: 10.1080/1351847X.2019.1596962 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1596962 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:15:p:1377-1401 Template-Type: ReDIF-Article 1.0 Author-Name: Catherine Kyrtsou Author-X-Name-First: Catherine Author-X-Name-Last: Kyrtsou Author-Name: Dimitris Kugiumtzis Author-X-Name-First: Dimitris Author-X-Name-Last: Kugiumtzis Author-Name: Angeliki Papana Author-X-Name-First: Angeliki Author-X-Name-Last: Papana Title: Further insights on the relationship between SP500, VIX and volume: a new asymmetric causality test Abstract: In the aim to explore the complex relationships between S&P500, VIX and volume we introduce a Granger causality test using the nonlinear statistic of Asymmetric Partial Transfer Entropy (APTE). Through a simulation exercise, it arises that the APTE offers precise information on the nature of the connectivity. Our empirical findings concretize the information flow that links volume, S&P500 and VIX, and merge the leverage effect and the asymmetric stock return-volume relationship into a unified framework of analysis. More specifically, when we condition on the tails, the detected causal channel provides empirical validation of the noise trading contribution to large swings in financial markets, because of the increase of trading volume and the subsequent worsening ability of market prices to adjust to new information. Journal: The European Journal of Finance Pages: 1402-1419 Issue: 15 Volume: 25 Year: 2019 Month: 10 X-DOI: 10.1080/1351847X.2019.1599406 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1599406 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:15:p:1402-1419 Template-Type: ReDIF-Article 1.0 Author-Name: Hang Zhou Author-X-Name-First: Hang Author-X-Name-Last: Zhou Author-Name: Seth Armitage Author-X-Name-First: Seth Author-X-Name-Last: Armitage Author-Name: Maria Michou Author-X-Name-First: Maria Author-X-Name-Last: Michou Title: Net equity issuance effect in the UK Abstract: Net equity issuance (NEI) by firms has predictive power for US stock returns. This paper examines the NEI anomaly for UK stocks, using regression on firm characteristics and sorted portfolios with several factor models. The anomaly generalises to the UK only in part. We confirm the existence of a large NEI effect for small and midsize stocks, but not for large stocks. The repurchase effect, of positive abnormal returns following repurchases, is absent in the UK. We also find that the NEI effect in smaller stocks is not exploitable by investors, allowing for transaction costs. Journal: The European Journal of Finance Pages: 1420-1439 Issue: 15 Volume: 25 Year: 2019 Month: 10 X-DOI: 10.1080/1351847X.2019.1601119 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1601119 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:15:p:1420-1439 Template-Type: ReDIF-Article 1.0 Author-Name: Hang Li Author-X-Name-First: Hang Author-X-Name-Last: Li Author-Name: Dan Zhou Author-X-Name-First: Dan Author-X-Name-Last: Zhou Title: The impact of possible-offer announcements on the wealth effect of target firms Abstract: The stock market materially and positively responds to released information on possible offers, likely because such announcements signal the high probability that formal bids will be offered. If potential takeover discussions are revealed earlier, then target shareholders will gain significantly lower abnormal returns around the time of when formal offers are announced. Financial bidders are less likely to approach targets with earlier possible offers; however, if they do offer possible takeovers, they need to pay incrementally higher bid premiums in their formal offers. The reform inherent in the U.K. Takeover Code of 2011 weakens a bidder’s willingness to offer possible takeovers. The pre-reform effects of possible offers on the wealth effect of targets differ from those seen after the reform. Journal: The European Journal of Finance Pages: 1440-1461 Issue: 15 Volume: 25 Year: 2019 Month: 10 X-DOI: 10.1080/1351847X.2019.1601120 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1601120 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:15:p:1440-1461 Template-Type: ReDIF-Article 1.0 Author-Name: Rui Zhou Author-X-Name-First: Rui Author-X-Name-Last: Zhou Author-Name: Johnny Siu-Hang Li Author-X-Name-First: Johnny Siu-Hang Author-X-Name-Last: Li Author-Name: Jeffrey Pai Author-X-Name-First: Jeffrey Author-X-Name-Last: Pai Title: Pricing temperature derivatives with a filtered historical simulation approach Abstract: In this paper, we propose pricing temperature derivatives using a filtered historical simulation (FHS) approach that amalgamates model-based treatment of volatility and empirical innovation density. The FHS approach implicitly captures the risk premium with the entire risk-neutral model (except the innovation distribution), thereby providing significantly more flexibility than existing methods that use only one designated parameter to capture the risk premium. Additionally, instead of relying on the fitted innovation distribution, the FHS approach uses empirical innovations to capture excess skewness, excess kurtosis, and other non-standard features in the temperature data, all of which are important for the correct pricing of temperature derivatives. We apply the FHS approach to pricing derivatives written on the temperature of Chicago, and demonstrate that this approach yields better in-sample and out-of-sample pricing performance than the constant market price of risk method and the consumption-based method. Journal: The European Journal of Finance Pages: 1462-1484 Issue: 15 Volume: 25 Year: 2019 Month: 10 X-DOI: 10.1080/1351847X.2019.1602068 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1602068 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:15:p:1462-1484 Template-Type: ReDIF-Article 1.0 Author-Name: André Dorsman Author-X-Name-First: André Author-X-Name-Last: Dorsman Author-Name: Henk Langendijk Author-X-Name-First: Henk Author-X-Name-Last: Langendijk Author-Name: Bart Van Praag Author-X-Name-First: Bart Van Author-X-Name-Last: Praag Title: The association between qualitative management earnings forecasts and discretionary accounting in the Netherlands Abstract: This paper examines whether there is an association between discretionary accounting and the accuracy of long-run forecasts of annual earnings disclosed voluntarily by Dutch companies in the directors’ report. In particular, investigations were made of the consistency in the sign and direction of discretionary accounting techniques and qualitative earnings forecasts. Long-run forecasts are defined, for the purposes of this paper, as forecasts made at least seven months before the year-end. Although not mandatory, qualitative forecasts are released by well over 60% of the listed companies in the Netherlands. Empirical results indicate that there is consistency in the sign and direction of qualitative earnings forecasts and discretionary accounting. After adopting discretionary accounting, the forecast errors are reduced if the company can reach the management earnings forecast (target). In the event that reserves are insufficient to accomplish this goal, managers choose their next best option and take an earnings bath in order to maximize reserves available for future use. By partitioning the sample in various sub-sets it is shown that earnings management and forecast errors occur most in the extreme ranges of financial performance. Overall, the study shows that management engages in discretionary accounting to present results in line with the disclosed qualitative earnings forecasts in their directors’ reports. Whilst discretionary accounting may clearly improve the consistency of companies’ earnings forecasts released via the directors’ reports and the actual earnings, managers’ earnings forecasts are sometimes disclosed in anticipation of planned discretionary accounting actions. Journal: The European Journal of Finance Pages: 19-40 Issue: 1 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110099696 File-URL: http://hdl.handle.net/10.1080/13518470110099696 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:1:p:19-40 Template-Type: ReDIF-Article 1.0 Author-Name: Gülnur Muradoğlu Author-X-Name-First: Gülnur Author-X-Name-Last: Muradoğlu Author-Name: Kürsat Aydoğan Author-X-Name-First: Kürsat Author-X-Name-Last: Aydoğan Title: Trends in market reactions: stock dividends and rights offerings at Istanbul stock exchange Abstract: This paper examines the existence of different price reactions to the implementation of stock dividends and rights offerings as the stock market matures over time and the investor mix changes. For that purpose market reactions at the Istanbul Stock Exchange (ISE) are Investigated during three sub-periods displaying different developmental phases of the market defined in terms of institutional framework, transactions volumes and related investor profiles. Differences in price reactions and the accompanying trading volumes are tested as the investor mix changes and small investors enter ISE due to the cultivating of awareness about the stock market. Other possible causes of excess returns such as prior knowledge about the stocks being traded or a preferred trading range are also tested. Considering the characteristics of thinly traded emerging markets, non-parametric tests are employed besides traditional event study methodology and results are immune to the choice of relevant test statistics. The results indicate that the changing mix of investors shift the timing of market reaction from announcement to implementation of stock dividends and rights offerings. Since individual investors, who are attracted by lower relative prices, are not expected to be prompt in timing, excess returns persist over longer event windows and are accompanied by increasing trading volumes. Journal: The European Journal of Finance Pages: 41-60 Issue: 1 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110047611 File-URL: http://hdl.handle.net/10.1080/13518470110047611 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:1:p:41-60 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Veld Author-X-Name-First: Chris Author-X-Name-Last: Veld Title: Warrant pricing: a review of empirical research Abstract: Recently, several warrant pricing studies have become available for different models as well as for different countries. The most important conclusions that can be drawn from reviewing these studies are: (1) it is not necessary to make a correction on option valuation models for the dilution effect; (2) the only model that systematically outperforms the Black-Scholes (1973) type models is the Square Root model; (3) US and German warrants seem to be priced correctly, while deviations are found for English and Japanese warrants (underpriced by the market) and Swiss and Dutch warrants (overpriced by the market). Journal: The European Journal of Finance Pages: 61-91 Issue: 1 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110047648 File-URL: http://hdl.handle.net/10.1080/13518470110047648 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:1:p:61-91 Template-Type: ReDIF-Article 1.0 Author-Name: Georges Darbellay Author-X-Name-First: Georges Author-X-Name-Last: Darbellay Title: The volatility term structure in a lognormal process for the short rate Abstract: One-factor Markov models are widely used by practitioners for pricing financial options. Their simplicity facilitates their calibration to the intial conditions and permits fast computer Implementations. Nevertheless, the danger remains that such models behave unrealistically, if the calibration of the volatility is not properly done. Here, we study a lognormal process and investigate how to specify the volatility constraints in such a way that the term structure of volatility at future times, as implied by the short rate process, has a realistic and stable shape. However, the drifting down of the volatility term structure is unavoidable. As a result, there is a tendency to underestimate option prices. Journal: The European Journal of Finance Pages: 92-103 Issue: 1 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470010011233 File-URL: http://hdl.handle.net/10.1080/13518470010011233 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:1:p:92-103 Template-Type: ReDIF-Article 1.0 Author-Name: Moez Bennouri Author-X-Name-First: Moez Author-X-Name-Last: Bennouri Author-Name: Sonia Falconieri Author-X-Name-First: Sonia Author-X-Name-Last: Falconieri Author-Name: Maher Kooli Author-X-Name-First: Maher Author-X-Name-Last: Kooli Title: Single versus multiple banking: lessons from initial public offerings Abstract: A vast research in banking addresses the question of the costs and benefits of multiple bank relationships versus a single bank relationship. Although no clear-cutting conclusion is reached, several contributions suggest that multiple bank relationships might lead to a sub-optimal level of monitoring, compared to a single bank relationship, as a result of free riding and coordination problems. We take a novel approach to tackle this research question, by looking at the role, if any, played by the number of lending relationships in initial public offerings (IPOs). We look at the short-term performances of IPOs as measured by underpricing and find that firms that go public with multiple bank relationships exhibit more underpricing than those that go public with a single bank relationship. This finding is independent of the number of bank relationships and/or whether any of the lending banks also acts as underwriter in the offering. We interpret our results as suggesting that the market attributes a weaker certification role to multiple bank relationships because of their less effective monitoring of IPO firms. Journal: The European Journal of Finance Pages: 841-858 Issue: 10 Volume: 23 Year: 2017 Month: 8 X-DOI: 10.1080/1351847X.2015.1053149 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1053149 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:10:p:841-858 Template-Type: ReDIF-Article 1.0 Author-Name: Charlie X. Cai Author-X-Name-First: Charlie X. Author-X-Name-Last: Cai Author-Name: Paul B. McGuinness Author-X-Name-First: Paul B. Author-X-Name-Last: McGuinness Author-Name: Qi Zhang Author-X-Name-First: Qi Author-X-Name-Last: Zhang Title: Capital account reform and short- and long-run stock price leadership Abstract: This paper studies the effect of capital account liberalization policies on the price discovery of cross-listings in Chinese stocks. We construct a non-linear causality framework that decomposes short- and long-run dimensions of price leadership. Our analysis shows that capital account liberalization has had a profound effect on long-run A- and H-price leadership traits. Specifically, increased inward capital movement from Qualified Foreign Institutional Investors strengthens long-term leadership in the mainland A-market. Similarly, increased capital outflow from the Chinese mainland galvanizes long-term price discovery processes in the Hong Kong H-market. We thus offer strong evidence that capital account liberalization promotes stock market efficiency in the long-run. The present study's empirical account also suggests that such capital flows inhibit short-term lead-lag effects. Journal: The European Journal of Finance Pages: 916-945 Issue: 10 Volume: 23 Year: 2017 Month: 8 X-DOI: 10.1080/1351847X.2015.1105272 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1105272 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:10:p:916-945 Template-Type: ReDIF-Article 1.0 Author-Name: Fabian T. Lutzenberger Author-X-Name-First: Fabian T. Author-X-Name-Last: Lutzenberger Title: Industry cost of equity capital: European evidence for multifactor models Abstract: We estimate the costs of equity capital for 117 industries from 16 European countries employing the CAPM and 8 multifactor asset pricing models as well as a variety of different econometric techniques. In doing so, we extend previous research on cost of equity estimation in mainly two ways. First, our study involves European instead of US or UK industries, which are investigated in previous research, and we find that cost of equity estimates obtained from the CAPM or multifactor asset pricing models are as imprecise for European industries as for US and UK industries. Second, in addition to the CAPM, the Fama and French [1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33: 3–56] three-factor model, and the Carhart [1997. “On Persistence in Mutual Fund Performance.” The Journal of Finance 52 (1): 57–82] four-factor model, which are usually employed, our study includes six multifactor models that have not yet been examined on their ability to provide precise estimates of the costs of equity: the five-factor model of Fama and French [1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33: 3–56] as well as the multifactor models of Pástor and Stambaugh [2003. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy 111 (3): 642–685]; Campbell and Vuolteenaho [2004. “Bad Beta, Good Beta.” American Economic Review 94 (5): 1249–1275]; Hahn and Lee [2006. “Yield Spreads as Alternative Risk Factors for Size and Book-To-Market.” Journal of Financial & Quantitative Analysis 41 (2): 245–269]; Petkova [2006. “Do the Fama–French Factors Proxy for Innovations in Predictive Variables?” The Journal of Finance 61 (2): 581–612]; and Koijen, Lustig, and van Nieuwerburgh [2010. “The Cross-Section and Time-Series of Stock and Bond Returns.” Working Paper, University of Chicago, University of California at Los Angeles, New York University]. Our results suggest that these models provide even more imprecise cost of equity estimates. One main reason for these inaccurate estimates is the large temporal variation of the risk loadings on the non-traded factors in these models. Journal: The European Journal of Finance Pages: 885-915 Issue: 10 Volume: 23 Year: 2017 Month: 8 X-DOI: 10.1080/1351847X.2015.1113193 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1113193 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:10:p:885-915 Template-Type: ReDIF-Article 1.0 Author-Name: Rasha Alsakka Author-X-Name-First: Rasha Author-X-Name-Last: Alsakka Author-Name: Owain ap Gwilym Author-X-Name-First: Owain Author-X-Name-Last: ap Gwilym Author-Name: Huong Vu Author-X-Name-First: Huong Author-X-Name-Last: Vu Title: Differences of opinion in sovereign credit signals during the European crisis Abstract: Motivated by the European debt crisis and the new European Union regulatory regime for the credit rating industry, we analyse differences of opinion in sovereign credit signals and their influence on European stock markets. Rating disagreements have a significant connection with subsequent negative credit actions by each agency. However, links among Moody’s/Fitch actions and their rating disagreements with other agencies have weakened in the post-regulation period. We also find that only S&P’s negative credit signals affect the own-country stock market and spill over to other European markets, but this is concentrated in the pre-regulation period. Stronger stock market reactions occur when S&P has already assigned a lower rating than Moody’s/Fitch prior to taking a further negative action. Journal: The European Journal of Finance Pages: 859-884 Issue: 10 Volume: 23 Year: 2017 Month: 8 X-DOI: 10.1080/1351847X.2016.1177565 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1177565 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:10:p:859-884 Template-Type: ReDIF-Article 1.0 Author-Name: Huamao Wang Author-X-Name-First: Huamao Author-X-Name-Last: Wang Author-Name: Qing Xu Author-X-Name-First: Qing Author-X-Name-Last: Xu Author-Name: Jinqiang Yang Author-X-Name-First: Jinqiang Author-X-Name-Last: Yang Title: Investment timing and optimal capital structure under liquidity risk Abstract: Deterioration in debt market liquidity reduces debt values and affects firms' decisions. Considering such risk, we develop an investment timing model and obtain analytic solutions. We carry out a comprehensive analysis in optimal financing, default, and investment strategies, and stockholder–bondholder conflicts. Our model explains stylized facts and replicates empirical findings in credit spreads. We obtain six new insights for decision makers. We propose a ‘new trade-off theory’ for optimal capital structure, a new tax effect, and new explanations of ‘debt conservatism puzzle’ and ‘zero-leverage puzzle’. Failure in recognizing liquidity risk results in substantially over-leveraging, early bankruptcy or investment, overpriced options, and undervalued coupons and credit spreads. In addition, agency costs are surprisingly small for a high liquidity risk or a low project risk. Interestingly, the risk shifting incentive and debt overhang problem decrease with liquidity risk under moderate tax rates while they increase under high tax rates. Journal: The European Journal of Finance Pages: 889-908 Issue: 11 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1356342 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1356342 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:11:p:889-908 Template-Type: ReDIF-Article 1.0 Author-Name: Ming-Che Chuang Author-X-Name-First: Ming-Che Author-X-Name-Last: Chuang Author-Name: Wan-Ru Yang Author-X-Name-First: Wan-Ru Author-X-Name-Last: Yang Author-Name: Ming-Chi Chen Author-X-Name-First: Ming-Chi Author-X-Name-Last: Chen Author-Name: Shih-Kuei Lin Author-X-Name-First: Shih-Kuei Author-X-Name-Last: Lin Title: Pricing mortgage insurance contracts under housing price cycles with jump risk: evidence from the U.K. housing market Abstract: Previous studies have investigated the determinants of housing price cycles in the housing market; however, we observed the phenomenon of housing price jumps in the 2007 subprime crisis. This paper presents a discussion on the housing price cycle and abnormal price jumps to describe the behavior of housing prices in the United Kingdom. The empirical results show that the impact factors of housing cycles are market risk and the switching factor. Furthermore, the impact factors of jump risks include the bursting of the housing bubble and financial crises. Therefore, in this paper, we employ the Markov switching model with jump risks to value the MI contracts and analyze the influences of housing price cycles, jump risks, risks of market interest rate, and the prepayment risks on MI premiums. The results of sensitivity analysis show that more volatile housing price index returns, as well as longer periods of higher volatility in housing prices, raise MI premiums. Moreover, the MI premium is positively related to the absolute value of the average jump amplitude and the shock frequency of abnormal events. There is the tradeoff between the market interest rate and the prepayment risk. The influences of market interest rate are different on MI premium with/without prepayment risks. Journal: The European Journal of Finance Pages: 909-943 Issue: 11 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1359199 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1359199 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:11:p:909-943 Template-Type: ReDIF-Article 1.0 Author-Name: Emmanouil N. Karimalis Author-X-Name-First: Emmanouil N. Author-X-Name-Last: Karimalis Author-Name: Nikos K. Nomikos Author-X-Name-First: Nikos K. Author-X-Name-Last: Nomikos Title: Measuring systemic risk in the European banking sector: a copula CoVaR approach Abstract: We propose a new methodology based on copula functions to estimate CoVaR, the Value-at-Risk (VaR) of the financial system conditional on an institution being under financial distress. Our Copula CoVaR approach provides simple, closed-form expressions for various definitions of CoVaR for a broad range of copula families and allows the CoVaR of an institution to have time-varying exposure to its VaR. We extend this approach to estimate other ‘co-risk’ measures such as Conditional Expected Shortfall (CoES). We focus on a portfolio of large European banks and examine the existence of common market factors triggering systemic risk episodes. Further, we analyse the extent to which bank-specific characteristics such as size, leverage, and equity beta are associated with institutions' contribution to systemic risk and highlight the importance of liquidity risk at the outset of the financial crisis in summer 2007. Finally, we investigate the link between macroeconomy and systemic risk and find that changes in major macroeconomic variables can contribute significantly to systemic risk. Journal: The European Journal of Finance Pages: 944-975 Issue: 11 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1366350 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1366350 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:11:p:944-975 Template-Type: ReDIF-Article 1.0 Author-Name: Cristiana Cerqueira Leal Author-X-Name-First: Cristiana Cerqueira Author-X-Name-Last: Leal Author-Name: Manuel J. Rocha Armada Author-X-Name-First: Manuel J. Rocha Author-X-Name-Last: Armada Author-Name: Gilberto Loureiro Author-X-Name-First: Gilberto Author-X-Name-Last: Loureiro Title: Individual investors repurchasing behaviour: evidence from the Portuguese stock market Abstract: We study the repurchasing behaviour of individual investors and identify-related stock- and investor-specific attributes that affect the preference to repurchase stocks previously owned. Using a unique database of Portuguese individual investors, we find that investors prefer to repurchase stocks that were associated with a gain during their previous roundtrip (i.e. prior winners) and have suffered price declines subsequent to their last sale. Consistent with the extant literature based on the US market, our results suggest that different market characteristics do not seem to affect investors’ preference regarding stock repurchases. Moreover, we find that this preference increases with the magnitude of the prior gain or the decline in price following the last sale. We also demonstrate that larger and more visible domestic stocks are more likely to be repurchased and that less active, under-diversified and home-biased investors are more likely to engage in such behaviour. Finally, we find that repurchased stocks yield poor post-performance – approximately 267 basis points less than newly purchased stocks. Our main conclusion is that repurchases are essentially emotionally driven and penalize investor’s performance. Journal: The European Journal of Finance Pages: 976-999 Issue: 11 Volume: 24 Year: 2018 Month: 7 X-DOI: 10.1080/1351847X.2017.1368681 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1368681 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:11:p:976-999 Template-Type: ReDIF-Article 1.0 Author-Name: Peter Grundke Author-X-Name-First: Peter Author-X-Name-Last: Grundke Author-Name: Michael Tuchscherer Author-X-Name-First: Michael Author-X-Name-Last: Tuchscherer Title: Global systemic risk measures and their forecasting power for systemic events Abstract: Since the financial crisis of 2007–2009, many market-based systemic risk measures have been proposed. Prominent examples are MES, SRISK or ΔCoVaR. Based on a simulation study in an extended banking network model that incorporates several sources of systemic risk, we analyze how well these systemic risk measures perform in indicating the risk of a systemic event. For this analysis, the systemic risk measures of the banks that default and whose default is followed by a systemic event are compared with the systemic risk measures of those defaulting banks for which no subsequent systemic event can be observed. Within the simulation study, we find that many bank-individual systemic risk measures are statistically significant in explaining the likelihood of a systemic event after a bank’s default. However, the economic significance of the bank-individual systemic risk measures is relatively low. Journal: The European Journal of Finance Pages: 205-233 Issue: 3 Volume: 25 Year: 2019 Month: 2 X-DOI: 10.1080/1351847X.2018.1509102 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1509102 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:3:p:205-233 Template-Type: ReDIF-Article 1.0 Author-Name: Alexander Bohnert Author-X-Name-First: Alexander Author-X-Name-Last: Bohnert Author-Name: Nadine Gatzert Author-X-Name-First: Nadine Author-X-Name-Last: Gatzert Author-Name: Robert E. Hoyt Author-X-Name-First: Robert E. Author-X-Name-Last: Hoyt Author-Name: Philipp Lechner Author-X-Name-First: Philipp Author-X-Name-Last: Lechner Title: The drivers and value of enterprise risk management: evidence from ERM ratings Abstract: In the course of recent regulatory developments, holistic enterprise-wide risk management (ERM) frameworks have become increasingly relevant for insurance companies. The aim of this paper is to contribute to the literature by analyzing determinants (firm characteristics) as well as the impact of ERM on the shareholder value of European insurers using the Standard & Poor’s ERM rating to identify ERM activities. This has not been done so far, even though it is of high relevance against the background of the introduction of Solvency II, which requires a holistic approach to risk management. Results show a significant positive impact of ERM on firm value for the case of European insurers. In particular, we find that insurers with a high quality risk management (RM) system exhibit a Tobin’s Q that on average is about 6.5% higher than for insurers with less high quality RM after controlling for covariates and endogeneity bias. Journal: The European Journal of Finance Pages: 234-255 Issue: 3 Volume: 25 Year: 2019 Month: 2 X-DOI: 10.1080/1351847X.2018.1514314 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1514314 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:3:p:234-255 Template-Type: ReDIF-Article 1.0 Author-Name: Kam C. Chan Author-X-Name-First: Kam C. Author-X-Name-Last: Chan Author-Name: Xunan Feng Author-X-Name-First: Xunan Author-X-Name-Last: Feng Title: Corporate philanthropy in a politically uncertain environment: does it bring tangible benefits to a firm? Evidence from China Abstract: We examine the impact of political uncertainty on a firm’s corporate philanthropy (CP) contribution and the associated direct tangible benefits of CP to a firm. Specifically, we examine two testable hypotheses. (1) When facing political uncertainty, a firm makes more CP, and (2) after a firm makes CP contributions during a period of uncertainty, it will obtain future tangible benefits. Using a sample of Chinese listed firms, we document that a firm, on average, increases its CP significantly during a period of political uncertainty (e.g. when there is a new local communist party secretary or mayor). In addition, we report that, on average, a firm’s donation in year t is positively correlated with its amount of government subsidies, corporate income tax reduction, and short- and long-term bank loan amounts in year t + 1. The findings are robust compared to those of placebo tests and fixed effect models, as well as when using an alternative measure of political uncertainty. We observe that the results are more pronounced among non-state-owned enterprises (non-SOEs) than those among SOEs, corroborating the notion that during a period of political uncertainty, non-SOEs are more willing to build political connections with new city leaders through CP than are SOEs. Journal: The European Journal of Finance Pages: 256-278 Issue: 3 Volume: 25 Year: 2019 Month: 2 X-DOI: 10.1080/1351847X.2018.1518252 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1518252 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:3:p:256-278 Template-Type: ReDIF-Article 1.0 Author-Name: Karl Ludwig Keiber Author-X-Name-First: Karl Ludwig Author-X-Name-Last: Keiber Author-Name: Helene Samyschew Author-X-Name-First: Helene Author-X-Name-Last: Samyschew Title: The pricing of sentiment risk in European stock markets Abstract: This paper studies whether sentiment is rewarded with a significant risk premium in the European stock markets. We examine several sentiment proxies and identify the Economic Sentiment Indicator from the EU Commission as the most relevant sentiment proxy for our sample. The analysis is performed for the contemporaneous excess returns of EA-11 stock markets in the period from February 1999 to September 2015. We apply a conditional multi-beta pricing model in order to track the variation of the sentiment risk premium over time. The results demonstrate a positive significant relationship between sentiment and contemporaneous excess returns which is consistent with previous studies. The calculated sentiment risk premium is significant as well but negative implying that an investment in EA-11 countries over the examined time period – that is bearing sentiment risk – would have been unattractive to the investors on average. Journal: The European Journal of Finance Pages: 279-302 Issue: 3 Volume: 25 Year: 2019 Month: 2 X-DOI: 10.1080/1351847X.2018.1521340 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1521340 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:3:p:279-302 Template-Type: ReDIF-Article 1.0 Author-Name: Barbara Alemanni Author-X-Name-First: Barbara Author-X-Name-Last: Alemanni Author-Name: Caterina Lucarelli Author-X-Name-First: Caterina Author-X-Name-Last: Lucarelli Title: Individual behaviour and long-range planning attitude Abstract: Declining welfare systems increase the importance of self-determination in pension decisions. Thus, the stability of long-life consumption markedly relies on individual long-range planning attitude. Our paper investigates how behavioural traits affect this attitude and influence the probability of holding voluntary integrative pension schemes (VIPS). We find that psychophysiological heterogeneity plays a role in predicting demand for VIPS, together with saving/indebtedness style and conventional sociodemographic characteristics. Specifically, individuals who have a high degree of non-planning impulsiveness, and who are inclined to intense psychophysiological arousals, are less likely to demand VIPS. Our results imply that behavioural individualities might prompt individuals to postpone, or even neglect, decisions necessary to maintain stable lifestyles in the long range. Journal: The European Journal of Finance Pages: 407-426 Issue: 5 Volume: 23 Year: 2017 Month: 4 X-DOI: 10.1080/1351847X.2014.1003313 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.1003313 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:5:p:407-426 Template-Type: ReDIF-Article 1.0 Author-Name: Aydin Ozkan Author-X-Name-First: Aydin Author-X-Name-Last: Ozkan Author-Name: Jannine Poletti-Hughes Author-X-Name-First: Jannine Author-X-Name-Last: Poletti-Hughes Author-Name: Agnieszka Trzeciakiewicz Author-X-Name-First: Agnieszka Author-X-Name-Last: Trzeciakiewicz Title: Directors’ share dealings and corporate insolvencies: evidence from the UK Abstract: This paper investigates the relation between insider trading and the likelihood of insolvency with a specific focus on the directors’ sale and purchase transactions preceding insolvency. We use a unique data set on directors’ dealings in 474 non-financial UK firms, of which 117 filed for insolvency, over the period 2000–2010. We show that the directors of insolvent firms increase their purchase transactions significantly as the insolvency approaches. The results also reveal a significant relation between three different measures of insider trading activity and the likelihood of insolvency, which is observed to be positive only during the last six-month trading period. The relation is negative for the earlier trading periods. While the earlier purchase transactions appear to be motivated by superior information held by insiders, the purchase trades closer to the insolvency date are possibly initiated by directors’ motives to influence the market's perception of the firm in an attempt to avert or delay insolvency. Journal: The European Journal of Finance Pages: 427-455 Issue: 5 Volume: 23 Year: 2017 Month: 4 X-DOI: 10.1080/1351847X.2015.1040168 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1040168 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:5:p:427-455 Template-Type: ReDIF-Article 1.0 Author-Name: Keith Anderson Author-X-Name-First: Keith Author-X-Name-Last: Anderson Author-Name: Tomasz Zastawniak Author-X-Name-First: Tomasz Author-X-Name-Last: Zastawniak Title: Glamour, value and anchoring on the changing / Abstract: The fact that value shares outperform glamour shares in the long term has been known for over 50 years. Why then do glamour shares remain popular? The price-earnings (P/E) ratio was the first statistic documented to discriminate between the two. Using data for all US stocks since 1983, we find that glamour shares have a much greater tendency to change P/E decile than value shares. We use TreeAge decision tree software, which has not been applied to problems in finance before, to show that glamour investors cannot rationally expect any windfall as their company's P/E decile changes, whatever their horizon. We infer that glamour investors anchor on the initially high P/E value, underestimate the likelihood of change and are continually surprised. We also seek theoretical justification for why value shares tend to outperform glamour shares. No convincing arguments based on the efficient market hypothesis have been put forward to show that the outperformance of value shares might be due to their being fundamentally riskier. Here, we apply equations from option theory to show that value shares can indeed be expected to outperform glamour shares. Journal: The European Journal of Finance Pages: 375-406 Issue: 5 Volume: 23 Year: 2017 Month: 4 X-DOI: 10.1080/1351847X.2015.1113192 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1113192 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:5:p:375-406 Template-Type: ReDIF-Article 1.0 Author-Name: John K. Ashton Author-X-Name-First: John K. Author-X-Name-Last: Ashton Author-Name: Andros Gregoriou Author-X-Name-First: Andros Author-X-Name-Last: Gregoriou Author-Name: Jerome V. Healy Author-X-Name-First: Jerome V. Author-X-Name-Last: Healy Title: The relative influence of price and non-price factors on short-term retail deposit quantities? Abstract: This study explores how price and non-price factors influence change in the quantity of short-term retail deposits held by depository institutions. The analysis is undertaken for a sample of UK building societies over 23 years using a disaggregated data set with a two-stage econometric procedure involving system estimators in a panel framework using seemingly unrelated regression, generalised method of moments and an ordinary least-squares fixed effects estimators to control for contemporaneous correlation and endogeneity concerns. Price factors examined include the policy or base rate and retail deposit interest rates set by individual building societies and non-price factors including the branch network and the number of deposit accounts offered by individual building societies. The cost of funds, one non-price factor and occurrence of mergers are consistently significant influences of retail deposit quantities. We conclude risk assessment of retail deposit quantity and monetary policy transmission would benefit from considering both price and non-price factors, rather than only price factors. Journal: The European Journal of Finance Pages: 1086-1108 Issue: 11 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2015.1019643 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1019643 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:11:p:1086-1108 Template-Type: ReDIF-Article 1.0 Author-Name: Sebastian Schroff Author-X-Name-First: Sebastian Author-X-Name-Last: Schroff Author-Name: Stephan Meyer Author-X-Name-First: Stephan Author-X-Name-Last: Meyer Author-Name: Hans-Peter Burghof Author-X-Name-First: Hans-Peter Author-X-Name-Last: Burghof Title: Retail investor information demand – speculating and investing in structured products Abstract: We study the impact of retail investor information demand on trading in bank-issued investment and leverage structured products, which are specifically designed for retail investors. Stock-specific information demand positively predicts speculative trading activity. Furthermore, we find a positive relationship between market-wide information demand and order aggressiveness and order uncertainty for speculating and investing activity. Whereas information supply is associated with speculative long positions, information demand does not induce investors to be predominantly long or short. Finally, we do not find retail investor information demand to contribute to an upward price pressure on security prices. In contrast, information supply exerts negative price pressure. Overall, retail investor trading in individual stocks is much more strongly influenced by market-wide information demand instead of firm-specific information demand. This implies a low informational efficiency of retail investor speculation and investing activity. Journal: The European Journal of Finance Pages: 1063-1085 Issue: 11 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2015.1020392 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1020392 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:11:p:1063-1085 Template-Type: ReDIF-Article 1.0 Author-Name: John Holland Author-X-Name-First: John Author-X-Name-Last: Holland Title: A behavioural theory of the fund management firm Abstract: The paper outlines a behavioural theory of the fund manager (FM) firm comprising investment decisions (at stock and portfolio levels) by teams and individuals, and of an organisation process and contextual resource factors affecting decisions. FM organisational processes interacted with resources to enhance investment team decision conditions, costs and processes. Enhanced conditions and reduced decision costs were expected to improve the chances of FM success via new information production and better-quality decisions. These dynamic elements to FM firms can be interpreted as tentative organisational means to deal with major problems of behaviour, uncertainty and information asymmetry at the heart of the valuation, investment and performance problems facing FMs. Field research was conducted in 15 FM firms during 2004–2011. A grounded theory approach was employed in processing the data. This led to improvements in empirical understanding of behaviour within FM firms and markets. The results were discussed relative to relevant literature and previous grounded theory. This created a new conceptual tool to investigate FM underperformance and variety in FM styles. The paper demonstrated an empirically rich model of hierarchy, information production, capital allocation and other resource usage in financial institutions and discussed how this created further opportunities for research. Journal: The European Journal of Finance Pages: 1004-1039 Issue: 11 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2014.924078 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.924078 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:11:p:1004-1039 Template-Type: ReDIF-Article 1.0 Author-Name: Donatien Hainaut Author-X-Name-First: Donatien Author-X-Name-Last: Hainaut Author-Name: David B. Colwell Author-X-Name-First: David B. Author-X-Name-Last: Colwell Title: A structural model for credit risk with switching processes and synchronous jumps Abstract: This paper studies a switching regime version of Merton's structural model for the pricing of default risk. The default event depends on the total value of the firm's asset modeled by a switching Lévy process. The novelty of this approach is to consider that firm's asset jumps synchronously with a change in the regime. After a discussion of dynamics under the risk neutral measure, two models are presented. In the first one, the default happens at bond maturity, when the firm's value falls below a predetermined barrier. In the second version, the firm can enter bankruptcy at multiple predetermined discrete times. The use of a Markov chain to model switches in hidden external factors makes it possible to capture the effects of changes in trends and volatilities exhibited by default probabilities. With synchronous jumps, the firm's asset and state processes are no longer uncorrelated. Finally, some econometric evidence that switching Lévy processes, with synchronous jumps, fit well historical time series is provided. Journal: The European Journal of Finance Pages: 1040-1062 Issue: 11 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2014.924079 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.924079 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:11:p:1040-1062 Template-Type: ReDIF-Article 1.0 Author-Name: Małgorzata Olszak Author-X-Name-First: Małgorzata Author-X-Name-Last: Olszak Author-Name: Mateusz Pipień Author-X-Name-First: Mateusz Author-X-Name-Last: Pipień Title: Cross-country linkages as determinants of procyclicality of loan loss provisions Abstract: Procyclicality in banking may result in financial instability and therefore be destructive to economic growth. The sensitivity of different banking balance sheet and income statement variables to the business cycle is diversified and may be prone to increasing integration of financial markets. In this paper, we address the problem of the influence of financial integration on the transmission of economic shocks from one country to another and consequently on the sensitivity of loan loss provisions (LLPs) to the business cycle. The application of the seemingly unrelated regression equations (SURE) approach to 13 OECD countries in 1995–2009 shows that the procyclicality of LLPs is statistically significant almost in the whole sample of countries. Regardless of the econometric specification, the income-smoothing, capital management and risk management hypotheses are hardly supported by the data. However, in SURE specification, the relationship of bank-specific variables is of higher statistical significance than in the country regression approach. Hence, cross-country interconnectedness is not only economically, but also empirically important when analyzing cross-country diversifications of LLPs. Journal: The European Journal of Finance Pages: 965-984 Issue: 11 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2014.983138 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.983138 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:11:p:965-984 Template-Type: ReDIF-Article 1.0 Author-Name: Malick Fall Author-X-Name-First: Malick Author-X-Name-Last: Fall Author-Name: Jean-Laurent Viviani Author-X-Name-First: Jean-Laurent Author-X-Name-Last: Viviani Title: A new multi-factor risk model to evaluate funding liquidity risk of banks Abstract: The present paper investigates funding liquidity risk of banks. We present a new statistical multi-factor risk model leading to three new funding liquidity risk metrics, thanks to liquidity gap's probability distribution analysis. We test our model on a large sample composed of 593 US banking companies, this allows us to identify some stylized facts regarding the evolution of liquidity risk and its relationship with the size of banking companies. Our main motivation is to develop ‘the contractual maturity mismatch’ monitoring tool proposed within the Basel III reform. Journal: The European Journal of Finance Pages: 985-1003 Issue: 11 Volume: 22 Year: 2016 Month: 9 X-DOI: 10.1080/1351847X.2014.996656 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.996656 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:11:p:985-1003 Template-Type: ReDIF-Article 1.0 Author-Name: Eric Bentzen Author-X-Name-First: Eric Author-X-Name-Last: Bentzen Author-Name: Peter Sellin Author-X-Name-First: Peter Author-X-Name-Last: Sellin Title: The Intertemporal Capital Asset Pricing Model with returns that follow Poisson jump–diffusion processes Abstract: Capital market equilibrium is derived in a model where asset returns follow a mixed Poisson jump–diffusion process. In the resulting modified Capital Asset Pricing Model (CAPM) expected returns are still linear in beta, but in addition premia have to be paid to compensate the investor for taking on jump risk. When jump risk is diversifiable in the market portfolio the model is reduced to the standard CAPM. Jumps are found to be prevalent in the daily returns of the market indices in the 18 countries investigated. A continuous return process does not give an adequate description of the market returns in any of the countries investigated. Journal: The European Journal of Finance Pages: 105-124 Issue: 2 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110099704 File-URL: http://hdl.handle.net/10.1080/13518470110099704 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:2:p:105-124 Template-Type: ReDIF-Article 1.0 Author-Name: Marcelo Fernandes Author-X-Name-First: Marcelo Author-X-Name-Last: Fernandes Title: Testing for a flexible non-linear link between short-term Eurorates and spreads Abstract: This paper investigates the relationship between short-term interest rates and spreads in the Euromarket. Specifically, five Eurocurrency deposit rates are analyzed: the Belgian and French francs, the German mark, the Danish crown, and the British pound. A multivariate test for unit roots is performed and strongly rejects the null hypothesis of integration in the 1-month and 12-months rates of these Eurocurrencies, indicating that the spread cannot be seen as a cointegration vector. Notwithstanding, a codependence analysis shows that the spread can still be interpreted as a long-run relationship between the short- and long-term Eurorates. A flexible non-linear error correction model is then proposed for the short-term rate to take both the short- and long-run adjustments into account. The model fits the data quite well, and seems to provide a slightly better forecast accuracy than the random walk benchmark. Journal: The European Journal of Finance Pages: 125-145 Issue: 2 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110074855 File-URL: http://hdl.handle.net/10.1080/13518470110074855 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:2:p:125-145 Template-Type: ReDIF-Article 1.0 Author-Name: Fernando Fernández-Rodríguez Author-X-Name-First: Fernando Author-X-Name-Last: Fernández-Rodríguez Author-Name: Simón Sosvilla-Rivero Author-X-Name-First: Simón Author-X-Name-Last: Sosvilla-Rivero Author-Name: Juan Martín-González Author-X-Name-First: Juan Author-X-Name-Last: Martín-González Title: Credibility in the EMS: new evidence using nonlinear forecastability tests Abstract: This paper develops a test for target-zone credibility that makes use of nonlinear forecastable dependences in time series. The test procedure, based on nearest-neighbour forecasting methods, is applied to nine EMS currencies. The results suggest credibility for most of the EMS countries before the 1992 crisis, credibility losses in all countries (except Belgium and the Netherlands) after such crisis, and some credibility gains after the widening of the fluctuation bands in 1993. Journal: The European Journal of Finance Pages: 146-168 Issue: 2 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110073685 File-URL: http://hdl.handle.net/10.1080/13518470110073685 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:2:p:146-168 Template-Type: ReDIF-Article 1.0 Author-Name: Nicholas Bailly Author-X-Name-First: Nicholas Author-X-Name-Last: Bailly Author-Name: David Browne Author-X-Name-First: David Author-X-Name-Last: Browne Author-Name: Eve Hicks Author-X-Name-First: Eve Author-X-Name-Last: Hicks Author-Name: Len Skerrat Author-X-Name-First: Len Author-X-Name-Last: Skerrat Title: UK corporate use of derivatives Abstract: The recent, and ongoing, large losses on derivatives transactions announced by UK corporates and the ensuing fears for systemic risk, highlight the need for focused research on derivative practices and corporate risk management activity in particular. This paper provides a descriptive analysis of the derivative practices of UK non-financial institutions, and attempts to evaluate whether these practices are consistent with value maximizing behaviour. Starting from the basic Modigliani and Miller Capital Structure proposition, more recent academic works on the subject are reviewed and analysed in the light of market Imperfections. Unlike previously published UK based research, this study encompasses a broad spectrum of both derivative instruments and companies surveyed, and offers a wider picture of derivative activity. The paper starts with an analysis of potential benefits and pitfalls of derivative instruments in risk management. The results of a survey, sent to 629 of the 637 corporates listed in the FTSE actuaries as of 1 April 1998 are discussed and compared to existing surveys which report mainly from North American markets. As a whole, the derivatives activity of UK corporates appears to be fairly similar to that of Canadian and US firms, but is still limited in view of the potential benefits that can be derived from their use in risk management. Small firms in particular do not seem to take advantage of the products available to manage their exposure to financial price risks, and initial findings suggest that this is because of a lack of knowledge in derivatives. The results support a positive relationship between derivative usage and firm size and a strong positive correlation between interest rate derivatives usage and firm size. Results also confirm that a significant proportion of firms appear to take unnecessary chances on financial markets using derivatives, although as expected, UK corporates do not use equity derivatives. Finally, although large firms seem to have adopted fairly consistent practices towards derivatives’ risk management; smaller firms have a far less consistent approach. Indeed, a significant number of them also do not appear to report their activity to the board of directors, and/or do not have a policy covering the use of these instruments. Journal: The European Journal of Finance Pages: 169-193 Issue: 2 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110071218a File-URL: http://hdl.handle.net/10.1080/13518470110071218a File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:2:p:169-193 Template-Type: ReDIF-Article 1.0 Author-Name: Joao Neves Author-X-Name-First: Joao Author-X-Name-Last: Neves Author-Name: K. Ben Nowman Author-X-Name-First: K. Ben Author-X-Name-Last: Nowman Title: The ECU term structure of interest rates Abstract: This paper provides one of the few applications to the ECU curve of a Gaussian multifactor model of the term structure of interest rates. We estimate one, two and three factor Generalized Vaslcek models using panel data accounting for both the cross-sectional and dynamic implications of the yield curve to be taken into account. Our empirical results indicate that the model provides a good description of the ECU yield curve. Journal: The European Journal of Finance Pages: 194-197 Issue: 2 Volume: 9 Year: 2003 X-DOI: 10.1080/13518470110072046 File-URL: http://hdl.handle.net/10.1080/13518470110072046 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:9:y:2003:i:2:p:194-197 Template-Type: ReDIF-Article 1.0 Author-Name: Garen Markarian Author-X-Name-First: Garen Author-X-Name-Last: Markarian Author-Name: Sebastien Michenaud Author-X-Name-First: Sebastien Author-X-Name-Last: Michenaud Title: Corporate investment and earnings surprises Abstract: We find that firm-level investment is negatively related to the likelihood of meeting or beating analysts’ short-term EPS forecasts. In a 35-year panel dataset of US based companies, we find evidence that suggests firms with the best growth opportunities, opaque firms, and firms with higher than usual bonus compensation, are the ones to alter investment in order to beat benchmarks. Utilizing the passage of Sarbanes-Oxley as a natural experiment we find that firms trade off accruals-based earnings management in lieu of investment cuts. Results are robust to a number of covariates, and endogeneity or reverse causality does not seem to drive our inferences. This study suggests that, consistent with survey results from Graham, Harvey, and Rajgopal [2005. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics 40: 3–73], managers may reduce or delay corporate investment to meet or beat short-term earnings benchmarks. Journal: The European Journal of Finance Pages: 1485-1509 Issue: 16 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1618361 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1618361 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1485-1509 Template-Type: ReDIF-Article 1.0 Author-Name: Richard Fairchild Author-X-Name-First: Richard Author-X-Name-Last: Fairchild Author-Name: Ian Crawford Author-X-Name-First: Ian Author-X-Name-Last: Crawford Author-Name: Adil El-Fakir Author-X-Name-First: Adil Author-X-Name-Last: El-Fakir Title: A development bank’s choice of private equity partner: a behavioural game-theoretic approach Abstract: We develop a formal game-theoretic analysis of the economic (value-adding abilities) and behavioural factors (empathy, emotional excitement, passion) affecting a development bank’s choice of private-equity partner when investing into emerging market entrepreneurship. Triple-sided moral hazard (TSMH) problems occur in the form of effort-shirking, since the bank, the PE-manager, and the entrepreneur all contribute to value-creation. The bank’s investment choices are crucially affected by a) the relative abilities and the potential level of empathy, excitement and passion that may be generated between a PE-manager and an entrepreneur, and b) the personal emotional attachment that the bank develops towards a PE. The severity of TSMH increases inefficiencies in decision-making. Finally, we consider, in addition to political risk mitigation, an additional impact that the bank may have on PE/E value-creation: the bank may have a coaching/mentoring role. Our analysis has implications for academics and practitioners alike. Journal: The European Journal of Finance Pages: 1510-1526 Issue: 16 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1647863 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1647863 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1510-1526 Template-Type: ReDIF-Article 1.0 Author-Name: Monika Bucher Author-X-Name-First: Monika Author-X-Name-Last: Bucher Author-Name: Diemo Dietrich Author-X-Name-First: Diemo Author-X-Name-Last: Dietrich Author-Name: Achim Hauck Author-X-Name-First: Achim Author-X-Name-Last: Hauck Title: Implications of bank regulation for loan supply and bank stability: a dynamic perspective Abstract: We show that internal funds play a particular role in the regulation of bank capital, which has not received much attention, yet. A bank's decision on loan supply and capital structure determines its immediate bankruptcy risk as well as the future availability of internal funds. These internal funds in turn determine a bank's future costs of external finance and its future vulnerability to bankruptcy risks. Using a partial equilibrium model, we study how internal funds affect these intra- and intertemporal links. Moreover, our positive analysis identifies the effects of risk-weighted capital-to-asset ratios, liquidity coverage ratios and regulatory margin calls on the dynamics of internal funds and thus loan supply and bank stability. Only regulatory margin calls or large liquidity coverage ratios achieve bank stability for all risk levels, but for large risks a bank will stop credit intermediation. Journal: The European Journal of Finance Pages: 1527-1550 Issue: 16 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1614084 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1614084 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1527-1550 Template-Type: ReDIF-Article 1.0 Author-Name: George Diacogiannis Author-X-Name-First: George Author-X-Name-Last: Diacogiannis Author-Name: Christos Ioannidis Author-X-Name-First: Christos Author-X-Name-Last: Ioannidis Title: Linear beta pricing with inefficient benchmarks in a given factor structure Abstract: We show the equivalence between the zero-beta version of a multi-factor arbitrage pricing model and a linear pricing model utilizing undiversified inefficient benchmarks in a given factor structure. The resulting linear model is a two-beta model, with one beta related to the inefficient benchmark and another adjusting for its inefficiency. This linear model shows that there are only two distinctive and computable sources of risk, affecting security expected returns, despite the existence of several risk factors. In a short empirical example we demonstrate that the model can be employed to provide guidance and allow researchers to test for the validity of their selection of the underlying risk factors driving variations in security returns. Journal: The European Journal of Finance Pages: 1551-1571 Issue: 16 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1639207 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1639207 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1551-1571 Template-Type: ReDIF-Article 1.0 Author-Name: Kamran Malikov Author-X-Name-First: Kamran Author-X-Name-Last: Malikov Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Stuart Manson Author-X-Name-First: Stuart Author-X-Name-Last: Manson Title: The effect of the interest coverage covenants on classification shifting of revenues Abstract: While prior studies focus on real/accrual-based earnings management and expense misclassification to investigate earnings manipulation in avoiding covenant violations, this paper extends such research in a new direction. In particular, it examines whether firms employ classification shifting of revenues when they are subject to interest coverage EBITDA-based covenants close to their threshold values or limits. This earnings management tool allows firms to increase reported EBITDA by misclassifying non-operating revenues as operating revenues to remain within covenant limits that include EBITDA. Using a sample of 559 UK listed firm-years for the period 2005–2014, it establishes that the use of classification shifting of revenues is high when interest coverage covenants are close to their limits. Further analysis suggests that firms also employ revenue shifting when all their loan covenants are EBITDA-related. Journal: The European Journal of Finance Pages: 1572-1590 Issue: 16 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1618888 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1618888 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1572-1590 Template-Type: ReDIF-Article 1.0 Author-Name: Alfredo Grau Author-X-Name-First: Alfredo Author-X-Name-Last: Grau Author-Name: Araceli Reig Author-X-Name-First: Araceli Author-X-Name-Last: Reig Title: The industry effect and the decision to integrate vertically in a crisis context Abstract: The objective of this work is twofold: firstly, to study if the characteristics of the industry affect certain financial and strategic decisions of manufacturing firms and, secondly, to determine if the strategy of diversifying the activity through vertical integration generates good financial results in times of crisis, depending on the industry. To this end, an analysis is carried out with panel data from 9,523 firms in the period between 2008 and 2013. The results show that there are different strategies that firms must follow, depending on the industry to which they belong. In sectors with lower operational risk, those firms characterized by greater specificity and better product quality obtained higher profitability. However, in riskier sectors, firms with more specific assets assumed too many risks and in times of crisis have seen their profitability fall. Likewise, it is observed that the decision to integrate vertically has mitigated the weak points of each sector, allowing firms to better weather the economic–financial crisis in which this research is framed. Journal: The European Journal of Finance Pages: 1591-1605 Issue: 16 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1628795 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1628795 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1591-1605 Template-Type: ReDIF-Article 1.0 Author-Name: Andrej Cupák Author-X-Name-First: Andrej Author-X-Name-Last: Cupák Author-Name: Gueorgui I. Kolev Author-X-Name-First: Gueorgui I. Author-X-Name-Last: Kolev Author-Name: Zuzana Brokešová Author-X-Name-First: Zuzana Author-X-Name-Last: Brokešová Title: Financial literacy and voluntary savings for retirement: novel causal evidence Abstract: We utilise recent Household Finance and Consumption Survey microdata to report first causal effects of financial literacy on voluntary private pension schemes participation for a Central and Eastern European (CEE) country, namely Slovakia. Savings for retirement in the supplementary pension schemes are positively associated with financial literacy after controlling for a set of relevant socio-economic variables. One additional correctly answered financial literacy question leads to a 5.6 percentage points increase in the probability of having a voluntary pension savings plan in our ordinary least squares estimates. The causal impact of financial literacy increases to 19.5 percentage points when we address potential endogeneity problems by novel to the literature instrumental variables. Journal: The European Journal of Finance Pages: 1606-1625 Issue: 16 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1641123 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1641123 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:16:p:1606-1625 Template-Type: ReDIF-Article 1.0 Author-Name: Yi Zhou Author-X-Name-First: Yi Author-X-Name-Last: Zhou Title: Narcissism and the art market performance Abstract: Using a unique auction dataset from artinfo.com, we find that narcissism measured by the signatures of artists is positively associated with the market performance of artworks. The artworks of more narcissistic artists have higher market prices, higher estimates from auction houses, and higher outperformance compared to the art market index. In support of this narcissistic view of the market performance of art works, we find that the higher recognition by art experts lead to more narcissistic artists having a greater number of solo and group exhibitions, more museum and gallery holdings, and higher art history rankings. More narcissistic artists also tend to make larger paintings and date their works more frequently. Journal: The European Journal of Finance Pages: 1197-1218 Issue: 13 Volume: 23 Year: 2017 Month: 10 X-DOI: 10.1080/1351847X.2016.1151804 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151804 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:13:p:1197-1218 Template-Type: ReDIF-Article 1.0 Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Heba Gazzaz Author-X-Name-First: Heba Author-X-Name-Last: Gazzaz Author-Name: Hardy Thomas Author-X-Name-First: Hardy Author-X-Name-Last: Thomas Title: The impact of mispricing and growth on UK M&As Abstract: This paper investigates the impact of mispricing and growth on salient aspects of 434 UK merger and acquisition (M&A) deals over the 1990–2009 period. Mispricing is proxied by both the 26-week high price and misvaluation given by the deviation of target price from its estimated fundamental value. One or both of these variables has a significantly pervasive influence on all aspects of M&As studied. The target 26-week high price, misvaluation and growth all have a significant effect on both the offer premium and whether bidders pay with cash or stock for the full sample. The 26-week high price is the main driver for the overvalued (price exceeds value) target sub-sample and growth prospects for the undervalued target sub-sample. Short run abnormal returns around the announcement are driven by misvaluation only while offers in excess of the 26-week high and of fundamental value increase the probability of deal success. Journal: The European Journal of Finance Pages: 1219-1237 Issue: 13 Volume: 23 Year: 2017 Month: 10 X-DOI: 10.1080/1351847X.2016.1206585 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1206585 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:13:p:1219-1237 Template-Type: ReDIF-Article 1.0 Author-Name: Indrajeet Mohite Author-X-Name-First: Indrajeet Author-X-Name-Last: Mohite Title: The value of target’s acquisition experience in M&A Abstract: Organisational learning theory predicts that firms should get better in Merger and Acquisition (M&A) deals with experience. Yet, existing studies on acquisition learning document decline in acquirer gains with acquisition experience. The lower gains in subsequent acquisition deals are likely induced by exogenous factors which can conceal the acquirer’s potential to learn with experience. To tackle this issue, this study examines the value of M&A experience by concentrating on the target firms’ prior acquisitions and investigates whether experienced deal-makers learn to negotiate the deal in favour of their shareholders when they are taken over by other firms. I find that the value created by the acquirer is inversely related to the deal-making experience of the target firm and the premium received by the target shareholders is positively related to the target’s deal-making experience. Our findings offer valuable contributions to the M&A learning literature as they suggest that deal-making skills improve with experience resulting in target firms securing more benefits for their shareholders at the expense of acquirers. Journal: The European Journal of Finance Pages: 1238-1266 Issue: 13 Volume: 23 Year: 2017 Month: 10 X-DOI: 10.1080/1351847X.2016.1212719 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1212719 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:13:p:1238-1266 Template-Type: ReDIF-Article 1.0 Author-Name: Ky-Hyang Yuhn Author-X-Name-First: Ky-Hyang Author-X-Name-Last: Yuhn Author-Name: Sang Bong Kim Author-X-Name-First: Sang Bong Author-X-Name-Last: Kim Author-Name: James Ross McCown Author-X-Name-First: James Ross Author-X-Name-Last: McCown Title: Stock returns, velocity dynamics and inflation volatility Abstract: Our model relates the variability of stock returns to the variability of consumption velocity and shows that real stock returns tend to co-vary negatively with expected inflation in a period (or regime) of low and stable inflation and to co-vary positively with expected inflation in a period (or regime) of high and volatile inflation. Long-run real stock returns are shown to be positively related to expected inflation. Our empirical results for 20 countries provide consistent support for our propositions, indicating that the standard deviation of the annual inflation rate roughly equal to 10% is the dividing line between negative and positive return-inflation relations. Journal: The European Journal of Finance Pages: 1755-1771 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1425731 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1425731 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1755-1771 Template-Type: ReDIF-Article 1.0 Author-Name: Justin Chircop Author-X-Name-First: Justin Author-X-Name-Last: Chircop Author-Name: Michele Fabrizi Author-X-Name-First: Michele Author-X-Name-Last: Fabrizi Author-Name: Antonio Parbonetti Author-X-Name-First: Antonio Author-X-Name-Last: Parbonetti Title: The impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 repo ‘safe harbor’ provisions on investors Abstract: The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 significantly expanded the exemptions from the normal workings of the U.S. Bankruptcy Code. Using a large sample of U.S. banks, we study investors’ reaction to news about the promulgation of the BAPCPA repo ‘safe harbor’ provisions and the influence extending such exemptions to repos collateralized by riskier collateral had on equity market information asymmetry. We find a negative market reaction to news events about the promulgation of BAPCPA, which subsequent cross-sectional analysis suggests is at least partly driven by repo exposure. This finding suggests that investors perceived the increase in finance risk from the extension of the ‘safe harbor’ provisions as dominating the perceived gain from accessing cheaper finance. Further, we find that the promulgation of BAPCPA gave rise to increased information asymmetry for banks with repo exposure. Journal: The European Journal of Finance Pages: 1772-1798 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1427608 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1427608 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1772-1798 Template-Type: ReDIF-Article 1.0 Author-Name: Andrew Grant Author-X-Name-First: Andrew Author-X-Name-Last: Grant Author-Name: Anastasios Oikonomidis Author-X-Name-First: Anastasios Author-X-Name-Last: Oikonomidis Author-Name: Alistair C. Bruce Author-X-Name-First: Alistair C. Author-X-Name-Last: Bruce Author-Name: Johnnie E. V. Johnson Author-X-Name-First: Johnnie E. V. Author-X-Name-Last: Johnson Title: New entry, strategic diversity and efficiency in soccer betting markets: the creation and suppression of arbitrage opportunities Abstract: We find that prices offered by competing bookmakers within the same quote-driven soccer (football) betting market provide arbitrage opportunities. However, the management practices of bookmakers prevent informed bettors exploiting these in practice. We identify two groups of bookmakers, ‘position-takers’ and ‘book-balancers’. Position-takers alter their odds infrequently, while actively restricting informed traders. Book-balancers actively manage inventory by adjusting odds, and place few restrictions on their customers. We identify 545 arbitrage portfolios, and find that around 50% would require a bet on the favourite at the position-taking bookmaker. The management practices of position-takers generally prevent these opportunities being exploited in practice. Journal: The European Journal of Finance Pages: 1799-1816 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1443148 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1443148 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1799-1816 Template-Type: ReDIF-Article 1.0 Author-Name: Franco Fiordelisi Author-X-Name-First: Franco Author-X-Name-Last: Fiordelisi Author-Name: Giuseppe Galloppo Author-X-Name-First: Giuseppe Author-X-Name-Last: Galloppo Title: Stock market reaction to policy interventions Abstract: We analyse stock price reactions to the announcements of monetary and fiscal policy actions in 12 stock exchanges worldwide between 1 June 2007 and 30 June 2012. While past papers have analysed the effect of policy interventions focusing on monetary policy actions (e.g. Ricci 2015), our paper focuses on stock indices either capturing the whole stock market or various industries. By estimating abnormal stock reactions around the announcement date, we show that (1) stock industry indices react to policy interventions in a different manner than the broad stock index does; (2) stock returns react negatively to restriction measures for general and non-banking sector indices; and (3) stock reaction to expansionary measures was stronger at the beginning of the financial crisis. Journal: The European Journal of Finance Pages: 1817-1834 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1450278 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1450278 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1817-1834 Template-Type: ReDIF-Article 1.0 Author-Name: Astrid Ayala Author-X-Name-First: Astrid Author-X-Name-Last: Ayala Author-Name: Szabolcs Blazsek Author-X-Name-First: Szabolcs Author-X-Name-Last: Blazsek Title: Score-driven copula models for portfolios of two risky assets Abstract: The precise measurement of the association between asset returns is important for financial investors and risk managers. In this paper, we focus on a recent class of association models: Dynamic Conditional Score (DCS) copula models. Our contributions are the following: (i) We compare the statistical performance of several DCS copulas for several portfolios. We study the Clayton, rotated Clayton, Frank, Gaussian, Gumbel, rotated Gumbel, Plackett and Student's t copulas. We find that the DCS model with the Student's t copula is the most parsimonious model. (ii) We demonstrate that the copula score function discounts extreme observations. (iii) We jointly estimate the marginal distributions and the copula, by using the Maximum Likelihood method. We use DCS models for mean, volatility and association of asset returns. (iv) We estimate robust DCS copula models, for which the probability of a zero return observation is not necessarily zero. (v) We compare different patterns of association in different regions of the distribution for different DCS copulas, by using density contour plots and Monte Carlo (MC) experiments. (vi) We undertake a portfolio performance study with the estimation and backtesting of MC Value-at-Risk for the DCS model with the Student's t copula. Journal: The European Journal of Finance Pages: 1861-1884 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1464488 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1464488 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1861-1884 Template-Type: ReDIF-Article 1.0 Author-Name: Samuel Xin Liang Author-X-Name-First: Samuel Xin Author-X-Name-Last: Liang Title: The systematic pricing of market sentiment shock Abstract: We show that market sentiment shocks create demand shocks for risky assets and a systematic risk for assets. We measure a market sentiment shock as the unexpected portion of the University of Michigan Consumer Sentiment Index’s growth. This shock prices stock returns in arbitrage pricing theory framework at 1% after controlling for market, size, value, momentum, and liquidity risk factors. Its premium lowered the implied risk aversion by 97.9% to 11.46 between 1978 and 2009 in our sentiment consumption-based capital-asset-pricing model. Merton’s [1973. “An Intertemporal Capital Asset Pricing Model.” Econometrica 41: 867–887]. intertemporal capital-asset-pricing model reconfirms our finding that this market sentiment shock is a systematic risk factor that provides investment opportunities. Journal: The European Journal of Finance Pages: 1835-1860 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1491875 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1491875 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1835-1860 Template-Type: ReDIF-Article 1.0 Author-Name: The Editors Title: Referees January 2014–December 2017 Journal: The European Journal of Finance Pages: 1902-1924 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1496569 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1496569 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1902-1924 Template-Type: ReDIF-Article 1.0 Author-Name: Athanasios P. Fassas Author-X-Name-First: Athanasios P. Author-X-Name-Last: Fassas Author-Name: Stephanos Papadamou Author-X-Name-First: Stephanos Author-X-Name-Last: Papadamou Title: Unconventional monetary policy announcements and risk aversion: evidence from the U.S. and European equity markets Abstract: This paper examines the role of unconventional monetary policy announcements on risk aversion – as proxied by the variance premium – by using panel data analysis. The objective of this empirical analysis is to investigate the risk-taking channel of monetary policy for the major European and U.S. equity markets by studying the impact that the announcements of an unconventional monetary policy has on market uncertainty and risk perception. By measuring the difference between risk-neutral and realised and conditional variance, we estimate the variance premium, which captures the impact that pricing concerns have on the prices of options. The empirical analysis indicates that easing monetary policies can significantly reduce the variance premium. In addition, we examine the risk premium structure across markets to determine the potential differences in investors’ risk aversion. Journal: The European Journal of Finance Pages: 1885-1901 Issue: 18 Volume: 24 Year: 2018 Month: 12 X-DOI: 10.1080/1351847X.2018.1496943 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1496943 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1885-1901 Template-Type: ReDIF-Article 1.0 Author-Name: Adrian Melia Author-X-Name-First: Adrian Author-X-Name-Last: Melia Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: Subtle is the Lord, but malicious He is not: the calculation of abnormal stock returns in applied research Abstract: We use the expected logarithmic returns formula for the Geometric Brownian Motion (GBM) in conjunction with the expected logarithmic returns formula for the Feller diffusion to illustrate the nature and magnitude of errors which arise in computed abnormal returns when one applies an expected logarithmic returns formula which is incompatible with the stochastic process that generates a stock’s returns. Empirical analysis based on FTSE 100 stock price data for the five year period ending in 2017 shows that the scale of the errors in computed abnormal returns will hinge on the volatility of the returns generating process but will be particularly pronounced for relatively low stock prices. Although our principal focus is with comparing abnormal returns on the GBM and Feller diffusion, we also simulate logarithmic returns for the Uhlenbeck and Ornstein (1930) process, several interpretations of the Constant Elasticity of Variance (CEV) process and the scaled ‘t’ process of Praetz (1972) and Blattberg and Gonedes (1974). Taken in conjunction with the GBM and the Feller diffusion, these processes underpin virtually every equilibrium based asset pricing model which appears in the literature. However, computing abnormal returns for any of these processes using the expected logarithmic returns formula for the GBM inevitably leads to errors in the abnormal returns. Hence, an important principle which emerges from our analysis is that it is crucially important for researchers and others to test the compatibility of empirically observed returns with the distributional assumptions on which the empirical analysis is based if the complications arising from mis-specified modelling procedures are to be avoided. Journal: The European Journal of Finance Pages: 835-855 Issue: 9 Volume: 25 Year: 2019 Month: 6 X-DOI: 10.1080/1351847X.2018.1537981 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1537981 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:9:p:835-855 Template-Type: ReDIF-Article 1.0 Author-Name: Nikolaos I. Papanikolaou Author-X-Name-First: Nikolaos I. Author-X-Name-Last: Papanikolaou Title: How changes in market conditions affect screening activity, credit risk, and the lending behaviour of banks Abstract: The global financial crisis dramatically transformed the market conditions in the banking industry. We construct a theoretical model of spatial competition that considers the differential information between lenders and loan applicants to explore how changes in the market structure affect the lending behaviour of banks and their incentives to invest in screening and how this, in turn, affects the level of credit risk in the economy. Our findings reveal that enhanced competition reduces lending cost thus encouraging the entry of new customers in credit markets. Also, that the transportation cost that loan applicants are required to pay to reach the bank of their interest shrinks with respect to the degree of competition. We further lend support to the view that stiffer competition has an increasing impact on the level of credit risk. Notably, we find that competition strengthens the incentives of banks to engage in screening activity and that screening serves as a protection mechanism that can provide banks with a shield against bad loans. Overall, when market conditions are substantially distorted, this has a dilutive impact on the incentives mechanism of banks to screen their applicants. We provide empirical evidence which is consistent with the conceptual underpinnings of our theoretical model and the obtained findings. Journal: The European Journal of Finance Pages: 856-875 Issue: 9 Volume: 25 Year: 2019 Month: 6 X-DOI: 10.1080/1351847X.2018.1548367 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1548367 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:9:p:856-875 Template-Type: ReDIF-Article 1.0 Author-Name: Yerzhan Tokbolat Author-X-Name-First: Yerzhan Author-X-Name-Last: Tokbolat Author-Name: Steve Thompson Author-X-Name-First: Steve Author-X-Name-Last: Thompson Author-Name: Hang Le Author-X-Name-First: Hang Author-X-Name-Last: Le Title: Shareholder voting in mergers and acquisitions: evidence from the UK Abstract: This paper examines the determinants and consequences of shareholder voting on mergers and acquisitions using a sample of resolutions approved by shareholders of UK publicly listed firms from 1997 to 2015. We find that dissent on M&A resolutions is negatively related to bidder announcement returns and positively related to shareholders’ general dissatisfaction towards the management. Shareholder dissent is an important predictor of the announcement returns of subsequent M&A deals. We also report an increase in shareholder dissent after the 2007–2008 financial crisis. Journal: The European Journal of Finance Pages: 815-834 Issue: 9 Volume: 25 Year: 2019 Month: 6 X-DOI: 10.1080/1351847X.2018.1552602 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1552602 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:9:p:815-834 Template-Type: ReDIF-Article 1.0 Author-Name: The Editors Title: Referees 2018 Journal: The European Journal of Finance Pages: 876-880 Issue: 9 Volume: 25 Year: 2019 Month: 6 X-DOI: 10.1080/1351847X.2019.1586154 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1586154 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:9:p:876-880 Template-Type: ReDIF-Article 1.0 Author-Name: Fabio Bellini Author-X-Name-First: Fabio Author-X-Name-Last: Bellini Author-Name: Elena Di Bernardino Author-X-Name-First: Elena Author-X-Name-Last: Di Bernardino Title: Risk management with expectiles Abstract: Expectiles (EVaR) are a one-parameter family of coherent risk measures that have been recently suggested as an alternative to quantiles (VaR) and to expected shortfall (ES). In this work we review their known properties, we discuss their financial meaning, we compare them with VaR and ES and we study their asymptotic behaviour, refining some of the results in Bellini et al. [(2014). “Generalized Quantiles as Risk Measures.” Insurance: Mathematics and Economics, 54:41–48]. Moreover, we present a real-data example for the computation of expectiles by means of simple Garch(1,1) models and we assess the accuracy of the forecasts by means of a consistent loss function as suggested by Gneiting [(2011). “Making and Evaluating Point Forecast.” Journal of the American Statistical Association, 106 (494): 746–762]. Theoretical and numerical results indicate that expectiles are perfectly reasonable alternatives to VaR and ES risk measures. Journal: The European Journal of Finance Pages: 487-506 Issue: 6 Volume: 23 Year: 2017 Month: 5 X-DOI: 10.1080/1351847X.2015.1052150 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1052150 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:6:p:487-506 Template-Type: ReDIF-Article 1.0 Author-Name: Tomasz Rólczyński Author-X-Name-First: Tomasz Author-X-Name-Last: Rólczyński Author-Name: Maria Forlicz Author-X-Name-First: Maria Author-X-Name-Last: Forlicz Author-Name: Łukasz Kuźmiński Author-X-Name-First: Łukasz Author-X-Name-Last: Kuźmiński Title: Risk attitude in case of losses or gains – an experimental study Abstract: In order to verify some hypotheses concerning decision-making in risky choice, we conducted two experiments with real payoffs (although nonmonetary). The purpose of the article was answering following questions: does the present status influence behavior in risky choice? Does the difference in scenarios (gain/loss) influence behavior? Are people willing to pay more for insurance than an expected value of a loss (paying for transferring risk)? Is there any relationship between ability to earn and risk attitude? Our experiments show that it is possible that people taking decisions involving risk not always act the way to maximize wealth (in our case points), sometimes they are happy enough when they achieve some level of wealth. We also found that people act in a different way when they know how much is missing to achieve their goal and when they do not. Based on the obtained results, we can also say that most people are risk averse. Even in the gain scenario, people were ready to give back so many points to get the rest for sure, that what remained was less than the expected value. It is possible that there is some relationship between risk attitude and ability to get (earn) wealth in another way than lottery. Journal: The European Journal of Finance Pages: 474-486 Issue: 6 Volume: 23 Year: 2017 Month: 5 X-DOI: 10.1080/1351847X.2015.1062789 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1062789 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:6:p:474-486 Template-Type: ReDIF-Article 1.0 Author-Name: Carole Bernard Author-X-Name-First: Carole Author-X-Name-Last: Bernard Author-Name: Ludger Rüschendorf Author-X-Name-First: Ludger Author-X-Name-Last: Rüschendorf Author-Name: Steven Vanduffel Author-X-Name-First: Steven Author-X-Name-Last: Vanduffel Author-Name: Jing Yao Author-X-Name-First: Jing Author-X-Name-Last: Yao Title: How robust is the value-at-risk of credit risk portfolios? Abstract: In this paper, we assess the magnitude of model uncertainty of credit risk portfolio models, that is, what is the maximum and minimum value-at-risk (VaR) of a portfolio of risky loans that can be justified given a certain amount of available information. Puccetti and Rüschendorf [2012a. “Computation of Sharp Bounds on the Distribution of a Function of Dependent Risks”. Journal of Computational and Applied Maths 236, 1833–1840] and Embrechts, Puccetti, and Rüschendorf [2013. “Model Uncertainty and VaR Aggregation”. Journal of Banking and Finance 37, 2750–2764] propose the rearrangement algorithm (RA) as a general method to approximate VaR bounds when the loss distributions of the different loans are known but not their interdependence (unconstrained bounds). Their numerical results show that the gap between worst-case and best-case VaR is typically very high, a feature that can only be explained by lack of using dependence information. We propose a modification of the RA that makes it possible to approximate sharp VaR bounds when besides the marginal distributions also higher order moments of the aggregate portfolio such as variance and skewness are available as sources of dependence information. A numerical study shows that the use of moment information makes it possible to significantly improve the (unconstrained) VaR bounds. However, VaR assessments of credit portfolios that are performed at high confidence levels (as it is the case in Solvency II and Basel III) remain subject to significant model uncertainty and are not robust. Journal: The European Journal of Finance Pages: 507-534 Issue: 6 Volume: 23 Year: 2017 Month: 5 X-DOI: 10.1080/1351847X.2015.1104370 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1104370 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:6:p:507-534 Template-Type: ReDIF-Article 1.0 Author-Name: Mauro Bernardi Author-X-Name-First: Mauro Author-X-Name-Last: Bernardi Author-Name: Leopoldo Catania Author-X-Name-First: Leopoldo Author-X-Name-Last: Catania Author-Name: Lea Petrella Author-X-Name-First: Lea Author-X-Name-Last: Petrella Title: Are news important to predict the Value-at-Risk? Abstract: In this paper, we investigate the impact of news to predict extreme financial returns using high-frequency data. We consider several model specifications differing for the dynamic property of the underlying stochastic process as well as for the innovation process. Since news are essentially qualitative measures, they are firstly transformed into quantitative measures which are subsequently introduced as exogenous regressors into the conditional volatility dynamics. Three basic sentiment indexes are constructed starting from three lists of words defined by historical market news response and by a discriminant analysis. Models are evaluated in terms of their predictive accuracy to forecast out-of-sample Value-at-Risk of the STOXX Europe 600 sectors at different confidence levels using several statistic tests and the model confidence set procedure of Hansen, Lunde, Nason [(2011). “The Model Confidence Set”. Econometrica, 79, pp. 453–497]. Moreover, since Hansen's procedure usually delivers a set of models having the same VaR predictive ability, we propose a new forecasting combination technique that dynamically weights the VaR predictions obtained by the models belonging to the optimal final set. Our results confirm that the inclusion of exogenous information as well as the right specification of the returns' conditional distribution significantly decreases the number of actual versus expected VaR violations towards one, and this is especially true for higher confidence levels. Journal: The European Journal of Finance Pages: 535-572 Issue: 6 Volume: 23 Year: 2017 Month: 5 X-DOI: 10.1080/1351847X.2015.1106959 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1106959 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:6:p:535-572 Template-Type: ReDIF-Article 1.0 Author-Name: Antonella Basso Author-X-Name-First: Antonella Author-X-Name-Last: Basso Author-Name: Stefania Funari Author-X-Name-First: Stefania Author-X-Name-Last: Funari Title: The role of fund size in the performance of mutual funds assessed with DEA models Abstract: This contribution studies the role of the size of mutual funds in the evaluation of the fund performance with a data envelopment analysis (DEA) approach, with the aim of studying the issue from different angles and with different statistical tools and investigating the presence of a positive or negative size effect in mutual funds market. Firstly, we discuss the role of fund size in the performance evaluation and wonder whether it is appropriate to include size information among the variables of DEA models. Secondly, we analyse the presence of a relationship between the performance scores and the size of mutual funds using different statistical tests and carry out an empirical investigation on a set of European equity mutual funds. Thirdly, we study scale efficiency and investigate whether the European mutual funds analysed exhibit constant, increasing or decreasing returns to scale. Journal: The European Journal of Finance Pages: 457-473 Issue: 6 Volume: 23 Year: 2017 Month: 5 X-DOI: 10.1080/1351847X.2016.1164209 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1164209 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:6:p:457-473 Template-Type: ReDIF-Article 1.0 Author-Name: Andrea Moro Author-X-Name-First: Andrea Author-X-Name-Last: Moro Author-Name: Daniela Maresch Author-X-Name-First: Daniela Author-X-Name-Last: Maresch Author-Name: Annalisa Ferrando Author-X-Name-First: Annalisa Author-X-Name-Last: Ferrando Title: Creditor protection, judicial enforcement and credit access Abstract: We investigate the impact of the legal system on whether firms obtain the credit they apply for or not. Data comprise unique information provided directly by 48,590 firms from 11 European countries. We look at the strength of creditor protection, the strength of property rights, the time taken to resolve a dispute, the dispute resolution process’s costs and the number of procedures the plaintiff faces using data provided by the World Bank and the Heritage Foundation. The results suggest that the more efficient the judicial enforcement system is, and the higher the creditor protection is, the lower the probability that the firms are partially or totally denied credit. Our results are robust to selection bias (Heckman selection) as well as different controls and different estimation techniques. We find that these variables have considerable economic impact: the probability of obtaining credit is up to 40% higher in countries with more robust legal systems. Journal: The European Journal of Finance Pages: 250-281 Issue: 3 Volume: 24 Year: 2018 Month: 2 X-DOI: 10.1080/1351847X.2016.1216871 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1216871 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:3:p:250-281 Template-Type: ReDIF-Article 1.0 Author-Name: Umut Gökçen Author-X-Name-First: Umut Author-X-Name-Last: Gökçen Author-Name: Thierry Post Author-X-Name-First: Thierry Author-X-Name-Last: Post Title: Trading volume, return variability and short-term momentum Abstract: We propose short-term averages of daily stock-level trading volume and return variability as proxies for latent corporate news flow. Conditioning momentum strategies on these two proxies give a significant boost to winner-minus-loser alphas. Regardless of the portfolio formation and holding periods, price drift is larger after elevated levels of volume and variability, supporting the view that prices underreact to news. This pattern is not driven by micro-cap stocks and it is robust to corrections for systematic risk factors and stock characteristics such as liquidity and credit quality. Journal: The European Journal of Finance Pages: 231-249 Issue: 3 Volume: 24 Year: 2018 Month: 2 X-DOI: 10.1080/1351847X.2016.1256828 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1256828 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:3:p:231-249 Template-Type: ReDIF-Article 1.0 Author-Name: Antonio Figueiredo Author-X-Name-First: Antonio Author-X-Name-Last: Figueiredo Author-Name: A.M. Parhizgari Author-X-Name-First: A.M. Author-X-Name-Last: Parhizgari Title: Contemporaneous ADR pricing: intraday dynamics during overlapping trading hours Abstract: We contribute to the literature by identifying and accurately measuring the drivers of American depositary receipt (ADR) returns contemporaneously across various global time zones. We consider ADRs as two inherently distinct asset classes – stocks and currencies – bundled into one. Throughout, we use a relatively refined, focused, and synchronized minute-by-minute data set on ADRs and all other variables. ADRs from all countries with regular trading hours that overlap with those of the US are considered individually and in clusters. We analyze the interplay of several factors that influence ADRs pricing patterns. Further, we investigate whether such patterns vary by currency, ADR, industry, and emerging/developed market classifications. Our findings indicate that synchronized returns on underlying shares comprise 68.5–74% of the explained returns in ADRs. The remaining 31.5–26% of returns are generated by movements in currency rates. These results are robust across the several models and estimation methods employed. Our findings also show persistent small price discrepancies between ADRs and dollar-adjusted underlying shares on a minute-by-minute basis, implying possible arbitrage opportunities. However, we conclude that trading and ADR conversion costs render such opportunities unattractive. Journal: The European Journal of Finance Pages: 183-207 Issue: 3 Volume: 24 Year: 2018 Month: 2 X-DOI: 10.1080/1351847X.2017.1292935 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1292935 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:3:p:183-207 Template-Type: ReDIF-Article 1.0 Author-Name: Marta Degl’Innocenti Author-X-Name-First: Marta Author-X-Name-Last: Degl’Innocenti Author-Name: Tapas Mishra Author-X-Name-First: Tapas Author-X-Name-Last: Mishra Author-Name: Simon Wolfe Author-X-Name-First: Simon Author-X-Name-Last: Wolfe Title: Branching, lending and competition in Italian banking Abstract: With the liberalization of legal barriers to the opening of bank branches in 1990, both market structure and competitive conditions in Italy changed profoundly as banks expanded their branching networks. This paper provides novel empirical evidence on how changes of the branch network structure at the province level affect the performance and lending activity of banks across the period 1993–2011. In particular, we adopt two modes of analysis. The first focuses on the impact of diversification strategies on performance, lending and funding strategies at the province level. The second one examines how the increase of big banks' local presence affects single-market bank performance and lending strategies. Our results show that geographical diversification strategies can reduce performance, the adjusted Lerner Index of banks and lending activities, but increase the Lerner Index in deposit markets. Furthermore, we find that the expansion of branches by large-medium sized banks in concentrated markets can reduce the Lerner Index for the deposit market and the amount of loans offered by single-market banks. Journal: The European Journal of Finance Pages: 208-230 Issue: 3 Volume: 24 Year: 2018 Month: 2 X-DOI: 10.1080/1351847X.2017.1303526 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1303526 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:3:p:208-230 Template-Type: ReDIF-Article 1.0 Author-Name: Song-Ping Zhu Author-X-Name-First: Song-Ping Author-X-Name-Last: Zhu Author-Name: Xin-Jiang He Author-X-Name-First: Xin-Jiang Author-X-Name-Last: He Title: A new closed-form formula for pricing European options under a skew Brownian motion Abstract: In this paper, we present a new pricing formula based on a modified Black–Scholes (B-S) model with the standard Brownian motion being replaced by a particular process constructed with a special type of skew Brownian motions. Although Corns and Satchell [2007. “Skew Brownian Motion and Pricing European Options.” The European Journal of Finance 13 (6): 523–544] have worked on this model, the results they obtained are incorrect. In this paper, not only do we identify precisely where the errors in Although Corns and Satchell [2007. “Skew Brownian Motion and Pricing European Options”. The European Journal of Finance 13 (6): 523–544] are, we also present a new closed-form pricing formula based on a newly proposed equivalent martingale measure, called ‘endogenous risk neutral measure’, by which only endogenous risks should and can be fully hedged. The newly derived option pricing formula takes the B-S formula as a special case and it does not induce any significant additional burden in terms of numerically computing option values, compared with the effort involved in computing the B-S formula. Journal: The European Journal of Finance Pages: 1063-1074 Issue: 12 Volume: 24 Year: 2018 Month: 8 X-DOI: 10.1080/1351847X.2017.1339104 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1339104 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:12:p:1063-1074 Template-Type: ReDIF-Article 1.0 Author-Name: Keehwan Park Author-X-Name-First: Keehwan Author-X-Name-Last: Park Author-Name: Mookwon Jung Author-X-Name-First: Mookwon Author-X-Name-Last: Jung Author-Name: Sangki Lee Author-X-Name-First: Sangki Author-X-Name-Last: Lee Title: Credit ratings and convertible bond prices: a simulation-based valuation Abstract: This study presents a simulation-based model of convertible bond prices under the assumption of stochastic interest rates. The model is developed such that the convertible bond price explicitly depends on the credit rating at the time of issuance. Key ideas explored in this study include terminating the simulated sample path immediately when the issuer defaults on the bond at time t, which is the same as the investor and the issuer optimally exercising their options and discounting the resulting cash flows at a risk-free rate. In turn, the defaulted group of sample paths belongs to the bottom xth percentile of the realized stock prices at each time, which is exogenously given by the cumulative or marginal default probability of a firm that has the same rating as the issuer. Upon calibrating the model, we can see that the moneyness of convertible bonds is strongly responsible for influencing the convertible bond price when the rating changes. Furthermore, the effects of stochastic interest rates are shown to be possibly significant when the interest rate risk’s market price is not zero. Journal: The European Journal of Finance Pages: 1001-1025 Issue: 12 Volume: 24 Year: 2018 Month: 8 X-DOI: 10.1080/1351847X.2017.1368682 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1368682 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:12:p:1001-1025 Template-Type: ReDIF-Article 1.0 Author-Name: Nataliya Barasinska Author-X-Name-First: Nataliya Author-X-Name-Last: Barasinska Author-Name: Dorothea Schäfer Author-X-Name-First: Dorothea Author-X-Name-Last: Schäfer Title: Gender role asymmetry and stock market participation – evidence from four European household surveys Abstract: This study investigates the importance of social norms for shaping women's and men's decision to participate in the stock market, aiming to disentangle the different channels playing a role in this decision. Gender role asymmetry is indicated by the country's rank in the gender equality index of the World Economic Forum. Using data from four national household surveys, we find that in Italy – the country with highly asymmetric gender role prescriptions – women's risk-taking behavior responds to this non-supportive environment. Consistent with the theory of social identity, Italian women refrain from stock market participation more than their self-reported risk tolerance levels would suggest. In contrast, in the three countries with a lower asymmetry in gender role prescriptions, no exaggerated female backing off from investing in stocks is observable. The result is robust to separately analyzing sub-samples of singles and couples. However, women who self-select into stock market participation invest the same portfolio share in stocks as do their male peers – independent of the society's degree of gender role divergence. Journal: The European Journal of Finance Pages: 1026-1046 Issue: 12 Volume: 24 Year: 2018 Month: 8 X-DOI: 10.1080/1351847X.2017.1371622 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1371622 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:12:p:1026-1046 Template-Type: ReDIF-Article 1.0 Author-Name: Sumon Kumar Bhaumik Author-X-Name-First: Sumon Kumar Author-X-Name-Last: Bhaumik Author-Name: Ali M. Kutan Author-X-Name-First: Ali M. Author-X-Name-Last: Kutan Author-Name: Sudipa Majumdar Author-X-Name-First: Sudipa Author-X-Name-Last: Majumdar Title: How successful are banking sector reforms in emerging market economies? Evidence from impact of monetary policy on levels and structures of firm debt in India Abstract: Many emerging markets have undertaken significant financial sector reforms, especially in their banking sectors, that are critical for both financial development and real economic activity. In this paper, we investigate the success of banking reforms in India where significant banking reforms were implemented during the 1990s. Using the argument that well-functioning credit markets would reflect a credit channel for monetary policy at work, we test whether a change in monetary policy has a predictable impact on borrowing behaviour of several types of firms, including business group affiliated, unaffiliated private firms, state-owned firms and foreign firms. The empirical results suggest that unaffiliated private firms have the most vulnerable to monetary policy stance during tight policy regimes. We also find that during tight monetary policy regimes, bank credit of smaller firms is more sensitive to changes in the interest rate than that of large firms. In an easy money regime, monetary policy and the associated change in interest rate does not affect change in bank credit, change in total debt and the proportion of bank credit in total debt for any of the firms. We discuss the policy implications of the findings. Journal: The European Journal of Finance Pages: 1047-1062 Issue: 12 Volume: 24 Year: 2018 Month: 8 X-DOI: 10.1080/1351847X.2017.1391857 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1391857 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:12:p:1047-1062 Template-Type: ReDIF-Article 1.0 Author-Name: Solomon Y. Deku Author-X-Name-First: Solomon Y. Author-X-Name-Last: Deku Author-Name: Alper Kara Author-X-Name-First: Alper Author-X-Name-Last: Kara Author-Name: Philip Molyneux Author-X-Name-First: Philip Author-X-Name-Last: Molyneux Title: Access to consumer credit in the UK Abstract: This paper investigates household access to consumer credit in the UK using information on 58,642 households between 2001 and 2009. Employing a treatment-effects model and propensity score matching, we find that non-white households are less likely to have financing compared to white households. We also find that even if they obtain financing, the intensity of borrowing is lower than for white households. Overall, non-white households seem to be in a weaker position to access consumer credit in the UK. Journal: The European Journal of Finance Pages: 941-964 Issue: 10 Volume: 22 Year: 2016 Month: 8 X-DOI: 10.1080/1351847X.2015.1019641 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1019641 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:10:p:941-964 Template-Type: ReDIF-Article 1.0 Author-Name: Jie Cheng Author-X-Name-First: Jie Author-X-Name-Last: Cheng Author-Name: Yi Hong Author-X-Name-First: Yi Author-X-Name-Last: Hong Author-Name: Juan Tao Author-X-Name-First: Juan Author-X-Name-Last: Tao Title: How do risk attitudes of clearing firms matter for managing default exposure in futures markets? Abstract: This article proposes a theoretical framework that is built upon extreme value theory to study three instruments (i.e. margin, capital requirement and price limits) for managing default risk in futures markets. Specifically, the exceedances over a price threshold are modeled using a generalized Pareto distribution, and the models are static (one-period). We incorporate the risk attitudes of clearing firms into the framework to investigate the efficacy of these instruments under several risk measures, including value-at-risk measures, expected-shortfall measures and spectral risk measures. An empirical study on the VIX futures (or VX) data shows that the effectiveness of these market instruments rests not only on clearing firms' risk attitudes, but also on the tail fatness of the futures price distribution. Moreover, the shift in the risk attitudes of clearing firms may cause interactions among these instruments, which casts new light on the economic rationale of price limits. Journal: The European Journal of Finance Pages: 909-940 Issue: 10 Volume: 22 Year: 2016 Month: 8 X-DOI: 10.1080/1351847X.2015.1041148 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1041148 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:10:p:909-940 Template-Type: ReDIF-Article 1.0 Author-Name: Chang-Yi Li Author-X-Name-First: Chang-Yi Author-X-Name-Last: Li Author-Name: Son-Nan Chen Author-X-Name-First: Son-Nan Author-X-Name-Last: Chen Author-Name: Shih-Kuei Lin Author-X-Name-First: Shih-Kuei Author-X-Name-Last: Lin Title: Pricing derivatives with modeling CO emission allowance using a regime-switching jump diffusion model: with regime-switching risk premium Abstract: Carbon markets trade the spot European Union Allowance (EUA), with one EUA providing the right to emit one tone of carbon dioxide (CO2). We examine the spot EUA returns in BlueNext that exhibit jumps and a volatility clustering feature. We propose a regime-switching jump diffusion model (RSJM) with a hidden Markov chain to capture not only a volatility clustering feature, but also the dynamics of the spot EUA returns that are influenced by change in the CO2 emission economic conditions. In addition, the switching jump intensities of the RSJM are shown to be affected by change in the carbon-market macroeconomic environment. We further derive the theoretical futures-option prices with a constant convenience yield under the RSJM via the generalized Esscher transform where regime-switching risk is priced with a risk premium. The empirical study shows that the derived futures-option pricing model under the RSJM with regime-switching risk is a more complete model than a jump diffusion model for pricing CO2 options. Journal: The European Journal of Finance Pages: 887-908 Issue: 10 Volume: 22 Year: 2016 Month: 8 X-DOI: 10.1080/1351847X.2015.1050526 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1050526 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:10:p:887-908 Template-Type: ReDIF-Article 1.0 Author-Name: Fabio Rumler Author-X-Name-First: Fabio Author-X-Name-Last: Rumler Author-Name: Walter Waschiczek Author-X-Name-First: Walter Author-X-Name-Last: Waschiczek Title: Have changes in the financial structure affected bank profitability? Evidence for Austria Abstract: We examine the impact of changes in the financial structure of the Austrian banking sector over the past 15 years, such as disintermediation, internationalization and privatization, on the profitability of banks. Several proxies based on bank balance sheet data at the micro-level as well as macroeconomic variables are used to capture these changes. The case of Austria is particularly interesting because the opening up of the Austrian banking sector due to EU accession and the strong engagement of Austrian banks in Eastern Europe coincided with the global trend toward deregulation of banking activities. Our estimation results, which are based on dynamic panel regression methods, indicate that disintermediation (a lower percentage of loans over total assets) and higher market concentration in the banking sector had a positive effect on bank profitability, while changes in the ownership structure (privatization and increased foreign ownership) as well as more foreign lending by Austrian banks did not have a clear-cut or significant impact on bank profits. Journal: The European Journal of Finance Pages: 803-824 Issue: 10 Volume: 22 Year: 2016 Month: 8 X-DOI: 10.1080/1351847X.2014.984815 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.984815 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:10:p:803-824 Template-Type: ReDIF-Article 1.0 Author-Name: Saad Badaoui Author-X-Name-First: Saad Author-X-Name-Last: Badaoui Author-Name: Lara Cathcart Author-X-Name-First: Lara Author-X-Name-Last: Cathcart Author-Name: Lina El-Jahel Author-X-Name-First: Lina Author-X-Name-Last: El-Jahel Title: Implied liquidity risk premium in the term structure of sovereign credit default swap and bond spreads Abstract: In this study, we focus on the dynamic properties of the risk-neutral liquidity risk premium specific to the sovereign credit default swap (CDS) and bond markets. We show that liquidity risk has a non-trivial role and participates directly to the variation over time of the term structure of sovereign CDS and bond spreads for both the pre- and crisis periods. Secondly, our results indicate that the time-varying bond and CDS liquidity risk premium move in opposite directions which imply that when bond liquidity risk is high, CDS liquidity risk is low (and vice versa), which may in turn be consistent with the substitution effect between CDS and bond markets. Finally, our Granger causality analysis reveals that, although the magnitude of bond and CDS liquidity risk is substantially different, there is a strong liquidity flow between the CDS and the bond markets, however, no market seems to consistently lead the other. Journal: The European Journal of Finance Pages: 825-853 Issue: 10 Volume: 22 Year: 2016 Month: 8 X-DOI: 10.1080/1351847X.2014.996297 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.996297 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:10:p:825-853 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Jaap Hazenberg Author-X-Name-First: Jan Jaap Author-X-Name-Last: Hazenberg Author-Name: Edwin Terink Author-X-Name-First: Edwin Author-X-Name-Last: Terink Title: Effectiveness of independent boards of UCITS funds Abstract: In order to protect fund investors against conflicts of interest with fund management companies, US funds have mandatory independent directors, but this obligation is not required under the European Union Undertakings for Collective Investment in Transferable Securities (UCITS) Directive. Nevertheless, a considerable number of UCITS funds do have independent directors. Whether independent directors should also be mandatory in Europe has been a topic of ongoing debate. Using a sample of Luxembourg UCITS, we test the hypothesis that more independent boards add value for investors through lower costs and/or better investment performance, but we fail to find supporting evidence, even for funds with a higher risk of conflicts of interest. Oversight by independent depositaries and institutional shareholders does not seem to be effective either. It appears that board attitude and the sponsor distribution model are more important since we find evidence that boards that prioritise cost monitoring have lower costs and that independent sponsor funds have better performance. These results question the effectiveness of self-regulation or formal regulation requiring independent board members. Journal: The European Journal of Finance Pages: 854-886 Issue: 10 Volume: 22 Year: 2016 Month: 8 X-DOI: 10.1080/1351847X.2014.996655 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.996655 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:10:p:854-886 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Brooks Author-X-Name-First: Chris Author-X-Name-Last: Brooks Author-Name: Andreas G. F. Hoepner Author-X-Name-First: Andreas G. F. Author-X-Name-Last: Hoepner Author-Name: David McMillan Author-X-Name-First: David Author-X-Name-Last: McMillan Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Author-Name: Chardin Wese Simen Author-X-Name-First: Chardin Author-X-Name-Last: Wese Simen Title: Financial data science: the birth of a new financial research paradigm complementing econometrics? Abstract: Financial data science and econometrics are highly complementary. They share an equivalent research process with the former’s intellectual point of departure being statistical inference and the latter’s being the data sets themselves. Two challenges arise, however, from digitalisation. First, the ever-increasing computational power allows researchers to experiment with an extremely large number of generated test subjects (i.e. p-hacking). We argue that p-hacking can be mitigated through adjustments for multiple hypothesis testing where appropriate. However, it can only truly be addressed via a strong focus on integrity (e.g. pre-registration, actual out-of-sample periods).  Second, the extremely large number of observations available in big data set provides magnitudes of statistical power at which common statistical significance levels are barely relevant. This challenge can be addressed twofold. First, researchers can use more stringent statistical significance levels such as 0.1% and 0.5% instead of 1% and 5%, respectively. Second, and more importantly, researchers can use criteria such as economic significance, economic relevance and statistical relevance to assess the robustness of statistically significant coefficients. Especially statistical relevance seems crucial, as it appears far from impossible for an individual coefficient to be considered statistically significant when its actual statistical relevance (i.e. incremental explanatory power) is extremely small. Journal: The European Journal of Finance Pages: 1627-1636 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1662822 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1662822 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1627-1636 Template-Type: ReDIF-Article 1.0 Author-Name: Irina Goloshchapova Author-X-Name-First: Irina Author-X-Name-Last: Goloshchapova Author-Name: Ser-Huang Poon Author-X-Name-First: Ser-Huang Author-X-Name-Last: Poon Author-Name: Matthew Pritchard Author-X-Name-First: Matthew Author-X-Name-Last: Pritchard Author-Name: Phil Reed Author-X-Name-First: Phil Author-X-Name-Last: Reed Title: Corporate social responsibility reports: topic analysis and big data approach Abstract: This paper performs topic modeling using all publicly available CSR (Corporate Social Responsibility) reports for all constituent firms of the major stock market indices of 15 industrialized countries included in MSCI Europe for the sample period from 1999 to 2016. Our text mining results and LDA analyses indicate that ‘employees safety’, ‘employees training support’, ‘carbon emission’, ‘human right’, ‘efficient power’, and ‘healthcare medicines’ are the common topics reported by publicly listed companies in Europe and the UK. There is a clear sector bias with industrial firms emphasizing ‘employee safety’, Utilities concentrating on ‘efficient power’ while consumer discretionary and consumer staples highlighting ‘food waste’ and ‘food packaging.’ To produce these results, we used a battery of python code to organize the hundreds of reports downloaded from Bloomberg and the internet, the latest R-algorithm to estimate LDA (Latent Dirichlet Allocation) model and the LDAvis interactive tool to visualize and refine the LDA model. Journal: The European Journal of Finance Pages: 1637-1654 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1572637 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1572637 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1637-1654 Template-Type: ReDIF-Article 1.0 Author-Name: Tiffany Thng Author-X-Name-First: Tiffany Author-X-Name-Last: Thng Title: Do VC-backed IPOs manage tone? Abstract: This paper examines how and why VC-backed firms manage their tone during initial public offerings (IPO) and seasoned equity offerings (SEO). Analysis conducted using the Management Discussion and Analysis section of the prospectuses from 1997 to 2011 show that VC-funded firms are less optimistic in tone. VC-financed firms do so to reduce litigation risks and protect their reputational capital; the effect of conservative tone management is more pronounced when they hire large auditors, receive more analyst coverage, operate in high-tech sectors and in industries with high litigation risk. Further, tone is not related to the conveying of private information as IPO firms that received VC funding experience larger surprise unexpected returns and perform better than non-VC-backed offers in the long run. Journal: The European Journal of Finance Pages: 1655-1682 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2018.1561482 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1561482 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1655-1682 Template-Type: ReDIF-Article 1.0 Author-Name: Gaurav Kumar Author-X-Name-First: Gaurav Author-X-Name-Last: Kumar Author-Name: Cal B. Muckley Author-X-Name-First: Cal B. Author-X-Name-Last: Muckley Author-Name: Linh Pham Author-X-Name-First: Linh Author-X-Name-Last: Pham Author-Name: Darragh Ryan Author-X-Name-First: Darragh Author-X-Name-Last: Ryan Title: Can alert models for fraud protect the elderly clients of a financial institution? Abstract: Using account-level transaction data at a major financial institution, we predict the incidence of suspicious activity that can be related to the external financial fraud of its elderly clients. The data consists of over 5 million accounts of clients aged 70 years and older, and over 250 million transactions extending from January 2015 to August 2016. Our main focus is to improve the detection of alerts within a proprietorial transaction monitoring system. Using logistic regression, random forest and support vector machine learning techniques, together with corrections for imbalanced alert samples, we provide a new alert model for the protection of elderly clients at a financial institution, with out-of-sample predictive accuracy. Our findings show the relative influence of client traits and account activity in our select external fraud alert models. Journal: The European Journal of Finance Pages: 1683-1707 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2018.1552603 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1552603 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1683-1707 Template-Type: ReDIF-Article 1.0 Author-Name: Panagiotis Asimakopoulos Author-X-Name-First: Panagiotis Author-X-Name-Last: Asimakopoulos Author-Name: Stylianos Asimakopoulos Author-X-Name-First: Stylianos Author-X-Name-Last: Asimakopoulos Author-Name: Filipa Da Silva Fernandes Author-X-Name-First: Filipa Da Silva Author-X-Name-Last: Fernandes Title: Cash holdings of listed and unlisted firms: new evidence from the euro area Abstract: This paper examines the cash holdings behavior of listed and unlisted firms. We argue that unlisted firms, which are smaller, face a greater wedge between the cost of external and internal finance and as a result they need to rely more on the later. Relying on internal funds means that firms have a precautionary motive to hold cash. We test our theory using an unbalanced panel of mainly small medium enterprises within the euro area over the period 2003–2017 paying special attention to the role of financial pressure, financial constraints and the recent financial crisis. Our findings reveal that unlisted firms hold more cash than their listed counterparts due to precautionary motives. In addition, when considering the effect of financial pressure, the results show that the difference in cash holdings between listed and unlisted firms exhibit a ‘U-shaped’ relationship. Finally, unlisted firms have a higher sensitivity to save cash out of cash flow than listed firms. Our results are robust to using different specifications and different financial pressure measures. Journal: The European Journal of Finance Pages: 1708-1729 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1652197 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1652197 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1708-1729 Template-Type: ReDIF-Article 1.0 Author-Name: Richard H. G. Jackson Author-X-Name-First: Richard H. G. Author-X-Name-Last: Jackson Title: Sub-sequence incidence analysis within series of Bernoulli trials: application in characterisation of time series dynamics Abstract: This paper presents a new and widely applicable nonparametric approach to the characterisation of time series dynamics. The approach involves analysis of the incidence of occurrence of patterns in the direction of movement of the series, and may readily be applied to time series data measured on any scale. The paper includes derivations of analytic forms for two (infinite) families of distributions under the null hypothesis of random behaviour, and of a useful analytic form for the generation of the moments of these distributions. The distributions are asymptotically normal, so allowing for straightforward application of the approach presented in the paper too long series of high frequency and/or extended time period data. Areas of application in finance and accounting are suggested. Journal: The European Journal of Finance Pages: 1730-1745 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1583117 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1583117 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1730-1745 Template-Type: ReDIF-Article 1.0 Author-Name: Esther B. Del Brio Author-X-Name-First: Esther B. Author-X-Name-Last: Del Brio Author-Name: Andrés Mora-Valencia Author-X-Name-First: Andrés Author-X-Name-Last: Mora-Valencia Author-Name: Javier Perote Author-X-Name-First: Javier Author-X-Name-Last: Perote Title: Expected shortfall assessment in commodity (L)ETF portfolios with semi-nonparametric specifications Abstract: This paper studies the risk assessment of semi-nonparametric (SNP) distributions for leveraged exchange trade funds, (L)ETFs. We applied the SNP model with dynamic conditional correlations (DCC) and EGARCH innovations, and implement recent techniques to backtest Expected Shortfall (ES) to portfolios formed by bivariate combinations of major (L)ETFs on metal (Gold and Silver) and energy (Oil and Gas) commodities. Results support that multivariate SNP-DCC model outperforms the Gaussian-DCC and provides accurate risk measures for commodity (L)ETFs. Journal: The European Journal of Finance Pages: 1746-1764 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2018.1559213 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1559213 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1746-1764 Template-Type: ReDIF-Article 1.0 Author-Name: John Cotter Author-X-Name-First: John Author-X-Name-Last: Cotter Author-Name: Anita Suurlaht Author-X-Name-First: Anita Author-X-Name-Last: Suurlaht Title: Spillovers in risk of financial institutions Abstract: We analyse the total and directional spillovers across a set of financial institution systemic risk state variables: credit risk, real estate market risk, interest rate risk, interbank liquidity risk and overall market risk. We examine the response of the spillover levels, within the set of systemic risk state variables, to a number of events in the financial markets and to initiatives undertaken by the European Central Bank and the Bank of England. The relationship between the time-varying spillovers and policy-related events is analysed using a multiple structural break estimation procedure and looking at the temporary increases in the spillover indices. Our sample includes five European Union countries: core countries France and Germany, periphery countries Spain and Italy, and a reference country, the UK. We show that national stock markets and real estate markets have a leading role in shock transmission across selected state variables. However, the role of the other variables reverses over the course of the crisis. We document that the total and net spillover indices react strongly to the events relating to financial assistance packages in Europe. Journal: The European Journal of Finance Pages: 1765-1792 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2019.1635897 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1635897 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1765-1792 Template-Type: ReDIF-Article 1.0 Author-Name: Ioannis Psaradellis Author-X-Name-First: Ioannis Author-X-Name-Last: Psaradellis Author-Name: Jason Laws Author-X-Name-First: Jason Author-X-Name-Last: Laws Author-Name: Athanasios A. Pantelous Author-X-Name-First: Athanasios A. Author-X-Name-Last: Pantelous Author-Name: Georgios Sermpinis Author-X-Name-First: Georgios Author-X-Name-Last: Sermpinis Title: Performance of technical trading rules: evidence from the crude oil market Abstract: This study investigates the debatable success of technical trading rules, through the years, on the trending energy market of crude oil. In particular, the large universe of 7846 trading rules proposed by Sullivan, Timmermann, and White (1999. “Data-Snooping, Technical Trading Rule Performance, and the Bootstrap.” The Journal of Finance 54 (5): 1647–1691. doi:10.1111/0022-1082.00163), divided into five families (filter rules, moving averages, support and resistance rules, channel breakouts, and on-balance volume averages), is applied to the daily prices of West Texas Intermediate (WTI) light, sweet crude oil futures as well as the United States Oil (USO) fund, from 2006 onwards. We employ the k-familywise error rate (k-FWER) and false discovery rate (FDR) techniques proposed by Romano, J. P., and M. Wolf. (2007. “Control of Generalized Error Rates in Multiple Testing.” The Annals of Statistics 35 (4): 1378–1408. doi:10.1214/009053606000001622) and Bajgrowicz, P., and O. Scaillet. (2012. “Technical Trading Revisited: False Discoveries, Persistence Tests, and Transaction Costs.” Journal of Financial Economics 106 (3): 473–491. doi:10.1016/j.jfineco.2012.06.001) respectively, accounting for data snooping in order to identify significantly profitable trading strategies. Our findings explain that there is no persistent nature in rules performance, contrary to the in-sample outstanding results, although tiny profits can be achieved in some periods. Overall, our results seem to be in favor of interim market inefficiencies. Journal: The European Journal of Finance Pages: 1793-1815 Issue: 17 Volume: 25 Year: 2019 Month: 11 X-DOI: 10.1080/1351847X.2018.1552172 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1552172 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:17:p:1793-1815 Template-Type: ReDIF-Article 1.0 Author-Name: Styliani-Iris Krokida Author-X-Name-First: Styliani-Iris Author-X-Name-Last: Krokida Author-Name: Neophytos Lambertides Author-X-Name-First: Neophytos Author-X-Name-Last: Lambertides Author-Name: Christos S. Savva Author-X-Name-First: Christos S. Author-X-Name-Last: Savva Author-Name: Dimitris A. Tsouknidis Author-X-Name-First: Dimitris A. Author-X-Name-Last: Tsouknidis Title: The effects of oil price shocks on the prices of EU emission trading system and European stock returns Abstract: This paper examines whether oil price shocks of different origin affect the price of carbon emission allowance traded under the European Union's Emissions Trading System; leading to changes in aggregate and sector-specific European equity returns. The results show that an unexpected oil-supply disruption has an imminent but weak positive effect on carbon emission price, while a positive aggregate demand shock has a strong positive effect on carbon emission price. By contrast, a positive oil-specific (precautionary) demand shock has a negative but weak effect on carbon emission price. These findings are economically important as positive shocks on the ${\rm CO}_{2} $CO2 emission allowance price trigger a decrease on the aggregate stock return of the European equity market, albeit they trigger a large and persistent increase on European equity returns of oil-related industries with the exception of the Energy sector. Journal: The European Journal of Finance Pages: 1-13 Issue: 1 Volume: 26 Year: 2020 Month: 1 X-DOI: 10.1080/1351847X.2019.1637358 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1637358 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:1:p:1-13 Template-Type: ReDIF-Article 1.0 Author-Name: Ioannis Oikonomou Author-X-Name-First: Ioannis Author-X-Name-Last: Oikonomou Author-Name: Chao Yin Author-X-Name-First: Chao Author-X-Name-Last: Yin Author-Name: Lei Zhao Author-X-Name-First: Lei Author-X-Name-Last: Zhao Title: Investment horizon and corporate social performance: the virtuous circle of long-term institutional ownership and responsible firm conduct Abstract: We investigate the relationship between corporate social performance and institutional ownership. We distinguish between long-term and short-term institutional investors using holdings-based measures which directly capture the investment horizon of each institution. Our analysis shows that long term institutional investment is positively related to corporate social performance (mainly by an avoidance of investing in firms with significant controversies) whereas short-term institutional investment is negatively related to corporate social performance. Further investigation reveals that increased holdings of a firm by long-term investors are positively associated with its future corporate social performance. Hence, we provide evidence of a ‘virtuous circle’ between long term investment and social responsibility. Journal: The European Journal of Finance Pages: 14-40 Issue: 1 Volume: 26 Year: 2020 Month: 1 X-DOI: 10.1080/1351847X.2019.1660197 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1660197 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:1:p:14-40 Template-Type: ReDIF-Article 1.0 Author-Name: Chi-Hsiou D. Hung Author-X-Name-First: Chi-Hsiou D. Author-X-Name-Last: Hung Author-Name: Shammyla Naeem Author-X-Name-First: Shammyla Author-X-Name-Last: Naeem Author-Name: K.C. John Wei Author-X-Name-First: K.C. Author-X-Name-Last: John Wei Title: Peer firms’ credit rating changes and corporate financing Abstract: We find that firms reduce net debt issuance (NDI, hereafter) when industry peers with the same credit rating were downgraded in the previous year, as opposed to an average NDI increase among all firms. This finding is consistent with the considerations of competition and contagion associated with relative strengths and weaknesses in credit quality. The peer effect on NDI reduction is ubiquitous across both speculative- and investment-grade firms, but is particularly strong for small size firms with speculative-grade ratings, and firms operating in concentrated industries, and in times when the economy is in expansion or outside financial crises. We also find that firms reduce leverage when their ratings are lower than the industry average, and that peer firms’ rating effects remain strong even when controlling for the lower-than-average effect. Journal: The European Journal of Finance Pages: 41-63 Issue: 1 Volume: 26 Year: 2020 Month: 1 X-DOI: 10.1080/1351847X.2019.1683874 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1683874 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:1:p:41-63 Template-Type: ReDIF-Article 1.0 Author-Name: Jie (Michael) Guo Author-X-Name-First: Jie (Michael) Author-X-Name-Last: Guo Author-Name: Krishna Paudyal Author-X-Name-First: Krishna Author-X-Name-Last: Paudyal Author-Name: Vinay Utham Author-X-Name-First: Vinay Author-X-Name-Last: Utham Author-Name: Xiaofei Xing Author-X-Name-First: Xiaofei Author-X-Name-Last: Xing Title: Investors’ activism and the gains from takeover deals Abstract: We examine whether activists add value to the shareholders of targets and their acquirers. Several findings emerge. First, acquirers of targets that have activists outperform acquirers of other targets in both the short and long term. Second, the premium received by the shareholders of targets is not affected by activism. Third, superior gains achieved by the acquirers of targets with activists are driven by non-cash deals, while the average target benefits more from cash deals. Journal: The European Journal of Finance Pages: 64-83 Issue: 1 Volume: 26 Year: 2020 Month: 1 X-DOI: 10.1080/1351847X.2019.1680407 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1680407 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:1:p:64-83 Template-Type: ReDIF-Article 1.0 Author-Name: Laurens Defau Author-X-Name-First: Laurens Author-X-Name-Last: Defau Author-Name: Lieven De Moor Author-X-Name-First: Lieven Author-X-Name-Last: De Moor Title: The investment costs of occupational pension funds in the European Union: a cross-country analysis Abstract: This paper evaluates which market characteristics influence pension funds’ investment costs on country level. The study builds on public statistics from EIOPA and includes information from fourteen countries for the period 2004–2015. The results indicate that economies of scale play an essential role in the level of investment costs and that pension funds pay less investment costs in mature markets. Furthermore, we show that inactive participants are an extra burden for pension funds and generate additional costs. In conclusion, this article proofs that there are still significant optimization opportunities to reduce pension funds’ investment costs in the European Union. Journal: The European Journal of Finance Pages: 84-94 Issue: 1 Volume: 26 Year: 2020 Month: 1 X-DOI: 10.1080/1351847X.2019.1656094 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1656094 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:1:p:84-94 Template-Type: ReDIF-Article 1.0 Author-Name: Roger Adkins Author-X-Name-First: Roger Author-X-Name-Last: Adkins Author-Name: Dean Paxson Author-X-Name-First: Dean Author-X-Name-Last: Paxson Title: The effects of an uncertain abandonment value on the investment decision Abstract: Using a three-factor stochastic real option model framework, this paper examines the effects of abandonment on the investment decision. Abandonment is classified according to whether the opportunity arises for an active operating asset post-investment, or for holding the project opportunity pre-investment. Separate analytical models are developed for the alternative forms of abandonment optionality. Numerical sensitivity analysis shows that the presence of a post-investment abandonment opportunity makes the investment opportunity appear to be more attractive because of the abandonment option value, but not by a considerable amount. Also, in contrast to the standard real option finding, an abandonment value volatility increase produces a project value threshold fall owing to the increase in the abandonment option value. Journal: The European Journal of Finance Pages: 1083-1106 Issue: 12 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2015.1113195 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1113195 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:12:p:1083-1106 Template-Type: ReDIF-Article 1.0 Author-Name: Leire Alcaniz Author-X-Name-First: Leire Author-X-Name-Last: Alcaniz Author-Name: Fernando Gomez-Bezares Author-X-Name-First: Fernando Author-X-Name-Last: Gomez-Bezares Author-Name: Jose Vicente Ugarte Author-X-Name-First: Jose Vicente Author-X-Name-Last: Ugarte Title: Efficiency in initial public offerings and intellectual capital disclosure Abstract: The returns of initial public offerings (IPOs) on the first trading day, or the underpricing of IPOs, are a puzzle according to the Efficient Market Hypothesis. Many studies have attempted to relate these returns to different variables. We studied the relationship between underpricing and information about intellectual capital (IC), source of competitive advantage, disclosed in IPO prospectuses as well as other control variables. Our conclusion is contrary to certain literature, as IC information does not have any influence on underpricing but is consistent with the semi-strong efficient market hypothesis defended by Eugene Fama (Nobel in Economics 2013). Journal: The European Journal of Finance Pages: 1129-1149 Issue: 12 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2016.1151806 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151806 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:12:p:1129-1149 Template-Type: ReDIF-Article 1.0 Author-Name: Roger Adkins Author-X-Name-First: Roger Author-X-Name-Last: Adkins Author-Name: Dean Paxson Author-X-Name-First: Dean Author-X-Name-Last: Paxson Title: Sequential investments with stage-specific risks and drifts Abstract: We provide a generalized analytical methodology for evaluating a real sequential investment opportunity, which does not rely on a multivariate distribution function, but which allows for stage-specific risks and drifts. This model may be a useful capital budgeting and valuation tool for exploration and development projects, where risks change over the stages. We construct a stage threshold pattern whereby the final stage threshold exceeds the early stage threshold due to drift differentials between the project values at the various stages, value volatility differences, and correlation differentials, implying a rich menu of parameter values that may be suitable for a variety of projects. Governments seeking to motivate early final stage investments might lower final stage project volatility or specify project value decline over time, unless prospective owners are willing to pay the real option value (ROV) for concessions. In contrast, concession owners, more interested in ROV than thresholds that motivate early investments, may welcome final stage value escalation, or guarantees that reduce the correlation between project value and construction cost. Journal: The European Journal of Finance Pages: 1150-1175 Issue: 12 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2016.1158728 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1158728 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:12:p:1150-1175 Template-Type: ReDIF-Article 1.0 Author-Name: Marcelo Pereira Author-X-Name-First: Marcelo Author-X-Name-Last: Pereira Author-Name: Sofia B. Ramos Author-X-Name-First: Sofia B. Author-X-Name-Last: Ramos Author-Name: José G. Dias Author-X-Name-First: José G. Author-X-Name-Last: Dias Title: The cyclical behaviour of commodities Abstract: Commodities are known to exhibit cyclical behaviour. This paper studies the dynamics of commodities regimes and their implications for portfolio diversification. Using an extension of the regime-switching model, we find that the 12 commodities studied can be clustered into four groups with different regime dynamics, demonstrating that the asset class behaviour of commodities is far from homogeneous. The existence of two regimes is transversal to the assets studied. One regime is marked by high volatility and the other by low volatility. In both regimes, most of the commodities exhibit returns that are not statistically significantly different from those of the stock market regime. The exceptions are oil and natural gas during the low-volatility regime. The analysis of regime synchronization shows that our stock market proxy has low synchronization with commodities, which suggests potential diversification value from adding commodities to an equity portfolio. Based on portfolio optimization, we find that commodities are included in the optimal portfolios in the bull and bear regime of the Standard & Poor’s 500 index. The benefits of diversifying into commodities are particularly strong in the bear stock market regime. Journal: The European Journal of Finance Pages: 1107-1128 Issue: 12 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2016.1205505 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1205505 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:12:p:1107-1128 Template-Type: ReDIF-Article 1.0 Author-Name: Dieter Gramlich Author-X-Name-First: Dieter Author-X-Name-Last: Gramlich Author-Name: Mikhail V. Oet Author-X-Name-First: Mikhail V. Author-X-Name-Last: Oet Author-Name: Stephen J. Ong Author-X-Name-First: Stephen J. Author-X-Name-Last: Ong Title: The contributions to systemic stress of financial interactions between the US and Europe Abstract: Understanding the connectivity of international financial markets is critical to understanding the origination and propagation of financial crises. This study investigates the contribution of US and European exchange rate interactions to overall stress in the US financial system from 1992 to 2013. The impacts of these interactions are assessed using a financial stress index that aggregates measures of national and international stresses. There are three main findings for the sample period. First, we find that European influences on US financial stress have increased. Second, observing several structural breaks with changing correlation and Granger causality patterns, we find that the euro and the British pound have contributed varying levels of stress. Third, we find that stress in US markets tends to spill over into European markets, while the reverse influences are of lesser importance. These findings have important implications for supervisors in international markets. Understanding the amplifying or attenuating feedback effects from international connectivity provides valuable insight into the development of macroprudential policies. Journal: The European Journal of Finance Pages: 1176-1196 Issue: 12 Volume: 23 Year: 2017 Month: 9 X-DOI: 10.1080/1351847X.2016.1276023 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1276023 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:12:p:1176-1196 Template-Type: ReDIF-Article 1.0 Author-Name: Moonsoo Kang Author-X-Name-First: Moonsoo Author-X-Name-Last: Kang Author-Name: Joshua Krausz Author-X-Name-First: Joshua Author-X-Name-Last: Krausz Author-Name: Kiseok Nam Author-X-Name-First: Kiseok Author-X-Name-Last: Nam Title: The intertemporal risk-Return relation, investor behavior, and technical trading profits: evidence from the G-7 countries Abstract: The intertemporal risk-return relation and investor behavior are both important pricing factors that jointly determine the expected market risk premium. Using the price adjustment process as a control variable, we find that the intertemporal risk-return relation is positive conditional on bad market news, but is non-positive conditional on good market news. This implies that good (bad) market news weakens (strengthens) the positive risk-return relation. The pattern in the distortion of the risk-return relation is consistent with short-term mispricing in which investors overvalue (undervalue) the stock market in reaction to good (bad) market news. We also show that ignoring the price adjustment process in the estimation of the risk-return relation leads to model misspecification and induces an upward (downward) bias in estimates of the relative risk aversion parameter conditional on good (bad) news. Our model of the asymmetric risk-return relation along with the price adjustment process is capable of generating the return dynamics that is attributable to technical trading profits. We suggest that the profitability of technical trading rules is not a violation of market efficiency, but a consequence of trading rules exploiting the asymmetric effect of price changes on the risk-return relation, along with the persistence property of price changes. Journal: The European Journal of Finance Pages: 780-798 Issue: 8 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1537980 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1537980 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:8:p:780-798 Template-Type: ReDIF-Article 1.0 Author-Name: Son-Nan Chen Author-X-Name-First: Son-Nan Author-X-Name-Last: Chen Author-Name: Pao-Peng Hsu Author-X-Name-First: Pao-Peng Author-X-Name-Last: Hsu Author-Name: Kuo-Yuan Liang Author-X-Name-First: Kuo-Yuan Author-X-Name-Last: Liang Title: Option pricing and hedging in different cyclical structures: a two-dimensional Markov-modulated model Abstract: The critical role of interest rate risk and associated regime-switching risk in pricing and hedging options is examined using a closed-form valuation model. Equity call options are valued under the proposed 2-dimensional Markov-modulated model in which asset prices and interest rates exhibit Markov regime-switching features. In addition, the relationship between cyclical structures and option prices are analyzed using a time-varying transition probability matrix. The proposed model can enhance the forecast transition probabilities in an out-sample period. The cycle-stylized effect of an economy exhibits different impacts on option prices and hedging strategies in a short- and a long-cycle economy. Our closed-form formula based on more realistic specifications with respect to business-cyclical structures in various financial markets is more appropriate for pricing and hedging options. Journal: The European Journal of Finance Pages: 762-779 Issue: 8 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1538895 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1538895 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:8:p:762-779 Template-Type: ReDIF-Article 1.0 Author-Name: Jurij-Andrei Reichenecker Author-X-Name-First: Jurij-Andrei Author-X-Name-Last: Reichenecker Title: Diversification effect of standard and optimized carry trades Abstract: Standard carry trades, which consist of purchasing high- and selling low-yield currencies, provide an economic diversification effect. However, the diversification effect is not robust, and is not borne out by much statistical evidence. We introduce optimized carry trades, which incorporate risk components such as currency volatility or currency skewness in the selection process. These optimized carry trades provide a robust economic diversification effect observed by a larger Sharpe ratio, a reduced portfolio volatility, a smaller drawdown, or a reduced tail risk with respect to a benchmark portfolio. Moreover, a significant improvement of the mean-efficient frontier is observable, with the result that minimum-variance and tangency portfolio are enhanced. The empirical results reveal that optimized carry trades have a larger diversification effect than standard carry trades and their modifications. Journal: The European Journal of Finance Pages: 745-761 Issue: 8 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1539023 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1539023 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:8:p:745-761 Template-Type: ReDIF-Article 1.0 Author-Name: Sturla Lyngnes Fjesme Author-X-Name-First: Sturla Lyngnes Author-X-Name-Last: Fjesme Title: Laddering IPO shares Abstract: Regulators, investors, and the financial media argue that underwriters tie Initial Public Offering (IPO) allocations to investor post-listing purchases in the issuer shares. Using unique data from the Oslo Stock Exchange (OSE) I investigate if these tie-in agreements are driven by price stabilization (reducing price falls below the offer price) or laddering (inflating prices above the offer price). I find that both stabilizing and laddering investors are rewarded with increased allocations for their service. However, only laddering investors increase allocations in very oversubscribed future issues. Secondary investors also lose from falling returns following laddering. I conclude that underwriters use both price stabilization and laddering across different IPOs. However, the rewards for cooperating investors and the economic consequences for secondary investors are much greater following laddering. Journal: The European Journal of Finance Pages: 799-813 Issue: 8 Volume: 25 Year: 2019 Month: 5 X-DOI: 10.1080/1351847X.2018.1541327 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1541327 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:8:p:799-813 Template-Type: ReDIF-Article 1.0 Author-Name: Jacopo Corbetta Author-X-Name-First: Jacopo Author-X-Name-Last: Corbetta Author-Name: Ilaria Peri Author-X-Name-First: Ilaria Author-X-Name-Last: Peri Title: Backtesting lambda value at risk Abstract: A new risk measure, lambda value at risk ( $ \Lambda {\rm VaR} $ ΛVaR), has been recently proposed as a generalization of value at risk (VaR). $ \Lambda {\rm VaR} $ ΛVaR appears attractive for its potential ability to solve several problems of VaR. This paper provides the first study on the backtesting of $ \Lambda {\rm VaR} $ ΛVaR. We propose three nonparametric tests which exploit different features. Two tests are based on simple results of probability theory. One test is unilateral and is more suitable for small samples of observations. A second test is bilateral and provides an asymptotic result. A third test is based on simulations and allows for a more accurate comparison among $ \Lambda {\rm VaR}s $ ΛVaRs computed with different assumptions on the asset return distribution. Finally, we perform a backtesting exercise that confirms a higher performance of $ \Lambda {\rm VaR} $ ΛVaR in respect to VaR especially when it is estimated with distributions that better capture tail behavior. Journal: The European Journal of Finance Pages: 1075-1087 Issue: 13 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1339105 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1339105 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:13:p:1075-1087 Template-Type: ReDIF-Article 1.0 Author-Name: Manuel Franco Author-X-Name-First: Manuel Author-X-Name-Last: Franco Author-Name: Juana-María Vivo Author-X-Name-First: Juana-María Author-X-Name-Last: Vivo Title: Genetic algorithms for parameter estimation in modelling of index returns Abstract: The main aim for this paper is motivated by the usefulness of genetic algorithms (GAs) for the fitting of distribution models to financial market data. In detail, we use a GA along with the least squares method in order to achieve a more relatively accurate and robust approach for optimizing non-linear objective functions. The combination of these two methods is applied for fitting parametric distributions to a dataset of market index returns, improving the methodology of cumulative returns prediction. The process of extrapolation plays a fundamental role in this area of analysis, being essential to empirically fit a convenient distribution that describes the available data as closely as possible. For comparison and illustrative purpose, we analyse distribution models used in the financial literature for modelling such dataset, and then the practical application is carried out again on a more updated dataset from the same financial index. In addition, a brief simulation study is developed to illustrate the usefulness of the proposal procedure. Journal: The European Journal of Finance Pages: 1088-1099 Issue: 13 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1392332 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1392332 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:13:p:1088-1099 Template-Type: ReDIF-Article 1.0 Author-Name: Jennifer Alonso-García Author-X-Name-First: Jennifer Author-X-Name-Last: Alonso-García Author-Name: María del Carmen Boado-Penas Author-X-Name-First: María del Carmen Author-X-Name-Last: Boado-Penas Author-Name: Pierre Devolder Author-X-Name-First: Pierre Author-X-Name-Last: Devolder Title: Adequacy, fairness and sustainability of pay-as-you-go-pension-systems: defined benefit versus defined contribution Abstract: There are three main challenges facing pay-as-you-go public pension systems. First, pension systems need to provide an adequate income for pensioners in the retirement phase. Second, participants wish a fair level of benefits in relation to the contributions paid. Last but not least, the pension system needs to be financially sustainable in the long run. In this paper, we jointly analyse the adequacy, fairness and sustainability of both defined benefit and defined contribution schemes. Finally, risk sharing mechanisms, that involve changes in the key variables of the system, are designed to restore the financial sustainability while we study their consequences on the adequacy and fairness of the system. Journal: The European Journal of Finance Pages: 1100-1122 Issue: 13 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1399429 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1399429 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:13:p:1100-1122 Template-Type: ReDIF-Article 1.0 Author-Name: Matthias Pelster Author-X-Name-First: Matthias Author-X-Name-Last: Pelster Author-Name: Felix Irresberger Author-X-Name-First: Felix Author-X-Name-Last: Irresberger Author-Name: Gregor N.F. Weiß Author-X-Name-First: Gregor N.F. Author-X-Name-Last: Weiß Title: Bank stock performance and bank regulation around the globe Abstract: We analyze the effect of bank capital, regulation, and supervision on the annual stock performance of global banks during the period of 1999–2012. We study a large comprehensive panel of international banks and find that higher Tier 1 capital decreases a bank's stock performance over the whole sample period. However, during turbulent times stocks of more highly capitalized banks perform significantly better. Additionally, we find strong evidence that banks that are more likely to receive government bailout during financial distress realize smaller stock performance. In contrast, we find no convincing evidence that banks that generate higher non-interest income have a higher performance. Journal: The European Journal of Finance Pages: 77-113 Issue: 2 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2016.1226189 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1226189 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:2:p:77-113 Template-Type: ReDIF-Article 1.0 Author-Name: Ali Ataullah Author-X-Name-First: Ali Author-X-Name-Last: Ataullah Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Author-Name: Bin Xu Author-X-Name-First: Bin Author-X-Name-Last: Xu Title: Time-varying managerial overconfidence and corporate debt maturity structure Abstract: We examine the impact of managerial overconfidence on corporate debt maturity. We build upon the argument that managerial overconfidence is likely to mitigate the underinvestment problem, which is often the major concern for long-term debt investors. Within this context, we hypothesise that managerial overconfidence increases debt maturity. Our empirical evidence, based on time-varying measures of overconfidence derived from computational linguistic analysis and directors’ dealings in their own companies’ shares, supports this hypothesis. Specifically, we find that the changes in both first person singular pronouns and optimistic tone are positively related to the change in debt maturity. Moreover, we find that the insider trading-based overconfidence of CEO, who is most likely to influence investment decision and thus the underinvestment problem, has a stronger impact on debt maturity than the overconfidence of other directors (e.g. CFO). Overall, our study provides initial evidence for a positive overconfidence-debt maturity relation via overconfidence mitigating the agency cost of long-term debt. Journal: The European Journal of Finance Pages: 157-181 Issue: 2 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2016.1274266 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1274266 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:2:p:157-181 Template-Type: ReDIF-Article 1.0 Author-Name: Guglielmo Maria Caporale Author-X-Name-First: Guglielmo Maria Author-X-Name-Last: Caporale Author-Name: Fabio Spagnolo Author-X-Name-First: Fabio Author-X-Name-Last: Spagnolo Author-Name: Nicola Spagnolo Author-X-Name-First: Nicola Author-X-Name-Last: Spagnolo Title: Macro news and bond yield spreads in the euro area Abstract: This paper analyses the effects of newspaper coverage of macro news on the spread between the yield on the 10-year German Bund and on sovereign bonds in eight countries belonging to the euro area (Belgium, France, Greece, Ireland, Italy, the Netherlands, Portugal and Spain) using daily data for the period 1999–2014. The econometric analysis is based on the estimation of a VAR-GARCH model. The results can be summarized as follows. Negative news have significant positive effects on yield spreads in all GIIPS (Greece, Ireland, Italy, Portugal and Spain) countries but Italy before September 2008; markets respond more to negative news, and their reaction has increased during the recent financial crisis. News volatility has a significant impact on yield spread volatility, the effects being more pronounced in the case of negative news and bigger in the most recent crisis period, especially in the GIIPS countries. Further, the conditional correlations between yield spreads and negative news increase in absolute value during the financial crisis (especially in the GIIPS countries), indicating a higher sensitivity of the former to the latter. Journal: The European Journal of Finance Pages: 114-134 Issue: 2 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2017.1285797 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1285797 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:2:p:114-134 Template-Type: ReDIF-Article 1.0 Author-Name: Hidemichi Fujii Author-X-Name-First: Hidemichi Author-X-Name-Last: Fujii Author-Name: Shunsuke Managi Author-X-Name-First: Shunsuke Author-X-Name-Last: Managi Author-Name: Roman Matousek Author-X-Name-First: Roman Author-X-Name-Last: Matousek Author-Name: Aarti Rughoo Author-X-Name-First: Aarti Author-X-Name-Last: Rughoo Title: Bank efficiency, productivity, and convergence in EU countries: a weighted Russell directional distance model Abstract: The objective of this study is three-fold. First we estimate and analyse bank efficiency and productivity changes in the EU28 countries with the application of a novel approach, a weighted Russell directional distance model. Second, we take a disaggregated approach and analyse the contribution of the individual bank inputs on bank efficiency and productivity growth. Third, we test for convergence in EU28 bank productivity as well as in the inefficiency of individual bank inputs. We find that bank efficiency has been undermined by the financial crisis in banks notably from the EU15 countries. We also argue that bank efficiency and productivity in EU countries vary across the banking sector with banks from the ‘old’ EU showing higher efficiency levels. Nonetheless, a noticeable catching up process is observed for banks from the ‘new’ EU countries. Consequently, we do not find evidence of group convergence for bank productivity but there is evidence of convergence in bank efficiency change and technical change among the EU28 countries throughout the period 2005–2014. The driving force seems to be convergent technical change from the old EU member states’ banks. On the other hand, almost no convergence is detected for the banks’ individual inputs while the transition paths show heightened diversity during the crisis years. Journal: The European Journal of Finance Pages: 135-156 Issue: 2 Volume: 24 Year: 2018 Month: 1 X-DOI: 10.1080/1351847X.2017.1303527 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1303527 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:2:p:135-156 Template-Type: ReDIF-Article 1.0 Author-Name: Ozlem Arikan Author-X-Name-First: Ozlem Author-X-Name-Last: Arikan Author-Name: Arie E. Gozluklu Author-X-Name-First: Arie E. Author-X-Name-Last: Gozluklu Author-Name: Gi H. Kim Author-X-Name-First: Gi H. Author-X-Name-Last: Kim Author-Name: Hiroaki Sakaguchi Author-X-Name-First: Hiroaki Author-X-Name-Last: Sakaguchi Title: Primacy in stock market participation: the effect of initial returns on market re-entry decisions Abstract: We examine whether initial returns influence investors’ decisions to return to the stock market following withdrawal. Using a survival analysis technique to estimate Finnish retail investors’ likelihood of stock market re-entry reveals that investors who experience lower initial returns are less likely to return, even after controlling for returns in the last month and average monthly returns for the duration of investing. This primacy effect is robust to accounting for endogeneity in investors’ exit decisions, and other behavioural biases such as recency and saliency of investment experience. Individual investors appear to be subject to primacy bias and tend to put a significant weight on initial experiences in re-entry decisions. Journal: The European Journal of Finance Pages: 883-909 Issue: 10 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2018.1459764 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1459764 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:10:p:883-909 Template-Type: ReDIF-Article 1.0 Author-Name: Marco Realdon Author-X-Name-First: Marco Author-X-Name-Last: Realdon Title: Discounting earnings with stochastic discount rates Abstract: This paper presents new equity valuation formulae in closed form that extend the abnormal earnings growth (AEG) valuation of Ohlson [2005. “On Accounting-Based Valuation Formulae.” Review of Accounting Studies 10: 323–347] to the cases of time-varying or stochastic cost of capital as in Ang and Liu [2004. “How to Discount Cash Flows with Time-Varying Expected Returns.” Journal of Finance 59 (6): 2745–2783] or to cases of stochastic interest rates as in Ang and Liu [2001. “A General Affine Earnings Valuation Model.” Review of Accounting Studies 6: 397–425]. Interest rates are modelled by quadratic term structure models, which are not hindered by restrictions to factors correlation or by other shortcomings of affine term structure models in discounting long-term earnings. This is crucial since valuation can be very sensitive to the correlation between the factors driving earnings and interest rates. Positive correlation reduces price-earnings ratios according to US data. Valuation is also sensitive to the ‘volatility’ of abnormal earnings growth. The residual earnings risk-neutral valuation of Ang and Liu (2001) is adapted to quadratic term structure models. Journal: The European Journal of Finance Pages: 910-936 Issue: 10 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2018.1548368 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1548368 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:10:p:910-936 Template-Type: ReDIF-Article 1.0 Author-Name: Fabian Hollstein Author-X-Name-First: Fabian Author-X-Name-Last: Hollstein Author-Name: Marcel Prokopczuk Author-X-Name-First: Marcel Author-X-Name-Last: Prokopczuk Author-Name: Björn Tharann Author-X-Name-First: Björn Author-X-Name-Last: Tharann Author-Name: Chardin Wese Simen Author-X-Name-First: Chardin Author-X-Name-Last: Wese Simen Title: Predicting the equity market with option-implied variables Abstract: We comprehensively analyze the predictive power of several option-implied variables for monthly S&P 500 excess returns and realized variance. The correlation risk premium (CRP) and the variance risk premium (VRP) emerge as strong predictors of both excess returns and realized variance. This is true both in- and out-of-sample. Our results also reveal that statistical evidence of predictability does not necessarily lead to economic gains. However, a timing strategy based on the CRP leads to utility gains of more than 5.03% per annum. Forecast combinations provide stable forecasts for both excess returns and realized variance, and add economic value. Journal: The European Journal of Finance Pages: 937-965 Issue: 10 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2018.1556176 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1556176 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:10:p:937-965 Template-Type: ReDIF-Article 1.0 Author-Name: Christopher Coyle Author-X-Name-First: Christopher Author-X-Name-Last: Coyle Author-Name: Fabian Gogolin Author-X-Name-First: Fabian Author-X-Name-Last: Gogolin Author-Name: Fearghal Kearney Author-X-Name-First: Fearghal Author-X-Name-Last: Kearney Title: Modelling gold futures: should the level of speculation inform our choice of variables? Abstract: Prior literature provides conflicting evidence about the impact of speculation on gold futures returns, volatility, and the relationship between market fundamentals and prices. In this paper, we exploit trade volume information to determine the most appropriate family of factors to adopt when modelling gold futures. Using the Disaggregated Commitment of Traders report, we find that extreme levels of speculation are informative in that they signify a shift in the relative modelling accuracy of macroeconomic and latent factors. A simple composite prediction framework, incorporating the changing level of speculation, empirically demonstrates the uncovered phenomenon and offers improved predictive accuracy for gold futures prices. Furthermore, our findings are shown to be robust to alternative latent and macroeconomic model specifications. Journal: The European Journal of Finance Pages: 966-977 Issue: 10 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2018.1559212 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1559212 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:10:p:966-977 Template-Type: ReDIF-Article 1.0 Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Edward Lee Author-X-Name-First: Edward Author-X-Name-Last: Lee Title: Chinese capital markets: institutional reforms and growing global links Journal: The European Journal of Finance Pages: 573-580 Issue: 7-9 Volume: 23 Year: 2017 Month: 7 X-DOI: 10.1080/1351847X.2017.1345051 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1345051 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:7-9:p:573-580 Template-Type: ReDIF-Article 1.0 Author-Name: Inés Pérez-Soba Author-X-Name-First: Inés Author-X-Name-Last: Pérez-Soba Author-Name: Elena Márquez-de-la-Cruz Author-X-Name-First: Elena Author-X-Name-Last: Márquez-de-la-Cruz Author-Name: Ana R. Martínez-Cañete Author-X-Name-First: Ana R. Author-X-Name-Last: Martínez-Cañete Title: Further empirical evidence on block transactions below the MBR: the Spanish market Abstract: There is a relatively unknown market for partial control or corporate influence in Spanish listed firms, where the control transaction size is below the legal threshold that triggers a mandatory tender offer, as this kind of deal looks for exercising some degree of control, but not a full control. The goal of this paper is to go further in its empirical analysis by exploring its distinguishing features, using as the criterion to define its transactions obtaining a seat in the board of directors. We find that these deals are mainly located in the segment of the market of large trades where the rules for private negotiations are easier to implement; the size of the block is relatively large and it is negotiated as a whole block. Besides, the most common buyer has no previous stake in the firm. We find no evidence that the buyers pay, in median, for a seat on the board of directors, but the variability of the premiums for those blocks is higher and shows that buyers that had no control position in the target firm pay more for being among largest shareholders (partial control) and less for not being among them (influence). Journal: The European Journal of Finance Pages: 1224-1251 Issue: 14 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1359197 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1359197 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:14:p:1224-1251 Template-Type: ReDIF-Article 1.0 Author-Name: Mawuli Segnon Author-X-Name-First: Mawuli Author-X-Name-Last: Segnon Author-Name: Mark Trede Author-X-Name-First: Mark Author-X-Name-Last: Trede Title: Forecasting market risk of portfolios: copula-Markov switching multifractal approach Abstract: This paper proposes a new methodology for modeling and forecasting market risks of portfolios. It is based on a combination of copula functions and Markov switching multifractal (MSM) processes. We assess the performance of the copula-MSM model by computing the value at risk of a portfolio composed of the NASDAQ composite index and the S&P 500. Using the likelihood ratio (LR) test by Christoffersen [1998. “Evaluating Interval Forecasts.” International Economic Review 39: 841–862], the GMM duration-based test by Candelon et al. [2011. “Backtesting Value at Risk: A GMM Duration-based Test.” Journal of Financial Econometrics 9: 314–343] and the superior predictive ability (SPA) test by Hansen [2005. “A Test for Superior Predictive Ability.” Journal of Business and Economic Statistics 23, 365–380] we evaluate the predictive ability of the copula-MSM model and compare it to other common approaches such as historical simulation, variance–covariance, RiskMetrics, copula-GARCH and constant conditional correlation GARCH (CCC-GARCH) models. We find that the copula-MSM model is more robust, provides the best fit and outperforms the other models in terms of forecasting accuracy and VaR prediction. Journal: The European Journal of Finance Pages: 1123-1143 Issue: 14 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1400453 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1400453 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:14:p:1123-1143 Template-Type: ReDIF-Article 1.0 Author-Name: Roland Gemayel Author-X-Name-First: Roland Author-X-Name-Last: Gemayel Author-Name: Alex Preda Author-X-Name-First: Alex Author-X-Name-Last: Preda Title: Does a scopic regime produce conformism? Herding behavior among trade leaders on social trading platforms Abstract: Social trading platforms (STPs) are transparent online markets governed by a scopic regime, where order flow is publicly disclosed and participants are subject to constant reciprocal scrutiny. Participants on STPs can be categorized into trade leaders and copiers, where the former execute unique trades and manage the funds allocated to them by the latter in return for compensation. Given limited individual capacity and the competition to attract copiers, we investigate whether the scopic regime produces excess and perpetual conformism among trade leaders. Using data from a popular STP, and from an anonymous traditional foreign exchange broker, we show that the scopic regime produces excess levels of herding. Under the scopic environment, we find that herding is high when market information is scarce, which is evidence of herding due to informational cascades. We find herding to be relatively low among risk-seeking trade leaders, which may be a sign of overconfidence. Herding is high for larger trades, suggesting that traders herd to avoid the disappointment associated with underperforming on large positions. Finally, we show that herding in the scopic environment persists at much higher levels compared to traditional environments. Our findings indicate that exposure to a scopic information-rich environment augments the limitations and personal biases of individual traders, thus producing excess and perpetual herding. Journal: The European Journal of Finance Pages: 1144-1175 Issue: 14 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1405832 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1405832 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:14:p:1144-1175 Template-Type: ReDIF-Article 1.0 Author-Name: Georgios Chortareas Author-X-Name-First: Georgios Author-X-Name-Last: Chortareas Author-Name: George Kapetanios Author-X-Name-First: George Author-X-Name-Last: Kapetanios Author-Name: Georgios Magkonis Author-X-Name-First: Georgios Author-X-Name-Last: Magkonis Title: Resuscitating real interest rate parity: new evidence from panels Abstract: This paper considers the real interest rate parity (RIRP) in OECD countries applying a sequential panel selection (SPS) method on alternative panel unit-root tests. Our approach exploits the enhanced power of panels to uncover evidence of stationarity, but also identifies the exact countries for which the RIRP holds in a panel. Moreover, we construct real interest rate measures using alternative approaches, including a Markov regime-switching procedure, which is consistent with the forward-looking nature of inflation expectations formation. Considering US as the benchmark economy, we produce strong evidence of stationarity in real interest rate differentials, which resuscitates RIRP, especially given the inconclusive results in the related literature. Our results are robust to different panel unit-root tests, measures of inflation expectations, and interest rate maturities. The RIRP appears quite resilient in the face of the global financial crisis and the low real interest rate environment after the great recession. The SPS allows to calculate half-lives, which avoid the pitfalls of over/underestimating the speed of adjustment and are lower as compared to the typical estimates in the literature. Journal: The European Journal of Finance Pages: 1176-1189 Issue: 14 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1406383 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1406383 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:14:p:1176-1189 Template-Type: ReDIF-Article 1.0 Author-Name: Cheng Yan Author-X-Name-First: Cheng Author-X-Name-Last: Yan Title: Hot money in disaggregated capital flows Abstract: We explore the possible existence and behavior of hot money in six categories of disaggregated bilateral capital flows (equity inflows, equity outflows, bond inflows, bond outflows, banking credit inflows, and banking credit outflows) for 12 emerging markets vis-à-vis the US from 1995 to 2012 and provides several new findings. First, we identify the existence of hot money in all six categories above and conclude that both gross inflows and gross outflows can be the sources of hot money. Second, hot money in equity inflows (outflows) engages in positive (negative) feedback trading regarding local stock market returns. Third, some categories of hot money have a temporary influence on local stock market returns while the others have a permanent influence, supporting the explanations of both price pressures and information advantage. Finally, local stock market returns in half of our sample countries, which have tightened capital controls during the late 2000s global financial crisis (GFC), are more affected by hot money than in the other half. Our findings confirm several popular conjectures of hot money, and endorse the use of capital controls to limit financial vulnerability in the run-up to and during the GFC. Journal: The European Journal of Finance Pages: 1190-1223 Issue: 14 Volume: 24 Year: 2018 Month: 9 X-DOI: 10.1080/1351847X.2017.1411821 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1411821 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:14:p:1190-1223 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Journal: The European Journal of Finance Pages: 459-459 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2019.1571723 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1571723 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:459-459 Template-Type: ReDIF-Article 1.0 Author-Name: Doulgas Cumming Author-X-Name-First: Doulgas Author-X-Name-Last: Cumming Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Zhenyu Wu Author-X-Name-First: Zhenyu Author-X-Name-Last: Wu Title: Chinese capital markets: challenges to the China model Journal: The European Journal of Finance Pages: 460-464 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2019.1571725 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1571725 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:460-464 Template-Type: ReDIF-Article 1.0 Author-Name: Nancy Huyghebaert Author-X-Name-First: Nancy Author-X-Name-Last: Huyghebaert Author-Name: Lihong Wang Author-X-Name-First: Lihong Author-X-Name-Last: Wang Title: Value creation and value distribution in Chinese listed firms: the role of ownership structure, board characteristics, and control Abstract: We investigate how ownership structure and board characteristics affect the value creation and value distribution in Chinese listed firms. Our results reveal that value creation – captured by firm profitability, labor productivity, and asset utilization efficiency – is superior when the firm’s largest ultimate shareholder controls a larger fraction of voting rights. Ownership by managers and by countervailing shareholders both improve value creation, yet only in privately controlled firms. In state-controlled firms, value creation is better when independent directors occupy a larger fraction of board seats. As to the proportional distribution of the generated value, operationalized by related-party transactions (RPT) and by cash dividends, we note that RPT are more extensive when the government controls a larger fraction of voting rights. In state-controlled firms, the wedge between the government’s voting rights and cash-flow rights is also positively associated with RPT, while negatively associated with the firm’s disbursement of cash dividends. Ownership by managers helps curb RPT in state-controlled firms, while it stimulates cash dividends in privately controlled firms. Regardless of who controls the listed firm, ownership by countervailing shareholders contributes to the proportional distribution of the firm’s generated value. Finally, independent directors have a positive influence on the distribution of cash dividends in Chinese listed firms. Overall, companies that generate more value trade at a larger market-to-book ratio. The effects of our measures of value distribution on a firm’s stock market valuation are generally insignificant, except for the negative impact of RPT in privately controlled firms. Journal: The European Journal of Finance Pages: 465-488 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2017.1386704 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1386704 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:465-488 Template-Type: ReDIF-Article 1.0 Author-Name: Sai Ding Author-X-Name-First: Sai Author-X-Name-Last: Ding Author-Name: John Knight Author-X-Name-First: John Author-X-Name-Last: Knight Author-Name: Xiao Zhang Author-X-Name-First: Xiao Author-X-Name-Last: Zhang Title: Does China overinvest? Evidence from a panel of Chinese firms Abstract: This paper uses a dataset of more than 100,000 firms over the period of 2000–2007 to assess whether and why Chinese firms overinvest. We find that corporate investment is more efficient in the non-state sector. Within all ownership categories, we uncover evidence indicating a degree of overinvestment among firms that invest more than their industry median or more than their predicted optimal investment. The free cash flow hypothesis provides a good explanation for China’s overinvestment in the non-state sectors, whereas in the state sector, overinvestment is attributable to the poor screening and monitoring of enterprises by banks. Journal: The European Journal of Finance Pages: 489-507 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2016.1211546 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1211546 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:489-507 Template-Type: ReDIF-Article 1.0 Author-Name: Gady Jacoby Author-X-Name-First: Gady Author-X-Name-Last: Jacoby Author-Name: Jialong Li Author-X-Name-First: Jialong Author-X-Name-Last: Li Author-Name: Mingzhi Liu Author-X-Name-First: Mingzhi Author-X-Name-Last: Liu Title: Financial distress, political affiliation and earnings management: the case of politically affiliated private firms Abstract: Using a sample of politically affiliated private firms in China, we explore the relation between corporate financial distress and earnings management. We further examine the joint moderating effects of political affiliation and regional development on this relation. The findings suggest that financially distressed firms engage more in reporting small positive earnings relative to financially healthy firms. In addition, political affiliation weakens the association between financial distress and small positive earnings management. A three-way interaction analysis indicates that the moderating effect of political affiliation is influenced by regional development. Journal: The European Journal of Finance Pages: 508-523 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2016.1233126 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1233126 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:508-523 Template-Type: ReDIF-Article 1.0 Author-Name: Hisham Farag Author-X-Name-First: Hisham Author-X-Name-Last: Farag Author-Name: Chris Mallin Author-X-Name-First: Chris Author-X-Name-Last: Mallin Title: Monitoring corporate boards: evidence from China Abstract: China’s listed companies have two-tier boards comprising of a supervisory board and a board of directors. The supervisory board has the responsibility to oversee and monitor the board of directors. Similarly, the role of the independent non-executive directors (INEDs) is to advise and monitor directors. In this paper, we investigate the main board structure hypotheses namely the scope of operations, monitoring and negotiation hypotheses for a sample of Chinese Initial Public Offerings floated on both the Shanghai and Shenzhen stock exchanges. Our results provide evidence to support the three hypotheses. Interestingly, we find that the larger the size of the board of directors, the larger the supervisory board size. Moreover, we find that the higher the proportion of INEDs, the smaller the supervisory board size and this implies that INEDs are perhaps a substituting mechanism for the supervisors’ monitoring role. Finally, we argue that as the Chinese governance structure combines both the German and the Anglo-Saxon models, this creates a conflict between the two boards with respect to the monitoring role. Our results, therefore call for a comprehensive reform in the Chinese governance mechanism. Journal: The European Journal of Finance Pages: 524-549 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2017.1369138 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1369138 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:524-549 Template-Type: ReDIF-Article 1.0 Author-Name: Lars Helge Haß Author-X-Name-First: Lars Helge Author-X-Name-Last: Haß Author-Name: Skrålan Vergauwe Author-X-Name-First: Skrålan Author-X-Name-Last: Vergauwe Author-Name: Zhifang Zhang Author-X-Name-First: Zhifang Author-X-Name-Last: Zhang Title: State-ownership and bank loan contracting: evidence from corporate fraud Abstract: This paper explores the effect of borrower and lender state-ownership on the consequences of corporate fraud in the debt market. Fraud revelations can increase a firm’s information and credit risk, and are therefore expected to significantly affect future bank loan conditions. The Chinese economy provides a unique setting from which to study the influence of state-ownership on debt contracting because it is dominated by state-owned banks (SBs) and firms. Using a sample of bank loans and enforcement actions announced between 2001 and 2012, we find that, after fraud announcements, the cost of private debt increases significantly, but not for loans issued by SBs to state-owned enterprises (SOEs). Moreover, we find evidence that SBs grant, and SOEs receive, lower interest rates. Additional tests show that SOEs that received a more favorable interest rate after the announcement of fraud from a SB perform worse than other firms. These results indicate that despite the bank reforms SBs continue to favor SOEs and this could lead to sub-optimal lending. Journal: The European Journal of Finance Pages: 550-567 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2017.1328454 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1328454 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:550-567 Template-Type: ReDIF-Article 1.0 Author-Name: Bo Liu Author-X-Name-First: Bo Author-X-Name-Last: Liu Author-Name: Jerry Cao Author-X-Name-First: Jerry Author-X-Name-Last: Cao Author-Name: Sofia Johan Author-X-Name-First: Sofia Author-X-Name-Last: Johan Author-Name: Tiecheng Leng Author-X-Name-First: Tiecheng Author-X-Name-Last: Leng Title: The real effect of liquidity provision on entrepreneurial financing: evidence from a natural experiment in China Abstract: This paper utilizes a natural experiment – the establishment of the Shenzhen Small and Medium Enterprises Board (SME Board) – as an exogenous shock of liquidity provision to venture capital (VC) investment in China. The establishing of the SME Board has enabled the disentangling of the supply side from the demand side of entrepreneurial financing. The results show that the establishment of the SME Board had a strong positive impact on VC investment activities. The impact, however, occurs mainly through the supply side channel, in the form of an influx of first-time VC funds and new government-sponsored VC funds. Such supply shocks, created by inexperienced – but politically connected – VCs, tend to overheat the VC market in the short-run. The results are robust against various regression specifications and endogeneity concerns. This research highlights the importance of liquidity provision, institutional factors and government policies on the development of entrepreneurial financing. Journal: The European Journal of Finance Pages: 568-593 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2017.1307771 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1307771 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:568-593 Template-Type: ReDIF-Article 1.0 Author-Name: The Editors Title: Corrigendum Journal: The European Journal of Finance Pages: 594-594 Issue: 6 Volume: 25 Year: 2019 Month: 4 X-DOI: 10.1080/1351847X.2017.1379929 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1379929 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:594-594 Template-Type: ReDIF-Article 1.0 Author-Name: Hugh M.J. Colaco Author-X-Name-First: Hugh M.J. Author-X-Name-Last: Colaco Author-Name: Amedeo De Cesari Author-X-Name-First: Amedeo Author-X-Name-Last: De Cesari Author-Name: Shantaram P. Hegde Author-X-Name-First: Shantaram P. Author-X-Name-Last: Hegde Title: The waiting period of initial public offerings Abstract: The length of time it takes an IPO firm to go public (called ‘waiting period’) reflects multiple layers of scrutiny from underwriters, auditors, venture capitalists, institutional investors, and regulators. Accordingly, we show that the waiting period is a good barometer of ex ante uncertainty about future cash flows and that it has predictive power after the firm goes public. We find that firms marked by short waiting periods experience lower underpricing and less uncertainty and superior stock/operating performance in the aftermarket. We also report that smaller firms are taking longer to go public after SOX Act, thus providing justification for the 2012 JOBS Act. Journal: The European Journal of Finance Pages: 363-390 Issue: 5 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2017.1307770 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1307770 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:5:p:363-390 Template-Type: ReDIF-Article 1.0 Author-Name: Roman Horváth Author-X-Name-First: Roman Author-X-Name-Last: Horváth Author-Name: Štefan Lyócsa Author-X-Name-First: Štefan Author-X-Name-Last: Lyócsa Author-Name: Eduard Baumöhl Author-X-Name-First: Eduard Author-X-Name-Last: Baumöhl Title: Stock market contagion in Central and Eastern Europe: unexpected volatility and extreme co-exceedance Abstract: We examine whether there is contagion from the US stock market to six Central and Eastern European stock markets. We use a novel measure of contagion that examines whether volatility shocks in the US stock market coupled with negative returns are followed by higher co-exceedance between US and emerging stock markets. Using our approach and controlling for a set of market-related variables, we show that during the period from 1998 to 2014, financial contagion occurred, that is, unexpected negative events in the US market are followed by higher co-exceedance between US and Central and Eastern European stock markets. Even though contagion is stronger during the financial crisis, it also occurs in tranquil times. Journal: The European Journal of Finance Pages: 391-412 Issue: 5 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2017.1307773 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1307773 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:5:p:391-412 Template-Type: ReDIF-Article 1.0 Author-Name: Giovanni Barone-Adesi Author-X-Name-First: Giovanni Author-X-Name-Last: Barone-Adesi Author-Name: Kostas Giannopoulos Author-X-Name-First: Kostas Author-X-Name-Last: Giannopoulos Author-Name: Les Vosper Author-X-Name-First: Les Author-X-Name-Last: Vosper Title: Estimating the joint tail risk under the filtered historical simulation: An application to the CCP’s default and waterfall fund Abstract: The estimation of joint tail risk is necessary to evaluate the size of portfolio margins and default funds of central counterparties. The ability of filtered historical simulation to satisfy new regulatory requirements in this area is examined at the very high confidence levels, necessary to ensure market integrity over time. Journal: The European Journal of Finance Pages: 413-425 Issue: 5 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2017.1308876 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1308876 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:5:p:413-425 Template-Type: ReDIF-Article 1.0 Author-Name: Paul Docherty Author-X-Name-First: Paul Author-X-Name-Last: Docherty Author-Name: Yizhe Dong Author-X-Name-First: Yizhe Author-X-Name-Last: Dong Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: The Feller diffusion, filter rules and abnormal stock returns Abstract: We determine the conditional expected logarithmic (i.e. continuously compounded) return on a stock whose price evolves in terms of the Feller diffusion and then use it to demonstrate how one must know the exact probability density that describes a stock’s return before one can determine the correct way to calculate the abnormal returns that accrue on the stock. We show in particular that misspecification of the stochastic process which generates a stock’s price will lead to systematic biases in the abnormal returns calculated on the stock. We examine the implications this has for the proper conduct of empirical work and for the evaluation of stock and portfolio performance. Journal: The European Journal of Finance Pages: 426-438 Issue: 5 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2017.1309328 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1309328 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:5:p:426-438 Template-Type: ReDIF-Article 1.0 Author-Name: Jing Chen Author-X-Name-First: Jing Author-X-Name-Last: Chen Author-Name: Diandian Ma Author-X-Name-First: Diandian Author-X-Name-Last: Ma Author-Name: Xiaojong Song Author-X-Name-First: Xiaojong Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: Negative real interest rates Abstract: Standard textbook general equilibrium term structure models such as that developed by Cox, Ingersoll, and Ross [1985b. “A Theory of the Term Structure of Interest Rates.” Econometrica 53 (2): 385–407], do not accommodate negative real interest rates. Given this, the Cox, Ingersoll, and Ross [1985b. “A Theory of the Term Structure of Interest Rates.” Econometrica 53 (2): 385–407] ‘technological uncertainty variable’ is formulated in terms of the Pearson Type IV probability density. The Pearson Type IV encompasses mean-reverting sample paths, time-varying volatility and also allows for negative real interest rates. The Fokker–Planck (i.e. the Chapman–Kolmogorov) equation is then used to determine the conditional moments of the instantaneous real rate of interest. These enable one to determine the mean and variance of the accumulated (i.e. integrated) real rate of interest on a bank (or loan) account when interest accumulates at the instantaneous real rate of interest defined by the Pearson Type IV probability density. A pricing formula for pure discount bonds is also developed. Our empirical analysis of short-dated Treasury bills shows that real interest rates in the UK and the USA are strongly compatible with a general equilibrium term structure model based on the Pearson Type IV probability density. Journal: The European Journal of Finance Pages: 1447-1467 Issue: 15 Volume: 23 Year: 2017 Month: 12 X-DOI: 10.1080/1351847X.2016.1158729 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1158729 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:15:p:1447-1467 Template-Type: ReDIF-Article 1.0 Author-Name: Marco Realdon Author-X-Name-First: Marco Author-X-Name-Last: Realdon Title: Gaussian models for Euro high grade government yields Abstract: This paper tests affine, quadratic and Black-type Gaussian models on Euro area triple A Government bond yields for maturities up to 30 years. Quadratic Gaussian models beat affine Gaussian models both in-sample and out-of-sample. A Black-type model best fits the shortest maturities and the extremely low yields since 2013, but worst fits the longest maturities. Even for quadratic models we can infer the latent factors from some yields observed without errors, which makes quasi-maximum likelihood (QML) estimation feasible. New specifications of quadratic models fit the longest maturities better than does the ‘classic’ specification of Ahn et al. [2002. ‘Quadratic Term Structure Models: Theory and Evidence.’ The Review of Financial Studies 15 (1): 243–288], but the opposite is true for the shortest maturities. These new specifications are more suitable to QML estimation. Overall quadratic models seem preferable to affine Gaussian models, because of superior empirical performance, and to Black-type models, because of superior tractability. This paper also proposes the vertical method of lines (MOL) to solve numerically partial differential equations (PDEs) for pricing bonds under multiple non-independent stochastic factors. ‘Splitting’ the PDE drastically reduces computations. Vertical MOL can be considerably faster and more accurate than finite difference methods. Journal: The European Journal of Finance Pages: 1468-1511 Issue: 15 Volume: 23 Year: 2017 Month: 12 X-DOI: 10.1080/1351847X.2016.1173082 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1173082 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:15:p:1468-1511 Template-Type: ReDIF-Article 1.0 Author-Name: Barbara Casu Author-X-Name-First: Barbara Author-X-Name-Last: Casu Author-Name: Bimei Deng Author-X-Name-First: Bimei Author-X-Name-Last: Deng Author-Name: Alessandra Ferrari Author-X-Name-First: Alessandra Author-X-Name-Last: Ferrari Title: Post-crisis regulatory reforms and bank performance: lessons from Asia Abstract: Based on a large dataset from eight Asian economies, we test the impact of post-crisis regulatory reforms on the performance of depository institutions in countries at different levels of financial development. We allow for technological heterogeneity and estimate a set of country-level stochastic cost frontiers followed by a deterministic bootstrapped meta-frontier to evaluate cost efficiency and cost technology. Our results support the view that liberalization policies have a positive impact on bank performance, while the reverse is true for prudential regulation policies. The removal of activities restrictions, bank privatization and foreign bank entry has a positive and significant impact on technological progress and cost efficiency. In contrast, prudential policies, which aim to protect the banking sector from excessive risk-taking, tend to adversely affect banks’ cost efficiency but not cost technology. Journal: The European Journal of Finance Pages: 1544-1571 Issue: 15 Volume: 23 Year: 2017 Month: 12 X-DOI: 10.1080/1351847X.2016.1177566 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1177566 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:15:p:1544-1571 Template-Type: ReDIF-Article 1.0 Author-Name: David Aristei Author-X-Name-First: David Author-X-Name-Last: Aristei Author-Name: Manuela Gallo Author-X-Name-First: Manuela Author-X-Name-Last: Gallo Title: The determinants of firm–bank relationships in Italy: bank ownership type, diversification and multiple banking relationships Abstract: This paper investigates the main features of the relationships between banks and non-financial firms in Italy. Based on detailed firm-level data, we analyse the role of firm-level characteristics, decision-making factors and local credit market indicators in shaping various aspects of corporate banking choices. Empirical results show that young and small firms have a higher probability of relationships with local banks, confirming the advantage of local credit institutions in dealing with informationally opaque firms. Large and internationally active firms tend to establish relationships with national and foreign banks, as they are able to provide more complex banking services that are crucial to access foreign markets. Moreover, firms that are more dependent on external financing are more likely to use multiple and differentiated banking relationships, as a way to diversify external financing sources and alleviate credit constraints. Journal: The European Journal of Finance Pages: 1512-1543 Issue: 15 Volume: 23 Year: 2017 Month: 12 X-DOI: 10.1080/1351847X.2016.1186712 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1186712 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:15:p:1512-1543 Template-Type: ReDIF-Article 1.0 Author-Name: Chulwoo Han Author-X-Name-First: Chulwoo Author-X-Name-Last: Han Title: Modeling severity risk under PD–LGD correlation Abstract: In this article, a generic severity risk framework in which loss given default (LGD) is dependent upon probability of default (PD) in an intuitive manner is developed. By modeling the conditional mean of LGD as a function of PD, which also varies with systemic risk factors, this model allows an arbitrary functional relationship between PD and LGD. Based on this framework, several specifications of stochastic LGD are proposed with detailed calibration methods. By combining these models with an extension of CreditRisk+, a versatile mixed Poisson credit risk model that is capable of handling both risk factor correlation and PD–LGD dependency is developed. An efficient simulation algorithm based on importance sampling is also introduced for risk calculation. Empirical studies suggest that ignoring or incorrectly specifying severity risk can significantly underestimate credit risk and a properly defined severity risk model is critical for credit risk measurement as well as downturn LGD estimation. Journal: The European Journal of Finance Pages: 1572-1588 Issue: 15 Volume: 23 Year: 2017 Month: 12 X-DOI: 10.1080/1351847X.2016.1212385 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1212385 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:15:p:1572-1588 Template-Type: ReDIF-Article 1.0 Author-Name: Haluk Yener Author-X-Name-First: Haluk Author-X-Name-Last: Yener Author-Name: Thanasis Stengos Author-X-Name-First: Thanasis Author-X-Name-Last: Stengos Author-Name: M. Ege Yazgan Author-X-Name-First: M. Ege Author-X-Name-Last: Yazgan Title: Analysis of the seeds of the debt crisis in Europe Abstract: This paper presents an analysis of the seeds of the recent debt crisis that occurred in the Eurozone area using a variant of Fleming and Stein [2004. “Stochastic Optimal Control, International Finance and Debt.” Journal of Banking and Finance, 28: 979–996] model. This model has two risk drivers arising from uncertainties in the return on capital and the effective rate of return on net foreign assets. Given the risk drivers, we model the net worth value process of an economy under a stochastic setting and show that opening to the rest of the world by pursuing the growth maximizing leverage strategy is better than remaining closed, as that strategy enhances the growth of the net worth process. Second, we provide an extra condition to show when the excessive leverage poses a threat to the sustainable growth of an economy. In this way, we improve the model introduced by Fleming and Stein as a signal of possible debt crises. Finally, we conduct an econometric analysis for the group of countries considered under this study, and show that there is a long-run relationship between the capital stock and the total external debt justifying the use of the structural model we employ. Journal: The European Journal of Finance Pages: 1589-1610 Issue: 15 Volume: 23 Year: 2017 Month: 12 X-DOI: 10.1080/1351847X.2016.1272474 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1272474 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:15:p:1589-1610 Template-Type: ReDIF-Article 1.0 Author-Name: Darren Duxbury Author-X-Name-First: Darren Author-X-Name-Last: Duxbury Author-Name: Barbara Summers Author-X-Name-First: Barbara Author-X-Name-Last: Summers Title: On perceptions of financial volatility in price sequences Abstract: Stock prices in financial markets rise and fall, sometimes dramatically, thus asset returns exhibit volatility. In finance theory, volatility is synonymous with risk and as such represents the dispersion of asset returns about their central tendency (i.e. mean), measured by the standard deviation of returns. When individuals make investment decisions, influenced by perceptions of risk and volatility, they commonly do so by examining graphs of historic price sequences rather than returns. It is unclear, therefore, whether standard deviation of return is foremost in their mind when making such decisions. We conduct two experiments to examine the factors that may influence perceptions of financial volatility, including standard deviation along with a number of price-based factors. Also of interest is the influence of price sequence regularity on perceived volatility. While standard deviation may have a role to play in perception of volatility, we find evidence that other price-based factors play a far greater role. Furthermore, we report evidence to support the view that the extent to which prices appear irregular is a separate aspect of volatility, distinct from the extent to which prices deviate from central tendency. Also, while partially correlated, individuals do not perceive risk and volatility as synonymous, though they are more closely related in the presence of price sequence irregularity. Journal: The European Journal of Finance Pages: 521-543 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1282882 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1282882 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:521-543 Template-Type: ReDIF-Article 1.0 Author-Name: James Bowden Author-X-Name-First: James Author-X-Name-Last: Bowden Author-Name: Bruce Burton Author-X-Name-First: Bruce Author-X-Name-Last: Burton Author-Name: David Power Author-X-Name-First: David Author-X-Name-Last: Power Title: Rumours built on quicksand: evidence on the nature and impact of message board postings in modern equity markets Abstract: It is argued that internet-based short-sellers take advantage of asymmetric information, publishing research online which often values shares in a target company at a large discount to their current price. The increasing popularity of online dissemination of information, coupled with evidence that individuals are prone to behave in a herd-like fashion suggests the potential for significant volatility in the share price of a company. In this paper, a dataset of 12,616 financial message board postings is employed to examine patterns in online activity following the publication of a research note targeting a specific firm by an internet-based short-seller. Identifiable trends in investor behaviour, indicative of community contagion, are shown with group sentiment shifting over time. The findings have implications for regulators’ attempts to adapt to an online environment in which information – and misinformation – can be rapidly incorporated into share prices. Journal: The European Journal of Finance Pages: 544-564 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1288647 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1288647 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:544-564 Template-Type: ReDIF-Article 1.0 Author-Name: Florian El Mouaaouy Author-X-Name-First: Florian Author-X-Name-Last: El Mouaaouy Title: Financial crime ‘hot spots’ – empirical evidence from the foreign exchange market Abstract: This paper uses a natural experiment to investigate the effects of collusive benchmark manipulation on foreign exchange (FX) market characteristics. Constructing digit-based measures, the empirical analysis detects anomalies throughout different digit positions of currency pairs in prosecuted FX data. The findings contribute to the understanding of suspicious patterns during the World Markets Company and Reuters benchmark window around the London close and suggest a simple, practical, and useful approach to screening other financial benchmarks, markets, and time periods. Journal: The European Journal of Finance Pages: 565-583 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1303528 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1303528 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:565-583 Template-Type: ReDIF-Article 1.0 Author-Name: Marianne Gogstad Author-X-Name-First: Marianne Author-X-Name-Last: Gogstad Author-Name: Ali M. Kutan Author-X-Name-First: Ali M. Author-X-Name-Last: Kutan Author-Name: Yaz Gulnur Muradoglu Author-X-Name-First: Yaz Gulnur Author-X-Name-Last: Muradoglu Title: Do international institutions affect financial markets?: evidence from the Greek Sovereign Debt Crisis Abstract: This paper investigates the effects of the policy announcements from the International Monetary Fund, and European Union (EU) offices including the European Commission, the European Central Bank, the Euro Area ministers on financial and real sectors during the recent Greek Sovereign Debt Crisis. We also include the reactions of financial and real sectors to Rating Agencies, Greek government and Greek public that were actively involved. We find that financial sectors have stronger reactions to international institutions and Greek government policy action announcements than the real sectors. Banking and financial sectors react predominantly negatively to unfavorable announcements, while real sector responses are mixed. The immediate reaction to EU offices and troika policy announcements are the highest in banking with negative abnormal returns of more than 1.5% per day. Public riots following unfavorable EU announcements also generate high falls in banking and financial sectors. The results show that favorable effects of an announcement from an international organization can be offset by negative effects arising from protests from the public and negative responses of the local government to announcements from international organizations. Journal: The European Journal of Finance Pages: 584-605 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1335223 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1335223 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:584-605 Template-Type: ReDIF-Article 1.0 Author-Name: Bibek Bhatta Author-X-Name-First: Bibek Author-X-Name-Last: Bhatta Author-Name: Andrew Marshall Author-X-Name-First: Andrew Author-X-Name-Last: Marshall Author-Name: Chandra Thapa Author-X-Name-First: Chandra Author-X-Name-Last: Thapa Title: Foreign bias in bond portfolio investments: the role of economic and non-economic factors and the impact of the global financial and sovereign debt crises Abstract: In this study we examine whether theoretically inconsistent foreign bond allocations are associated with economic fundamentals and/or non-economic behavioural factors. Using panel data for 54 developed and emerging markets spanning a temporal period of 12 years, the results show that non-economic factors, that is, familiarity with foreign markets and behavioural characteristics of source markets, are the stronger drivers of biases in foreign bond allocations. Further, using the recent 2009–2011 European sovereign debt crisis as an experimental set-up, we find that investors reduce their foreign bond allocations during the debt crisis, with the withdrawals being more severe from the most affected countries. We also find that the relevance of familiarity with foreign markets becomes more pronounced during the European debt crisis. However, in case of the recent 2007–2009 global financial crisis, we find no evidence of change in foreign bias by international bond investors. Journal: The European Journal of Finance Pages: 654-681 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1343199 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1343199 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:654-681 Template-Type: ReDIF-Article 1.0 Author-Name: Richard Fairchild Author-X-Name-First: Richard Author-X-Name-Last: Fairchild Title: A behavioural game-theoretic analysis of hedge fund regulation Abstract: We analyse the efficacy of hedge fund regulation in a behavioural game-theoretic model consisting of two players: a hedge fund manager and a regulator. The regulator decides whether or not to regulate hedge fund strategies, and location of key service providers (KSPs). The manager then decides (a) which KSP to choose, (b) whether to choose a safe or risky strategy, and (c) how much effort to exert in affecting the strategy’s success probability. We consider the effect of expected future fund flows on the manager’s incentives. Furthermore, we consider economic and behavioural factors affecting the regulator’s decision-making. Finally, we discuss how our two cases (myopic versus far-sighted managerial behaviour) may inform the debate over regulation over the entire financial market-cycle. Overall, our analysis contributes to the debate on hedge fund regulation. Journal: The European Journal of Finance Pages: 606-629 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1359198 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1359198 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:606-629 Template-Type: ReDIF-Article 1.0 Author-Name: Richard Taffler Author-X-Name-First: Richard Author-X-Name-Last: Taffler Title: Emotional finance: investment and the unconscious Abstract: Unconscious mental processes are ubiquitous. However, little attention has been paid in the finance literature to date to how people’s unconscious fantasies, needs and desires help drive their investment decisions, and markets more generally. Emotional finance which is informed by the psychoanalytic understanding of the human mind sets out to explore such issues directly. This paper first describes the underlying theory and then examines some of its potential insights and empirical applications. How emotional finance more generally may help explain asset pricing bubbles and the Global Financial Crisis is also discussed, as well as the paradox the asset management industry represents. Recognising that investors are often driven by not-always conscious emotions of excitement, anxiety and denial, and markets by parallel collusive group-wide processes, this paper concludes by suggesting that the key role unconscious mental processes play in all human activity is worthy of greater attention in finance. Appropriate research methodologies and the way forward in terms of future work are also outlined. Journal: The European Journal of Finance Pages: 630-653 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1369445 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1369445 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:630-653 Template-Type: ReDIF-Article 1.0 Author-Name: C. A. E. Goodhart Author-X-Name-First: C. A. E. Author-X-Name-Last: Goodhart Title: Behavioural perspectives on bank misdeeds Journal: The European Journal of Finance Pages: 517-520 Issue: 7-8 Volume: 24 Year: 2018 Month: 5 X-DOI: 10.1080/1351847X.2017.1416917 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1416917 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:7-8:p:517-520 Template-Type: ReDIF-Article 1.0 Author-Name: Jun Wen Author-X-Name-First: Jun Author-X-Name-Last: Wen Author-Name: Gen-Fu Feng Author-X-Name-First: Gen-Fu Author-X-Name-Last: Feng Author-Name: Chun-Ping Chang Author-X-Name-First: Chun-Ping Author-X-Name-Last: Chang Author-Name: Zhao-Zhen Feng Author-X-Name-First: Zhao-Zhen Author-X-Name-Last: Feng Title: Stock liquidity and enterprise innovation: new evidence from China Abstract: We employ data of 6194 firm-year observations for 1058 listed companies in the period 2006–2013 to investigate the interaction between stock liquidity and enterprise innovation in China and confirm that an increase in stock liquidity raises the number of patents granted, R&D investment, and the innovation efficiency of state-owned enterprises, while it decreases innovation significantly in private firms. These findings are also supported by quasi-natural experiments under the split-share structure policy reform and the adjustment of the stamp duty rate using propensity score matching and difference-in-difference methods. We then identify two possible mechanisms through which liquidity increases innovation: the entry of long-term and strategic institutional investors and the gradual privatization of SOEs. Several policy implications are provided in accordance with our findings. Journal: The European Journal of Finance Pages: 683-713 Issue: 9 Volume: 24 Year: 2018 Month: 6 X-DOI: 10.1080/1351847X.2017.1347573 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1347573 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:9:p:683-713 Template-Type: ReDIF-Article 1.0 Author-Name: Daniel Maul Author-X-Name-First: Daniel Author-X-Name-Last: Maul Author-Name: Dirk Schiereck Author-X-Name-First: Dirk Author-X-Name-Last: Schiereck Title: The market timing of corporate bond reopenings Abstract: The objective of this paper is to test whether companies use corporate bond reopenings to exploit overvalued debt. Reopenings represent new debt offerings, which are characterized through identical configurations as an already outstanding bond, but with a market-adjusted price. Their advantage lies with the fact that fewer preparations are required compared to a new regular offering. For a set of European companies our results suggest that stockholders respond less positively to the announcements of reopenings than to regular offerings. This effect is stronger, the higher the pre-issue bond price run-up, and the stock price reaction is directly linked to the change in the firm’s debt value. Additionally, the prices of the reopened bonds drop on the announcement day. Therefore, in line with the window of opportunity theory, the firm’s management appears to use reopenings as a fast and inexpensive way to raise debt capital, which leads stockholders and bondholders to suspect an overvaluation and therefore to adjust their price expectations. The analysis also reveals that the redistribution of wealth from bondholders to stockholders is a major determinant for the observed price changes. Journal: The European Journal of Finance Pages: 714-734 Issue: 9 Volume: 24 Year: 2018 Month: 6 X-DOI: 10.1080/1351847X.2017.1354053 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1354053 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:9:p:714-734 Template-Type: ReDIF-Article 1.0 Author-Name: Michal Wojewodzki Author-X-Name-First: Michal Author-X-Name-Last: Wojewodzki Author-Name: Winnie P.H. Poon Author-X-Name-First: Winnie P.H. Author-X-Name-Last: Poon Author-Name: Jianfu Shen Author-X-Name-First: Jianfu Author-X-Name-Last: Shen Title: The role of credit ratings on capital structure and its speed of adjustment: an international study Abstract: Using an international dataset, we examine the role of issuers’ credit ratings in explaining corporate leverage and the speed with which firms adjust toward their optimal level of leverage. We find that, in countries with a more market-oriented financial system, the impact of credit ratings on firms’ capital structure is more significant and that firms with a poorer credit rating adjust more rapidly. Furthermore, our results show some striking differences in the speed of adjusting capital structure between firms rated as speculative and investment grade, with the former adjusting much more rapidly. As hypothesized, those differences are statistically significant only for firms based in a more market-oriented economy. Journal: The European Journal of Finance Pages: 735-760 Issue: 9 Volume: 24 Year: 2018 Month: 6 X-DOI: 10.1080/1351847X.2017.1354900 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1354900 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:9:p:735-760 Template-Type: ReDIF-Article 1.0 Author-Name: Chih-Liang Liu Author-X-Name-First: Chih-Liang Author-X-Name-Last: Liu Author-Name: Yin-Hua Yeh Author-X-Name-First: Yin-Hua Author-X-Name-Last: Yeh Title: Ownership concentration and bank risk: international study on acquisitions Abstract: This paper explores the effects of different types of bank ownership concentration on changes in bank risk during acquisition years. Using multi-country data from 2000 to 2006, during which market failures caused by various crises and government interventions are less influential to acquisition decisions, we collect 505 banking acquisition deals from 23 countries to examine which type of ownership concentration (such as financial intermediary, capital investor, non-financial, and state ownership) brings larger changes to an acquirer’s risk from pre-acquisition year to post-acquisition year (including non-performing loans, capital adequacy ratio, loan loss reserve, and credit rating). The empirical analyses show that acquirer banks with a concentration of shares owned by financial intermediaries and non-financial firms experience larger risk changes during acquisition years. In contrast, the risk changes of acquirer banks with a concentration of capital investors and state ownership are lower. Robustness checks from the random effect estimation, instrumental variables model, reverse causality, and different subsamples of (non-)U.S. or different levels of regulation enforcement confirm these results. Journal: The European Journal of Finance Pages: 761-808 Issue: 9 Volume: 24 Year: 2018 Month: 6 X-DOI: 10.1080/1351847X.2017.1354901 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1354901 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:9:p:761-808 Template-Type: ReDIF-Article 1.0 Author-Name: Sonia Falconieri Author-X-Name-First: Sonia Author-X-Name-Last: Falconieri Author-Name: Igor Filatotchev Author-X-Name-First: Igor Author-X-Name-Last: Filatotchev Author-Name: Mesut Tastan Author-X-Name-First: Mesut Author-X-Name-Last: Tastan Title: Size and diversity in VC syndicates and their impact on IPO performance Abstract: This paper investigates the impact of venture capital (VC) syndicate size and composition on the IPO and post-IPO performances of investee companies in an attempt to shed some light on the extent to which larger and more diverse syndicates are more likely to suffer from internal agency problems which might hinder the decision-making process and lead to less value added for their portfolio companies. The question is of great relevance because, while the vast majority of the empirical literature compares VC backed IPOs with non-VC backed ones, most VC funding is provided by syndicates of two or more financiers. We construct alternative measures of size as well as diversity based on several VC characteristics such as age, geographic location, type and affiliation of VC firms and find that larger and more diverse syndicates are associated with higher underpricing and lower valuation at the IPO date. Furthermore, we provide evidence that that diversity and size are negatively correlated to the long-term performance of the IPO firms and this finding is robust to several alternative measures of long-term performance. Journal: The European Journal of Finance Pages: 1032-1053 Issue: 11 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2018.1560345 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1560345 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:11:p:1032-1053 Template-Type: ReDIF-Article 1.0 Author-Name: Ceyda Aktan Author-X-Name-First: Ceyda Author-X-Name-Last: Aktan Author-Name: Perihan Iren Author-X-Name-First: Perihan Author-X-Name-Last: Iren Author-Name: Tolga Omay Author-X-Name-First: Tolga Author-X-Name-Last: Omay Title: Market development and market efficiency: evidence based on nonlinear panel unit root tests Abstract: This study tests the weak form market efficiency of 32 European stock markets. Utilizing monthly data from June 2006 to June 2017, six different, newly developed nonlinear panel root tests were applied in three different groups of European markets: Frontier, Emerging and Developed. The results show that there is a meaningful relationship between different levels of economic development and the weak form market efficiency. Considering the nonlinear structure of the stock market indices, use of linear models might lead to wrong conclusions regarding market efficiency. Using several nonlinear panel root tests, the results of this study shed more light on the true data generating process of the stock market indices and more appropriately model market efficiency. Journal: The European Journal of Finance Pages: 979-993 Issue: 11 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2018.1560346 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1560346 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:11:p:979-993 Template-Type: ReDIF-Article 1.0 Author-Name: Zaghum Umar Author-X-Name-First: Zaghum Author-X-Name-Last: Umar Author-Name: Choudhry Tanveer Shehzad Author-X-Name-First: Choudhry Tanveer Author-X-Name-Last: Shehzad Author-Name: Aristeidis Samitas Author-X-Name-First: Aristeidis Author-X-Name-Last: Samitas Title: The demand for eurozone stocks and bonds in a time-varying asset allocation framework Abstract: This paper analyzes the short and long-run demand for traditional financial asset classes in eleven founding eurozone members. Our sample period starts from the introduction of euro till 2017. We calculate the welfare losses stemming from ignoring the demand for domestic and eurozone equities and bonds, for various levels of risk aversion. Our results show that the bonds of eurozone countries are, in general, desirable for short-run only. However, in Ireland, Portugal and Spain the bonds are desirable for both short-run and long-run investment horizons. Stocks exhibit both short-run and long-run desirability for all countries except Greece. The Greek stocks are desirable for short- run only. Journal: The European Journal of Finance Pages: 994-1011 Issue: 11 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2018.1564690 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1564690 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:11:p:994-1011 Template-Type: ReDIF-Article 1.0 Author-Name: Mike Adams Author-X-Name-First: Mike Author-X-Name-Last: Adams Author-Name: Vineet Upreti Author-X-Name-First: Vineet Author-X-Name-Last: Upreti Author-Name: Jing Chen Author-X-Name-First: Jing Author-X-Name-Last: Chen Title: Product-market strategy and underwriting performance in the United Kingdom’s property–casualty insurance market Abstract: Drawing on a framework from the organizational economics literature, we utilize a panel data design to examine empirically the effect of motor insurance and liability insurance business on the overall underwriting performance of insurers operating in the United Kingdom’s (UK) property–casualty insurance market. We find that participation in liability insurance contributes positively to underwriting performance, whereas motor insurance is associated with inferior underwriting performance. Additionally, we find that higher reinsurance ratio is associated with better underwriting performance, but reduced profit margins. Our results show that higher leverage too is associated with better underwriting performance. We conclude that our results could have potentially important commercial and/or policy implications. Journal: The European Journal of Finance Pages: 1012-1031 Issue: 11 Volume: 25 Year: 2019 Month: 7 X-DOI: 10.1080/1351847X.2019.1578676 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1578676 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:11:p:1012-1031 Template-Type: ReDIF-Article 1.0 Author-Name: Debarati Bhattacharya Author-X-Name-First: Debarati Author-X-Name-Last: Bhattacharya Author-Name: Gokhan Sonaer Author-X-Name-First: Gokhan Author-X-Name-Last: Sonaer Title: Herding by mutual funds: impact on performance and investors’ response Abstract: In this paper we investigate whether herding by actively managed equity funds affects their performances and flows over the 1980–2013 period. We show that during the herding quarter, on average, funds that trade with the herd benefit from this behavior. Although this does not directly translate into a positive association between the extent to which funds herd and their subsequent performance, we find that the funds that follow the herd earn negative abnormal returns whereas the ones that lead earn no abnormal returns. Our results also indicate that investors react adversely to follower funds while they are neutral towards the leader funds. Journal: The European Journal of Finance Pages: 283-299 Issue: 4 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2016.1224194 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1224194 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:4:p:283-299 Template-Type: ReDIF-Article 1.0 Author-Name: Alfred Y.-T. Wong Author-X-Name-First: Alfred Y.-T. Author-X-Name-Last: Wong Author-Name: Tom Pak Wing Fong Author-X-Name-First: Tom Pak Wing Author-X-Name-Last: Fong Title: Safehavenness of currencies Abstract: This study assesses the ‘safehavenness’ of a number of currencies with a view to providing a better understanding of how capital flow tends to react to a sharp increase in global risk aversion in turbulent times. It focuses on how the currencies are perceived by international investors or, more specifically, whether they are seen as safe-haven or risky currencies. To assess the safehavenness of the currency, we use risk reversal, which is the price difference between the call and put options of a currency, as it reflects how disproportionately market participants are willing to pay to hedge against its appreciation or depreciation. The relationship between the risk reversal of the currency and global risk aversion is estimated by means of parametric and non-parametric regressions that allow us to capture currency behaviour in times of extreme adversity, that is, the tail risk. Our empirical results found the Japanese yen and, to a lesser extent, the Hong Kong dollar to be the only safe havens under stressful conditions among the 34 currencies vis-à-vis the US dollar. Journal: The European Journal of Finance Pages: 300-332 Issue: 4 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2016.1239584 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1239584 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:4:p:300-332 Template-Type: ReDIF-Article 1.0 Author-Name: Mehmet Balcilar Author-X-Name-First: Mehmet Author-X-Name-Last: Balcilar Author-Name: Rangan Gupta Author-X-Name-First: Rangan Author-X-Name-Last: Gupta Author-Name: Christian Pierdzioch Author-X-Name-First: Christian Author-X-Name-Last: Pierdzioch Author-Name: Mark E. Wohar Author-X-Name-First: Mark E. Author-X-Name-Last: Wohar Title: Terror attacks and stock-market fluctuations: evidence based on a nonparametric causality-in-quantiles test for the G7 countries Abstract: We use a novel nonparametric causality-in-quantiles test to study the effects of terror attacks on stock-market returns and volatility in G7 countries. We also use the novel test to study the international repercussions of terror attacks. Test results show that terror attacks often have significant effects on returns, whereas the effect on volatility is significant only for Japan and the UK for several quantiles above the median. The effects on returns in many cases become stronger in terms of significance for the upper and lower quantiles of the conditional distribution of stock-market returns. As for international repercussions, we find that terror attacks mainly affect the tails of the conditional distribution of stock-market returns. We find no evidence of a significant cross-border effects of terror attacks on stock-market volatility, where again Japan and the UK are exceptions as far as terror attacks on the US are concerned. Finally, our results continue to hold following various robustness checks involving model structure, lag-lengths and possible omitted variable bias. Journal: The European Journal of Finance Pages: 333-346 Issue: 4 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2016.1239586 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1239586 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:4:p:333-346 Template-Type: ReDIF-Article 1.0 Author-Name: Susheng Wang Author-X-Name-First: Susheng Author-X-Name-Last: Wang Title: A theory of mandatory convertibles: distinct features for large repeated financing Abstract: In recent years, mandatory convertibles (MCs) have become a popular means of raising capital, especially for large projects. This paper is the first theoretical paper to investigate MCs using the incomplete-contract approach. We show that MCs can be an efficient instrument in sequential financing. MCs have some distinct features compared to other convertibles, such as mandatory conversion, a high dividend rate, and capped capital appreciation. We show in theory that these features are designed to achieve efficiency. Journal: The European Journal of Finance Pages: 347-362 Issue: 4 Volume: 24 Year: 2018 Month: 3 X-DOI: 10.1080/1351847X.2017.1285337 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1285337 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:4:p:347-362 Template-Type: ReDIF-Article 1.0 Author-Name: Zhisheng Li Author-X-Name-First: Zhisheng Author-X-Name-Last: Li Author-Name: Bingxuan Lin Author-X-Name-First: Bingxuan Author-X-Name-Last: Lin Author-Name: Ting Zhang Author-X-Name-First: Ting Author-X-Name-Last: Zhang Author-Name: Chen Chen Author-X-Name-First: Chen Author-X-Name-Last: Chen Title: Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China Abstract: China introduced short selling for designated stocks in March 2010. Using this important policy change as a natural experiment, we examine the effect of short selling on stock price efficiency and liquidity. We show that the introduction of short selling significantly improves price efficiency, as measured by the differences in individual stock responses to market returns and the delay in price adjustments. Short selling also enhances stock liquidity, as measured by bid-ask spread and Amihud [2002. ‘Illiquidity and Stock Returns: Cross-section and Time-series Effects.’ Journal of Financial Markets 5: 31–56] illiquidity measure; and reduces stock volatility. Overall, our results suggest that short selling helps to stabilize asset prices, provides additional liquidity and improves market quality, even in an emerging economy with a less developed stock market than that in the US and Europe. Journal: The European Journal of Finance Pages: 1350-1368 Issue: 15 Volume: 24 Year: 2018 Month: 10 X-DOI: 10.1080/1351847X.2017.1307772 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1307772 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:15:p:1350-1368 Template-Type: ReDIF-Article 1.0 Author-Name: Nadia Linciano Author-X-Name-First: Nadia Author-X-Name-Last: Linciano Author-Name: Caterina Lucarelli Author-X-Name-First: Caterina Author-X-Name-Last: Lucarelli Author-Name: Monica Gentile Author-X-Name-First: Monica Author-X-Name-Last: Gentile Author-Name: Paola Soccorso Author-X-Name-First: Paola Author-X-Name-Last: Soccorso Title: How financial information disclosure affects risk perception. Evidence from Italian investors’ behaviour Abstract: This paper investigates how different representations of financial information may be appraised in terms of complexity and usefulness, and how financial disclosure influences individuals’ risk perception. By using a consumer testing analytical approach, we run a survey on a sample of Italian investors: 254 bank customers were submitted 4 different templates, each combining a different typology of data (historical and prospective) and framing (words, numbers and charts) to indicate the same level of risk and return of four real-life financial instruments. Representation formats partially overlap with those mandated by regulators and used within the financial industry. Results show that the perceived riskiness of financial products is affected by the way information is disclosed. Perceived complexity of the financial information disclosure intensifies perception of riskiness of the product solicited. Gender, age, personal traits, behavioural biases and financial knowledge, do also play a role. Overall, given investors’ heterogeneity and behavioural biases, neither simplifying disclosure nor a ‘one-size-fits-all’ approach may be sufficient to ensure correct risk perception and to prevent unbiased investment choices. Journal: The European Journal of Finance Pages: 1311-1332 Issue: 15 Volume: 24 Year: 2018 Month: 10 X-DOI: 10.1080/1351847X.2017.1414069 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1414069 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:15:p:1311-1332 Template-Type: ReDIF-Article 1.0 Author-Name: Emilio Barucci Author-X-Name-First: Emilio Author-X-Name-Last: Barucci Author-Name: Roberto Baviera Author-X-Name-First: Roberto Author-X-Name-Last: Baviera Author-Name: Carlo Milani Author-X-Name-First: Carlo Author-X-Name-Last: Milani Title: The Comprehensive Assessment: What lessons can be learned? Abstract: Analysing the database made available by the European Central Bank and by the European Banking Authority, we evaluate the Comprehensive Assessment (CA) (Asset Quality Review and Stress Test (ST)) of banks carried out in 2014. In a nutshell, the main results are: (i) risk-adjusted capital ratios are negatively related to the Asset Quality Review shortfall, but not to the ST shortfall, whereas the leverage ratio plays a significant role in both cases; (ii) the CA predominantly concentrated on traditional credit activity rather than on banks’ financial assets and (iii) the CA seems to be characterized by double standards. The Asset Quality Review was severe with banks operating in non-core countries, while medium-sized banks were either riskier or were treated severely in both exercises. The analysis leads to a puzzle: comparatively, the assessment per se led to significant adjustments for solid banks and large shortfalls for weak banks. The puzzle can be resolved by referring to the legacy of the country’s former supervisory activity and to the low level of capitalization of weak banks mostly in peripheral countries.Abbreviations: ADJ_AQR: adjustment due to the AQR; ADJ_ST: adjustment due to the ST adverse scenario; AQR: asset quality review; bps: basis points (1 bp is equal to 0.01%); bn: billion; CA: comprehensive assessment; CET1: common equity tier 1; CR: coverage ratio; CRD/CRR: capital requirements directive/capital requirements regulation; CVA: credit valuation adjustment; EBA: European Banking Authority; ECB: European Central Bank; LM test: Lagrange-multiplier test; NPE: Non-performing exposure; RWA: risk-weighted asset; SF_AQR: shortfall due to the AQR; SF_ST: shortfall due to the ST adverse scenario; SREP: supervisory review and evaluation process; SSM: single supervisory mechanism; ST: stress test; tr: trillion (one thousand of billions) Journal: The European Journal of Finance Pages: 1253-1271 Issue: 15 Volume: 24 Year: 2018 Month: 10 X-DOI: 10.1080/1351847X.2017.1414703 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1414703 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:15:p:1253-1271 Template-Type: ReDIF-Article 1.0 Author-Name: Son-Nan Chen Author-X-Name-First: Son-Nan Author-X-Name-Last: Chen Author-Name: Pao-Peng Hsu Author-X-Name-First: Pao-Peng Author-X-Name-Last: Hsu Title: Pricing inflation-indexed derivatives with default risk Abstract: Inflation-indexed derivatives with default risk are modeled using the jump-diffusion processes in the Heath–Jarrow–Morton’s (HJM) [(1992). “Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claim Valuation.” Econometrica 60: 77–105] framework. A four-factor HJM model is proposed by incorporating an exogenous intensity function into a foreign currency analogy under the three-factor HJM model proposed by Jarrow and Yildirim [(2003). “Pricing Treasury Inflation Protected Securities and Related Derivatives Using a HJM Model.” Journal of Financial and Quantitative Analysis 38: 337–358]. The proposed model improves the valuation accuracy of zero-coupon inflation-indexed swaps (IIS) through calibrating the model to swap market data. In addition, the valuation formulas of year-on-year IIS and caps with default risk are derived. Journal: The European Journal of Finance Pages: 1272-1287 Issue: 15 Volume: 24 Year: 2018 Month: 10 X-DOI: 10.1080/1351847X.2017.1415217 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1415217 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:15:p:1272-1287 Template-Type: ReDIF-Article 1.0 Author-Name: Moritz Maier Author-X-Name-First: Moritz Author-X-Name-Last: Maier Author-Name: Hendrik Scholz Author-X-Name-First: Hendrik Author-X-Name-Last: Scholz Title: A return-based approach to identify home bias of European equity funds Abstract: This paper introduces a return-based approach to studying a possible home bias of European equity funds by estimating their exposures to their domestic markets. We first confirm the robustness of our approach using simulated portfolios with different proportions of domestic and foreign stocks. The empirical analysis examines equity funds domiciled in 15 European countries that invest in European stocks. We examine individual funds as well as portfolios comprising funds that are all domiciled in a particular country. Our findings reveal that the portfolios of four domiciles show a significant home bias. Moreover, we observe that in seven domiciles more than a quarter of the individual funds are home-biased. These results are robust when controlling for fund-specific benchmarks or for the average country exposures of all funds in our final sample. Finally, a home bias of individual funds is not related to superior performance, but actually results in higher investment risk consistent with underdiversification. Journal: The European Journal of Finance Pages: 1288-1310 Issue: 15 Volume: 24 Year: 2018 Month: 10 X-DOI: 10.1080/1351847X.2017.1415946 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1415946 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:15:p:1288-1310 Template-Type: ReDIF-Article 1.0 Author-Name: Ylva Baeckström Author-X-Name-First: Ylva Author-X-Name-Last: Baeckström Author-Name: Jo Silvester Author-X-Name-First: Jo Author-X-Name-Last: Silvester Author-Name: Rachel A. J. Pownall Author-X-Name-First: Rachel A. J. Author-X-Name-Last: Pownall Title: Millionaire investors: financial advisors, attribution theory and gender differences Abstract: To date little attention has been paid to how social cognitive bias can influence how financial advisors interpret and respond to the needs of millionaire investors, and if this varies depending on the gender of the investor. This research investigates whether experienced professional financial advisors who work with millionaire investors make different attributions for the control and knowledge that investors have of their investments, and if they make different investment portfolio recommendations to equivalent male and female investors. Using methodology novel to finance, this vignette-based study that controls for gender finds evidence that professional financial advisors judge millionaire female investors to have less control over their investment portfolios relative to men. Empirical results also show that female advisors judge women to be less knowledgeable about investments than men. Despite such perceptual differences, advisors recommend equally risky portfolios to male and female investors. These results have implications for wealth management institutions and the monitoring of financial advisors for millionaire individuals. Journal: The European Journal of Finance Pages: 1333-1349 Issue: 15 Volume: 24 Year: 2018 Month: 10 X-DOI: 10.1080/1351847X.2018.1438301 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1438301 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:15:p:1333-1349 Template-Type: ReDIF-Article 1.0 Author-Name: Hubert Dichtl Author-X-Name-First: Hubert Author-X-Name-Last: Dichtl Author-Name: Wolfgang Drobetz Author-X-Name-First: Wolfgang Author-X-Name-Last: Drobetz Author-Name: Martin Wambach Author-X-Name-First: Martin Author-X-Name-Last: Wambach Title: A bootstrap-based comparison of portfolio insurance strategies Abstract: This study presents a systematic comparison of portfolio insurance strategies. We implement a bootstrap-based hypothesis test to assess statistical significance of the differences in a variety of downside-oriented risk and performance measures for pairs of portfolio insurance strategies. Our comparison of different strategies considers the following distinguishing characteristics: static versus dynamic protection; initial wealth versus cumulated wealth protection; model-based versus model-free protection; and strong floor compliance versus probabilistic floor compliance. Our results indicate that the classical portfolio insurance strategies synthetic put and constant proportion portfolio insurance (CPPI) provide superior downside protection compared to a simple stop-loss trading rule and also exhibit a higher risk-adjusted performance in many cases (dependent on the applied performance measure). Analyzing recently developed strategies, neither the TIPP strategy (as an ‘improved’ CPPI strategy) nor the dynamic VaR-strategy provides significant improvements over the more traditional portfolio insurance strategies. Journal: The European Journal of Finance Pages: 31-59 Issue: 1 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2015.1029590 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1029590 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:1:p:31-59 Template-Type: ReDIF-Article 1.0 Author-Name: Seth Armitage Author-X-Name-First: Seth Author-X-Name-Last: Armitage Title: Discount rates for long-term projects: the cost of capital and social discount rate compared Abstract: Research on the cost of capital and on the social discount rate (SDR) has developed largely along separate paths. This paper offers an overview and comparison of both concepts. The consumption-based theory of discount rates is common to both, but there are striking differences in how the cost of capital and SDR are estimated. A project's cost of capital is inferred in practice from market data, by a well-established package of techniques, and project risk makes a large difference. In contrast, the SDR is estimated by applying judgement about the welfare of future generations, in the setting of consumption-based theory. Project risk has tended to be ignored under the SDR approach. Journal: The European Journal of Finance Pages: 60-79 Issue: 1 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2015.1029591 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1029591 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:1:p:60-79 Template-Type: ReDIF-Article 1.0 Author-Name: Nikolaos Balafas Author-X-Name-First: Nikolaos Author-X-Name-Last: Balafas Author-Name: Alexandros Kostakis Author-X-Name-First: Alexandros Author-X-Name-Last: Kostakis Title: Financial constraints and asset pricing: comprehensive evidence from London Stock Exchange Abstract: This study provides comprehensive evidence on the pricing of financial constraints (FC) risk on London Stock Exchange during the period 1988–2013. Utilizing a large number of proxies for FC, we find that investors are not compensated with higher premia for holding shares of financially constrained firms. To the contrary, in most of the cases, the most constrained firms significantly underperform, both statistically and economically, the least constrained ones. Focussing on the Whited–Wu index to construct a zero-cost FC factor that goes long the most constrained firms and sells short the least constrained ones, we find that this factor carries a significantly negative premium and it is priced in the cross-section over and above the commonly used risk factors. Journal: The European Journal of Finance Pages: 80-110 Issue: 1 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2015.1115773 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1115773 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:1:p:80-110 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Bessler Author-X-Name-First: Wolfgang Author-X-Name-Last: Bessler Author-Name: Heiko Opfer Author-X-Name-First: Heiko Author-X-Name-Last: Opfer Author-Name: Dominik Wolff Author-X-Name-First: Dominik Author-X-Name-Last: Wolff Title: Multi-asset portfolio optimization and out-of-sample performance: an evaluation of Black–Litterman, mean-variance, and naïve diversification approaches Abstract: The Black–Litterman model aims to enhance asset allocation decisions by overcoming the problems of mean-variance portfolio optimization. We propose a sample-based version of the Black–Litterman model and implement it on a multi-asset portfolio consisting of global stocks, bonds, and commodity indices, covering the period from January 1993 to December 2011. We test its out-of-sample performance relative to other asset allocation models and find that Black–Litterman optimized portfolios significantly outperform naïve-diversified portfolios (1/N rule and strategic weights), and consistently perform better than mean-variance, Bayes–Stein, and minimum-variance strategies in terms of out-of-sample Sharpe ratios, even after controlling for different levels of risk aversion, investment constraints, and transaction costs. The BL model generates portfolios with lower risk, less extreme asset allocations, and higher diversification across asset classes. Sensitivity analyses indicate that these advantages are due to more stable mixed return estimates that incorporate the reliability of return predictions, smaller estimation errors, and lower turnover. Journal: The European Journal of Finance Pages: 1-30 Issue: 1 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2014.953699 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.953699 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:1:p:1-30 Template-Type: ReDIF-Article 1.0 Author-Name: Gordon Gemmill Author-X-Name-First: Gordon Author-X-Name-Last: Gemmill Author-Name: Dylan C. Thomas Author-X-Name-First: Dylan C. Author-X-Name-Last: Thomas Title: Are IPO investors rational? Evidence from closed-end funds Abstract: Why buy a closed-end fund at IPO, when it is likely to trade at a discount in a few months’ time? One theory suggests that buying a new fund is justified by an initial period of investment outperformance. A second theory is that new funds are launched to provide access to assets that are temporarily illiquid and to exploit the subsequent liquidity gain while a third theory asserts that buyers of new issues are not fully rational but are influenced by time-varying sentiment. This paper tests the three theories using data from UK-traded closed-end equity-fund IPOs over 1984–2006. The empirical results provide strong support for the influence of sentiment but provide little or no support for the two other theories. Journal: The European Journal of Finance Pages: 1311-1334 Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2015.1115774 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1115774 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1311-1334 Template-Type: ReDIF-Article 1.0 Author-Name: Fabio Pizzutilo Author-X-Name-First: Fabio Author-X-Name-Last: Pizzutilo Author-Name: Valeria Roncone Author-X-Name-First: Valeria Author-X-Name-Last: Roncone Title: Red sky at night or in the morning, to the equity market neither a delight nor a warning: the weather effect re-examined using intraday stock data Abstract: Unlike most of the existing literature on the weather effect, we conducted our analysis by employing intraday weather and market data, examining a large set of stocks rather than indices only, including volume and volatility data in the study and inspecting a wide number of weather variables (temperature, humidity, pressure, visibility, wind, cloud, rain and snow). Our analysis covered the Italian stock market for the period August 2005–March 2014 for a total of 2201 trading days. We conclude that no systematic relationship seems to exist between the weather and the Italian stock market. Moreover, our results raise doubts that testing the weather effect by limiting the analysis to indices only can lead to spurious conclusions. Journal: The European Journal of Finance Pages: 1280-1310 Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2016.1151808 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151808 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1280-1310 Template-Type: ReDIF-Article 1.0 Author-Name: Geert Van Campenhout Author-X-Name-First: Geert Author-X-Name-Last: Van Campenhout Author-Name: Rosanne Vanpée Author-X-Name-First: Rosanne Author-X-Name-Last: Vanpée Title: My global fund portfolio is not yours: the effect of home bias on European- and US-managed convertible bond fund exposures Abstract: This paper shows that global convertible bond funds (CBFs) and their resulting equity-bond exposures are regionally biased. Global bond fund managers display home bias, resulting in CBFs that are not only tilted towards the home market but also reflect the different bond-equity exposures of European and US convertibles. More specifically we find that global funds managed by a European asset management firm are more bond-like than global funds managed by a US-based asset manager. Hence, investors have to account for the asset management company's origin to avoid that the performance of the fund and its correlation with other assets is not in line with investor's ex ante expectations about globally managed portfolios. Our results also indicate that for investors of European-based CBFs this home bias has resulted in an ex post opportunity cost up to 1.38% per year, depending on the sample period. Journal: The European Journal of Finance Pages: 1335-1361 Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2016.1151809 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151809 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1335-1361 Template-Type: ReDIF-Article 1.0 Author-Name: Paolo Vitale Author-X-Name-First: Paolo Author-X-Name-Last: Vitale Title: Insider trading in sequential auction markets with risk-aversion and time-discounting Abstract: We extend Kyle's [Kyle, A. S. 1985. “Continuous Auctions and Insider Trading.” Econometrica 53, 1315–1335] analysis of sequential auction markets to the case in which the insider is risk-averse and discounts her trading profits as her private information is long-lived. We see that time-discounting exacerbates the impact of risk-aversion on the optimal trading strategy of the insider. Ceteris paribus, a larger degree of risk-aversion or a smaller time-discount factor induces the informed agent to consume more rapidly her informational advantage increasing the liquidity and efficiency of the securities market. Journal: The European Journal of Finance Pages: 1267-1279 Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2016.1151810 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151810 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1267-1279 Template-Type: ReDIF-Article 1.0 Author-Name: Emma L. Black Author-X-Name-First: Emma L. Author-X-Name-Last: Black Author-Name: Jie (Michael) Guo Author-X-Name-First: Jie (Michael) Author-X-Name-Last: Guo Author-Name: Nan Hu Author-X-Name-First: Nan Author-X-Name-Last: Hu Author-Name: Evangelos Vagenas-Nanos Author-X-Name-First: Evangelos Author-X-Name-Last: Vagenas-Nanos Title: Uncertainty triggers overreaction: evidence from corporate takeovers Abstract: Behavioural finance models suggest that under uncertainty, investors overweight their private information and overreact to it. We test this theoretical prediction in an M&A framework. We find that under high information uncertainty, when investors are more likely to possess firm-specific information, acquiring firms generate highly positive and significant gains following the announcement of private stock and private cash acquisitions (positive news) while the market heavily punishes public stock (negative news) deals. On the other hand, under conditions of low information uncertainty, when investors do not possess private information, the market reaction is complete (i.e. zero abnormal returns) irrespective of the type of acquisition. Overall, we provide empirical evidence that shows that information uncertainty plays a significant role in explaining short-run acquirer abnormal returns. Journal: The European Journal of Finance Pages: 1362-1389 Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2016.1202296 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1202296 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1362-1389 Template-Type: ReDIF-Article 1.0 Author-Name: Steffen Hundt Author-X-Name-First: Steffen Author-X-Name-Last: Hundt Author-Name: Björn Sprungk Author-X-Name-First: Björn Author-X-Name-Last: Sprungk Author-Name: Andreas Horsch Author-X-Name-First: Andreas Author-X-Name-Last: Horsch Title: The information content of credit ratings: evidence from European convertible bond markets Abstract: Prior research has investigated the information content of credit ratings for standard financing instruments such as stocks and corporate bonds, while this question has been neglected for convertible bonds (CBs) so far. CBs are simultaneously determined by the bond floor and the conversion value, which makes it more difficult to assess price effects following rating announcements. In this context, we compare price effects of CBs with those of stocks and corporate bonds of the same issuer using robust event study methods. Our findings indicate that rating changes convey new information for investors in European CBs. In terms of the direction of the expected price reaction, we find CBs to react in a more debt-like manner to the announcement of a rating change. Moreover, our results provide evidence that the magnitude of price reactions differs among different types of securities. Journal: The European Journal of Finance Pages: 1414-1445 Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2016.1204333 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1204333 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1414-1445 Template-Type: ReDIF-Article 1.0 Author-Name: Andrew Urquhart Author-X-Name-First: Andrew Author-X-Name-Last: Urquhart Title: How predictable are precious metal returns? Abstract: This paper provides strong evidence of time-varying return predictability of three precious metals from January 1987 to September 2014. We use three variations of the variance ratio test, the nonlinear Brock, Dechert and Schieinkman test as well as the Hurst exponent to evaluate the time-varying return predictability of precious metals to reduce the risk of spurious results. Our full sample results report mixed findings where some tests indicate significant predictability while some suggest no predictability. However through a time-varying procedure, we show that each precious metal market goes through periods of significant predictability as well as periods of unpredictability. Therefore this finding suggests that return predictability does vary over time and is not a static, all-or-nothing condition and therefore is consistent with the adaptive market hypothesis. We also show that platinum is the most predictable of the three precious metals and silver the least predictable, which may be of great to investors who include precious metals in their investment portfolios. Journal: The European Journal of Finance Pages: 1390-1413 Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2016.1204334 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1204334 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:1390-1413 Template-Type: ReDIF-Article 1.0 Author-Name: The Editors Title: Corrigendum Journal: The European Journal of Finance Pages: x-x Issue: 14 Volume: 23 Year: 2017 Month: 11 X-DOI: 10.1080/1351847X.2017.1325993 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1325993 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:14:p:x-x Template-Type: ReDIF-Article 1.0 Author-Name: Yilmaz Yildiz Author-X-Name-First: Yilmaz Author-X-Name-Last: Yildiz Author-Name: Mehmet Baha Karan Author-X-Name-First: Mehmet Baha Author-X-Name-Last: Karan Author-Name: Aydin Ozkan Author-X-Name-First: Aydin Author-X-Name-Last: Ozkan Title: Is conservative reporting attractive to foreign institutional investors? Evidence from an emerging market Abstract: This study investigates the relation between conservative reporting and foreign institutional ownership using a unique dataset of firms in Turkey. In doing so, we distinguish between foreign funds and corporations. Contrary to prior findings, our analysis shows that conservative reporting is not necessarily a desirable accounting feature for foreign institutional investors. We also find that the interplay between conservative reporting and ownership is significantly different between foreign funds and corporations. The estimated negative relation holds only for foreign funds. Further analysis reveals that foreign funds do not find conservative reporting desirable in low-asymmetric information firms and reduce ownership with greater accounting conservatism in such firms. The analysis sheds significant lights on the relevance of conservative reporting in alleviating the negative consequences of asymmetric information. Journal: The European Journal of Finance Pages: 1099-1121 Issue: 12 Volume: 25 Year: 2019 Month: 8 X-DOI: 10.1080/1351847X.2018.1561481 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1561481 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:12:p:1099-1121 Template-Type: ReDIF-Article 1.0 Author-Name: Wei Cui Author-X-Name-First: Wei Author-X-Name-Last: Cui Author-Name: Juan Yao Author-X-Name-First: Juan Author-X-Name-Last: Yao Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Title: Trapped in diversification – another look at the risk of fund of hedge funds Abstract: Recent literature implies that despite being more diversified, fund of hedge funds (FOFs) are exposed to tail risk. We propose an explanation for this phenomenon; tail risk is a systematic risk factor for hedge funds, which by construction, explains the higher portion of the returns in the diversified portfolios. Our study suggests that not only an additional tail risk factor improves the explanatory power of the factor model, the relative importance of tail risk factor increases with the number of underlying hedge funds in an FOF portfolio. Furthermore, we demonstrate that FOFs with a short history, higher management fees, leverage and requiring shorter lockup periods are more sensitive to tail risk. Journal: The European Journal of Finance Pages: 1055-1076 Issue: 12 Volume: 25 Year: 2019 Month: 8 X-DOI: 10.1080/1351847X.2019.1571524 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1571524 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:12:p:1055-1076 Template-Type: ReDIF-Article 1.0 Author-Name: Paul B. McGuinness Author-X-Name-First: Paul B. Author-X-Name-Last: McGuinness Title: Risk factor and use of proceeds declarations and their effects on IPO subscription, price ‘fixings’, liquidity and after-market returns Abstract: This paper addresses two important areas of voluntary disclosure for Hong Kong IPOs: (1) The risk factors surrounding a listing entity’s business and offer and (2) an issuer’s planned use of proceeds. Issuers assigning a greater fraction of proceeds to investment (debt repayment) generate higher (lower) subscription rates, price ‘fixings’ and after-market liquidity levels, as well as more (less) robust initial and longer-run returns. Greater enumeration of issue-based risk factors inflates after-market volatility but exerts little influence on other initial pricing characteristics. In contrast, enumerations on business and global risk factors bear strong negative association with longer-run returns. Additionally, risk factor enumeration and debt repayments are increasing in underwriter quality. However, such disclosures exhibit weak connection with state ownership. Journal: The European Journal of Finance Pages: 1122-1146 Issue: 12 Volume: 25 Year: 2019 Month: 8 X-DOI: 10.1080/1351847X.2019.1572023 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1572023 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:12:p:1122-1146 Template-Type: ReDIF-Article 1.0 Author-Name: Irina B. Mateus Author-X-Name-First: Irina B. Author-X-Name-Last: Mateus Author-Name: Cesario Mateus Author-X-Name-First: Cesario Author-X-Name-Last: Mateus Author-Name: Natasa Todorovic Author-X-Name-First: Natasa Author-X-Name-Last: Todorovic Title: Use of active peer benchmarks in assessing UK mutual fund performance and performance persistence Abstract: The majority of UK style-specific mutual funds either report a broad market index as their prospectus benchmark or give no benchmark at all – a practice that may be (a) strategic, or (b) cultural and attributable to the lack of UK style-specific indices (e.g. mid-cap-growth, small-cap-value). The choice of a broad market index as a benchmark can bias the inferences of a fund’s performance and performance persistence. This study is the first to provide an alternative to style-specific indices in the UK, and suggests the use style-specific peer group benchmarks, following [Hunter, D., E. Kandel, S. Kandel, and R. Wermers. 2014. “Mutual Fund Performance Evaluation with Active Peer Benchmarks.” Journal of Financial Economics 112 (1): 1–29]. Our sample comprises of 817 active UK long-only equity mutual funds allocated to nine Morningstar style categories (peer groups) during the period 1992–2016. We show that the funds with the most significant positive peer-group-adjusted alphas continue to perform well one year ahead, in terms of both parametric and non-parametric measures of persistence in performance. Moreover, persistence in performance is driven by both winner and loser funds. The results within each peer group are by and large consistent with these findings. Journal: The European Journal of Finance Pages: 1077-1098 Issue: 12 Volume: 25 Year: 2019 Month: 8 X-DOI: 10.1080/1351847X.2019.1581639 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1581639 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:12:p:1077-1098 Template-Type: ReDIF-Article 1.0 Author-Name: Chris Adcock Author-X-Name-First: Chris Author-X-Name-Last: Adcock Title: Preface Journal: The European Journal of Finance Pages: 95-95 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2020.1701261 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1701261 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:95-95 Template-Type: ReDIF-Article 1.0 Author-Name: Martin Eling Author-X-Name-First: Martin Author-X-Name-Last: Eling Author-Name: Nicola Loperfido Author-X-Name-First: Nicola Author-X-Name-Last: Loperfido Title: New mathematical and statistical methods for actuarial science and finance Journal: The European Journal of Finance Pages: 96-99 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1707251 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1707251 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:96-99 Template-Type: ReDIF-Article 1.0 Author-Name: Leopoldo Catania Author-X-Name-First: Leopoldo Author-X-Name-Last: Catania Author-Name: Nima Nonejad Author-X-Name-First: Nima Author-X-Name-Last: Nonejad Title: Density forecasts and the leverage effect: Evidence from Observation and parameter-Driven volatility models Abstract: The leverage effect refers to the well-known relationship between returns and volatility for an equity. When returns fall, volatility increases. We evaluate the role of the leverage effect with regards to generating density forecasts of equity returns using well-known observation and parameter-driven conditional volatility models. These models differ in their assumptions regarding: The parametric specification, the evolution of the conditional volatility process and how the leverage effect is specified. The ability of a model to generate accurate density forecasts when the leverage effect is incorporated or not as well as a comparison between different model-types is analyzed using a large number of financial time series. For each model type, the specification with the leverage effect tends to generate more accurate density forecasts than its no-leverage counterpart. Among the specifications considered, the Beta-t-EGARCH model is the top performer, regardless of whether we attach the same weight to each region of the conditional distribution or emphasize the left tail. Journal: The European Journal of Finance Pages: 100-118 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1586744 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1586744 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:100-118 Template-Type: ReDIF-Article 1.0 Author-Name: Mauro Bernardi Author-X-Name-First: Mauro Author-X-Name-Last: Bernardi Author-Name: Paola Stolfi Author-X-Name-First: Paola Author-X-Name-Last: Stolfi Title: A dominance test for measuring financial connectedness Abstract: This paper introduces a dominance test that allows to determine whether or not a financial institution can be classified as being more systemically important than another in a multivariate framework. The dominance test relies on a new risk measure, the ΔNetCoVaR that is specifically tailored to capture the joint extreme co-movements between institutions belonging to a network. The asymptotic theory for the statistical test is provided under mild regularity conditions concerning the joint distribution of asset returns which is assumed to be elliptically contoured. The proposed risk measure and risk measurement framework is used to analyse the US financial system during the recent Global Financial Crises. In the empirical analysis, the returns are assumed to be Elliptically Stable distributed and the estimation is carried out through the Sparse Multivariate Method of Simulated Quantiles, handling both the lack of an analytic expression for the probability density function and the potential high-dimensionality of the problem. Journal: The European Journal of Finance Pages: 119-141 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1620819 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1620819 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:119-141 Template-Type: ReDIF-Article 1.0 Author-Name: Nicola Loperfido Author-X-Name-First: Nicola Author-X-Name-Last: Loperfido Title: Kurtosis-based projection pursuit for outlier detection in financial time series Abstract: Outlier detection in financial time series is made difficult by serial dependence, volatility clustering and heavy tails. Projections achieving maximal kurtosis proved to be useful for outlier detection in multivariate datasets but their widespread application has been hampered by computational and inferential difficulties. This paper addresses both problems within the framework of univariate and multivariate financial time series. Computation of projections with maximal kurtoses in univariate financial time series is simplified to a eigenvalue problem. Projections with maximal kurtoses in multivariate financial time series best separate outliers from the bulk of the data, under a finite mixture model. The paper also addresses kurtosis optimization within the framework of portfolio selection. Practical relevance of these theoretical results is illustrated with univariate and multivariate time series from several financial markets. Empirical results also suggest that projections removing excess kurtosis could transform a univariate financial time series to a time series very similar to a Gaussian process, while the effect of outliers might be alleviated by projections achieving minimal kurtosis. Journal: The European Journal of Finance Pages: 142-164 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1647864 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1647864 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:142-164 Template-Type: ReDIF-Article 1.0 Author-Name: Zinoviy Landsman Author-X-Name-First: Zinoviy Author-X-Name-Last: Landsman Author-Name: Udi Makov Author-X-Name-First: Udi Author-X-Name-Last: Makov Author-Name: Tomer Shushi Author-X-Name-First: Tomer Author-X-Name-Last: Shushi Title: Analytic solution to the portfolio optimization problem in a mean-variance-skewness model Abstract: In portfolio theory, it is well-known that the distributions of stock returns are often unimodal asymmetric distributions. Therefore, many researches have suggested considering the skew-normal distribution as an adequate model in quantitative finance. Such asymmetry explains why the celebrated mean-variance theory, which does not account to the skewness of distribution of returns, frequently fails to provide an optimal portfolio selection rule. In this paper, we provide a novel approach for solving the problem of optimal portfolio selection for asymmetric distributions of the stock returns, by putting it into a framework of a mean-variance-skewness measure. Moreover, our optimal solutions are explicit and are closed-form. In particular, we provide an analytical portfolio optimization solution to the exponential utility of the well-known skew-normal distribution. Our analytical solution can be investigated in comparison to other portfolio selection rules, such as the standard mean-variance model. The new methodology is illustrated numerically. Journal: The European Journal of Finance Pages: 165-178 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1618363 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1618363 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:165-178 Template-Type: ReDIF-Article 1.0 Author-Name: Gero Junike Author-X-Name-First: Gero Author-X-Name-Last: Junike Author-Name: Argimiro Arratia Author-X-Name-First: Argimiro Author-X-Name-Last: Arratia Author-Name: Alejandra Cabaña Author-X-Name-First: Alejandra Author-X-Name-Last: Cabaña Author-Name: Wim Schoutens Author-X-Name-First: Wim Author-X-Name-Last: Schoutens Title: American and exotic options in a market with frictions Abstract: In a market with frictions, bid and ask prices are described by sublinear pricing functionals, which can be defined recursively using coherent risk measures. We prove the convergence of bid and ask prices for various European and American possible path-dependent options, in particular plain vanilla, Asian, lookback and barrier options in a binomial model with transaction costs. We perform several numerical experiments to confirm the theoretical findings. We apply the results to real market data of American options and compute an implied liquidity to describe the bid–ask spread. This method describes liquidity over time very well, compared to the classical approach of describing bid and ask prices by quoting bid and ask implied volatilities. Journal: The European Journal of Finance Pages: 179-199 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1599407 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1599407 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:179-199 Template-Type: ReDIF-Article 1.0 Author-Name: Andres Algaba Author-X-Name-First: Andres Author-X-Name-Last: Algaba Author-Name: Kris Boudt Author-X-Name-First: Kris Author-X-Name-Last: Boudt Author-Name: Steven Vanduffel Author-X-Name-First: Steven Author-X-Name-Last: Vanduffel Title: The variance implied conditional correlation Abstract: We apply univariate GARCH models to construct a computationally simple filter for estimating the conditional correlation matrix of asset returns. The proposed Variance Implied Conditional Correlation (VICC) exploits the polarization result that links the correlation between two standardized variables with the variances of linear combinations thereof. In a Monte Carlo study, we show that the VICC yields accurate correlation estimates for common choices of the correlation dynamics. We also provide an empirical application to cross hedging that confirms the effectiveness of the VICC. Journal: The European Journal of Finance Pages: 200-222 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1615524 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1615524 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:200-222 Template-Type: ReDIF-Article 1.0 Author-Name: Giovanni De Luca Author-X-Name-First: Giovanni Author-X-Name-Last: De Luca Author-Name: Giorgia Rivieccio Author-X-Name-First: Giorgia Author-X-Name-Last: Rivieccio Author-Name: Stefania Corsaro Author-X-Name-First: Stefania Author-X-Name-Last: Corsaro Title: Value-at-Risk dynamics: a copula-VAR approach Abstract: In financial research and among risk management practitioners the estimation of a correct measure of the Value-at-Risk still proves interesting. A current approach, the multivariate CAViaR allows to provide an accurate measure of VaR modelling the joint dynamics in the Values-at-Risk by capturing the quantile conditional dependence structure to take into account financial contagion risk. The parameter estimates are based on multiple quantile regressions which assume linear combinations of sample quantiles. In this paper we argue that the analysis of multiple time-series aimed to model the time-varying quantile dependence can require non-linear and flexible estimation procedures. To this end, we examine the conditional quantile behaviour of some assets included in the Eurostoxx50 with respect to the quantile of a portfolio representing the market with a new copula-based quantile Vector AutoRegressive approach, and compare the results with the bivariate CAViaR model. Findings show that the copula approach is highly competitive, providing a time-varying model aimed to give a better specification of the Value-at-Risk, especially in terms of loss functions. Journal: The European Journal of Finance Pages: 223-237 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1652665 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1652665 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:223-237 Template-Type: ReDIF-Article 1.0 Author-Name: Massimo Costabile Author-X-Name-First: Massimo Author-X-Name-Last: Costabile Author-Name: Ivar Massabó Author-X-Name-First: Ivar Author-X-Name-Last: Massabó Author-Name: Emilio Russo Author-X-Name-First: Emilio Author-X-Name-Last: Russo Title: Evaluating variable annuities with GMWB when exogenous factors influence the policy-holder's withdrawals Abstract: We propose an evaluation framework for variable annuities with guaranteed minimum withdrawal benefits aimed at considering a more realistic context where the policy-holder takes the decisions. In particular, in a rational context, where the policy-holder withdraws the optimal amounts maximizing the current policy value only with respect to the endogenous variables of the evaluation problem, we take into account the effect of exogenous factors that may lead the holder to withdraw sub-optimal amounts. For the sake of completeness, we propose an evaluation model based on a lattice approximation due to its flexibility and ease of implementation that is useful also for practitioners. We discretize the personal sub-account dynamics by a trinomial tree that, despite the presence of a downward jump due to the paid withdrawal at each anniversary of the contract, guarantees the reconnecting property. A backward induction scheme is used to compute the insurance fair fee paid for the guarantee. Journal: The European Journal of Finance Pages: 238-257 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1618362 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1618362 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:238-257 Template-Type: ReDIF-Article 1.0 Author-Name: Irene Albarrán Author-X-Name-First: Irene Author-X-Name-Last: Albarrán Author-Name: Pablo J. Alonso-González Author-X-Name-First: Pablo J. Author-X-Name-Last: Alonso-González Author-Name: Aurea Grané Author-X-Name-First: Aurea Author-X-Name-Last: Grané Title: Long term care insurance pricing in Spanish population: a functional data approach Abstract: Developed and developing countries are experiencing the consequences of an ever-increasing elderly population, including the challenges of chronic illness, disability, dependency and long term care. All over the world, more people are surviving diseases that were fatal some decades ago. Dependency can be seen as a consequence of the process of gradual aging. In a health context, this contingency is defined as a lack of autonomy in performing basic activities of daily living that requires the care of another person or significant help. In this work we propose a stand-alone insurance, focused on the necessities of the eligible dependent people in Spain, taking into account their health evolution along their lives, in order to enhance the net premium calculation. We use information from the Spanish survey EDAD 2008. The main finding is that, a policyholder can choose to underwrite among three kinds of coverages, going from a minimum to a maximum level of protection, the latter's premium being more than twice the former's, regardless of the onset of dependency. Journal: The European Journal of Finance Pages: 258-276 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1678497 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1678497 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:258-276 Template-Type: ReDIF-Article 1.0 Author-Name: María del Carmen Boado-Penas Author-X-Name-First: María del Carmen Author-X-Name-Last: Boado-Penas Author-Name: Humberto Godínez-Olivares Author-X-Name-First: Humberto Author-X-Name-Last: Godínez-Olivares Author-Name: Steven Haberman Author-X-Name-First: Steven Author-X-Name-Last: Haberman Author-Name: Pedro Serrano Author-X-Name-First: Pedro Author-X-Name-Last: Serrano Title: Automatic balancing mechanisms for mixed pension systems under different investment strategies Abstract: State pension systems are usually pay-as-you-go financed, i.e. current contributions cover pension expenditure. However, some countries combine funding and pay-as-you-go (PAYG) elements within the first pillar. The aim of this paper is twofold. First, using nonlinear optimisation based on [Godínez-Olivares, H., M. C. Boado-Penas, and S. Haberman. 2016. “Optimal strategies for pay-as-you-go pension finance: A sustainability framework.” Insurance: Mathematics and Economics 69: 117–126], it seeks to assess the impact of a compulsory funded defined contribution (DC) pension scheme that complements the traditional defined benefit (DB) PAYG on the level of pension benefits. Future expected returns for both the funded part and the buffer fund of the PAYG are simulated through the non-overlapping block bootstrap technique. Second, in the case of partial financial sustainability, we design different optimal strategies, that involve variables such as the contribution rate, age of retirement and indexation of pensions, to restore the long-term financial equilibrium of the system. We show that the adjustments needed to ensure sustainability for the mixed pension systems are less severe than the pure DB PAYG but the total replacement rate for the former is lower in most of the cases studied. When calculating the return that the individuals would receive, we prove that some cohorts are better off under a mixed pension system. Journal: The European Journal of Finance Pages: 277-294 Issue: 2-3 Volume: 26 Year: 2020 Month: 2 X-DOI: 10.1080/1351847X.2019.1647260 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1647260 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:2-3:p:277-294 Template-Type: ReDIF-Article 1.0 Author-Name: Wissam Abdallah Author-X-Name-First: Wissam Author-X-Name-Last: Abdallah Author-Name: Marc Goergen Author-X-Name-First: Marc Author-X-Name-Last: Goergen Title: Evolution of control of cross-listed companies Abstract: There are two theories on the determinants of the control structure of the firm. The first theory postulates that the control structure is determined by company-specific characteristics. The second theory emphasises the importance of institutional characteristics in shaping this structure. In this paper, we test the validity of both theories in the context of a cross-listing, which causes a change to the company's legal environment. We find that the initial control structure, risk and size determine the control structure post cross-listing and that cross-listing on better quality markets facilitates the evolution of control towards more dispersed control. To conclude, company characteristics have a greater impact than country characteristics on the company's decision to cross-list and are also better at explaining the change in the control structure post cross-listing. Journal: The European Journal of Finance Pages: 1507-1533 Issue: 15 Volume: 22 Year: 2016 Month: 12 X-DOI: 10.1080/1351847X.2014.1003312 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.1003312 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:1507-1533 Template-Type: ReDIF-Article 1.0 Author-Name: Thomas Conlon Author-X-Name-First: Thomas Author-X-Name-Last: Conlon Author-Name: John Cotter Author-X-Name-First: John Author-X-Name-Last: Cotter Author-Name: Ramazan Gençay Author-X-Name-First: Ramazan Author-X-Name-Last: Gençay Title: Commodity futures hedging, risk aversion and the hedging horizon Abstract: This paper examines the impact of management preferences on optimal futures hedging strategy and associated performance. Applying an expected utility hedging objective, the optimal futures hedge ratio is determined for a range of preferences on risk aversion, hedging horizon and expected returns. Empirical results reveal substantial hedge ratio variation across distinct management preferences and are supportive of the hedging policies of real firms. Hedging performance is further shown to be strongly dependent on underlying preferences. In particular, hedgers with high risk aversion and short horizon reduce hedge portfolio risk but achieve inferior utility in comparison to those with low aversion. Journal: The European Journal of Finance Pages: 1534-1560 Issue: 15 Volume: 22 Year: 2016 Month: 12 X-DOI: 10.1080/1351847X.2015.1031912 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1031912 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:1534-1560 Template-Type: ReDIF-Article 1.0 Author-Name: Jyh-Bang Jou Author-X-Name-First: Jyh-Bang Author-X-Name-Last: Jou Author-Name: Tan (Charlene) Lee Author-X-Name-First: Tan (Charlene) Author-X-Name-Last: Lee Title: How to design down-and-out barrier option contracts so that firms invest when it is socially efficient Abstract: This paper investigates how to design down-and-out barrier options contracts so as firms invest when it is socially efficient. A government initially offers a firm a privileged right to exercise an investment opportunity that exhibits external benefits to society, but will eliminate this opportunity if its prospects are sufficiently bleak. The firm will invest at the date further away from that is socially efficient if the firm either is less uncertain about the return of the investment or incurs lower investment costs, or the government owns a more valuable knock-out option. Consequently, under these three scenarios the government can efficiently either offer the firm a higher investment tax credit or impose the firm a higher lease fee for holding the option to invest. Journal: The European Journal of Finance Pages: 1561-1579 Issue: 15 Volume: 22 Year: 2016 Month: 12 X-DOI: 10.1080/1351847X.2015.1040169 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1040169 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:1561-1579 Template-Type: ReDIF-Article 1.0 Author-Name: Mahmoud Arayssi Author-X-Name-First: Mahmoud Author-X-Name-Last: Arayssi Title: The effect of private investments on banks' capital requirements Abstract: A simple leverage ratio restriction is not efficient because it does not discriminate between risky and safe banks. We use a structural and comprehensive model of the firm's asset growth to describe the equity buy-out portfolios' stylized facts for two types of banks. We derive a leverage ratio that depends on the level of risky investments, and balances between the spread on such investments, the cost of capital and the overall power of the supervisor to enforce the capital requirements. This method is more transparent and requires fewer parameters than other commonly used methods. We obtain an incentive-compatible constraint on banks to carry the minimal adequate amount of capital. This constraint enhances the supervisors' ability to enforce the rules ex post, and provide banks with a further incentive to reveal their risk type truthfully. Journal: The European Journal of Finance Pages: 1580-1595 Issue: 15 Volume: 22 Year: 2016 Month: 12 X-DOI: 10.1080/1351847X.2015.1049283 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1049283 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:1580-1595 Template-Type: ReDIF-Article 1.0 Author-Name: The Editors Title: Editorial Board Journal: The European Journal of Finance Pages: ebi-ebi Issue: 15 Volume: 22 Year: 2016 Month: 12 X-DOI: 10.1080/1351847X.2016.1228271 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1228271 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:ebi-ebi Template-Type: ReDIF-Article 1.0 Author-Name: Olaf Stotz Author-X-Name-First: Olaf Author-X-Name-Last: Stotz Title: The relative pricing of European dividend futures and their predictive abilities for index returns Abstract: We use dividend futures prices to derive a dividend future discount model. Arbitrage arguments postulate that the sum of discounted dividend futures prices should equal the index price, i.e. the sum of discounted dividends. We analyze whether this relation holds and find that the two valuation approaches lead to a different valuation of expected dividends. These observations indicate that dividend futures and index prices seem to provide the investor with different information on future dividends. We further show that the difference in valuation can be used to forecast index returns and show how an investment strategy can exploit this predictability. Journal: The European Journal of Finance Pages: 1484-1506 Issue: 15 Volume: 22 Year: 2016 Month: 12 X-DOI: 10.1080/1351847X.2014.953701 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.953701 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:15:p:1484-1506 Template-Type: ReDIF-Article 1.0 Author-Name: Daniel W. Richards Author-X-Name-First: Daniel W. Author-X-Name-Last: Richards Author-Name: Janette Rutterford Author-X-Name-First: Janette Author-X-Name-Last: Rutterford Author-Name: Devendra Kodwani Author-X-Name-First: Devendra Author-X-Name-Last: Kodwani Author-Name: Mark Fenton-O'Creevy Author-X-Name-First: Mark Author-X-Name-Last: Fenton-O'Creevy Title: Stock market investors' use of stop losses and the disposition effect Abstract: The disposition effect is an investment bias where investors hold stocks at a loss longer than stocks at a gain. This bias is associated with poorer investment performance and exhibited to a greater extent by investors with less experience and less sophistication. A method of managing susceptibility to the bias is through use of stop losses. Using the trading records of UK stock market individual investors from 2006 to 2009, this paper shows that stop losses used as part of investment decisions are an effective tool for inoculating against the disposition effect. We also show that investors who use stop losses have less experience and that, when not using stop losses, these investors are more reluctant to realise losses than other investors. Journal: The European Journal of Finance Pages: 130-152 Issue: 2 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2015.1048375 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1048375 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:2:p:130-152 Template-Type: ReDIF-Article 1.0 Author-Name: Nurhan Davutyan Author-X-Name-First: Nurhan Author-X-Name-Last: Davutyan Author-Name: Canan Yildirim Author-X-Name-First: Canan Author-X-Name-Last: Yildirim Title: Efficiency in Turkish banking: post-restructuring evidence Abstract: Turkish banking sector went through a significant restructuring process in the aftermath of the country's financial crisis of 2000–2001. In this paper, we analyze the evolution of banking performance using a novel approach due to Ray [(2007). “Shadow Profit Maximization and a Measure of Overall Inefficiency.” Journal of Productivity Analysis 27, 231–236]. We derive ‘shadow unrealized profit scores’ as well as ‘shadow input–output prices’ for each year and bank in the sector from 2002 to 2011. We argue these scores operationalize the Hicksian concept of ‘monopolistic quiet life’. We provide some evidence the sector came closer to the ‘zero profit condition’ as well as displaying a closer approximation to the ‘law of one price’ over time. We show the variability of these ‘shadow prices’ essentially coincides with that of corresponding actual prices. We utilize shadow price information to show that business models and competitive choices of banks differ across ownership types with foreign banks competing on the broadest front compared to state-owned and privately owned Turkish banks. Journal: The European Journal of Finance Pages: 170-191 Issue: 2 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2015.1049282 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1049282 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:2:p:170-191 Template-Type: ReDIF-Article 1.0 Author-Name: Juan J. García-Machado Author-X-Name-First: Juan J. Author-X-Name-Last: García-Machado Author-Name: Jarosław Rybczyński Author-X-Name-First: Jarosław Author-X-Name-Last: Rybczyński Title: How Spanish options market smiles in summer: an empirical analysis for options on IBEX-35 Abstract: This paper examines the behaviour of the smile in the Spanish Stock Exchange during 2011 and 2012 summers. In these periods, the value of the main index of the Spanish Stock Exchange market IBEX-35 had fallen down a maximum of 2103.60 points in summer 2011, which made a drop of 20.05% in this period. On the contrary, in summer 2012, it had raised a maximum of 2165.70 points. That means a rise of 26.31%, whereas the Spanish risk premium had raised dramatically. By linear interpolation, implied volatilities for moneyness points needed were calculated. Then, we construct 3288 smile curves and the same quantity of distortion levels. Thousand six hundred and forty-four smiles are for both call and put option contracts, and for all summer 2011 and 2012 maturities (June, July, August and September). Next, we compare all smile curves with 1 of the 17-typical shape patterns for calls, puts, different dates, etc. Afterwards, we take the value of the distortion level calculated before and include the smile in one A–E class of distortion. We can notice that the most popular types are only two, for both calls and puts, Left Smirk (LK) rather than Reversed Right Smirk (RRK); all smiles are formed in the same way, and they are all from ‘D’ class. The changes between LK and RRK occur only on, or one day after, expiring dates, thus are jumps in distortion. Afterwards, we make a comparison with 2013 and 2014 summers' smiles which are not marred by the short-selling ban imposed by the Spanish Securities Exchange Commission in 2011 and 2012. Journal: The European Journal of Finance Pages: 153-169 Issue: 2 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2015.1067634 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1067634 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:2:p:153-169 Template-Type: ReDIF-Article 1.0 Author-Name: Fabio Parlapiano Author-X-Name-First: Fabio Author-X-Name-Last: Parlapiano Author-Name: Vitali Alexeev Author-X-Name-First: Vitali Author-X-Name-Last: Alexeev Author-Name: Mardi Dungey Author-X-Name-First: Mardi Author-X-Name-Last: Dungey Title: Exchange rate risk exposure and the value of European firms Abstract: This paper presents a new assessment of the exposure of European firms to exchange rate fluctuations which takes into account the potential common drivers of exchange rates and equity market conditions. Using monthly data for European firms from 1999 to 2011, we assess the impact of unexpected fluctuations in the USD, JPY, GBP and CHF against the Euro, and show that the proportion of firms subject to exchange rate risk is considerably larger when estimation accounts for potential common drivers and firm-specific factors than otherwise. Firm exposure to exchange rate risk is affected by the level of international involvement, industry, firm size and country of origin. European firms with largely domestic operations reveal the greatest vulnerability to unexpected exchange rate movements, suggesting an opportunity to improve risk management for these companies. Journal: The European Journal of Finance Pages: 111-129 Issue: 2 Volume: 23 Year: 2017 Month: 1 X-DOI: 10.1080/1351847X.2015.1072570 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1072570 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:2:p:111-129 Template-Type: ReDIF-Article 1.0 Author-Name: Surendranath Rakesh Jory Author-X-Name-First: Surendranath Rakesh Author-X-Name-Last: Jory Author-Name: Tapas Mishra Author-X-Name-First: Tapas Author-X-Name-Last: Mishra Author-Name: Thanh N. Ngo Author-X-Name-First: Thanh N. Author-X-Name-Last: Ngo Title: Location-specific stock market indices: an exploration Abstract: This article develops an alternative location-specific stock market index driven by investors’ ‘attachment’ towards investment at a specific location. We evaluate the performance of hypothetical stock market indices that track companies based on their state of registration, taking the US stock market as our case. Using annual data since 1980 we present raw, risk-adjusted and value-weighted state portfolios’ returns to study the extent to which stock market performance varies by state-level demographics and economic factors. A dynamic panel data estimation – with and without spatial spillover effects – is employed to establish a strong association between stock price performance and the state-level (or geography-weighted) factors. We find that spatial effects are strong and that the ‘spatial attachment’ of companies in interaction with the various location-specific variables imparts an overarching influence on stock-price performance. Comparison of model performances further supports our claims. Journal: The European Journal of Finance Pages: 305-337 Issue: 4 Volume: 25 Year: 2019 Month: 3 X-DOI: 10.1080/1351847X.2018.1515095 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1515095 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:4:p:305-337 Template-Type: ReDIF-Article 1.0 Author-Name: Jerome Kreuser Author-X-Name-First: Jerome Author-X-Name-Last: Kreuser Author-Name: Didier Sornette Author-X-Name-First: Didier Author-X-Name-Last: Sornette Title: Super-Exponential RE bubble model with efficient crashes Abstract: We propose a dynamic Rational Expectations (RE) bubble model of prices, combining a geometric random walk with separate crash (and rally) discrete jump distributions associated with positive (and negative) bubbles. Crashes tend to efficiently bring back excess bubble prices close to a “normal” process. Then, the RE condition implies that the excess risk premium of the risky asset exposed to crashes is an increasing function of the amplitude of the expected crash, which itself grows with the bubble mispricing: hence, the larger the bubble price, the larger its subsequent growth rate. This positive feedback of price on return is the archetype of super-exponential price dynamics. We use the RE condition to estimate the real-time crash probability dynamically through an accelerating probability function depending on the increasing expected return. After showing how to estimate the model parameters, we obtain a closed-form approximation for the optimal investment that maximizes the expected log of wealth (Kelly criterion) for the risky bubbly asset and a risk-free asset. We demonstrate, on seven historical crashes, the promising outperformance of the method compared to a 60/40 portfolio, the classic Kelly allocation, and the risky asset, and how it mitigates jumps, both positive and negative. Journal: The European Journal of Finance Pages: 338-368 Issue: 4 Volume: 25 Year: 2019 Month: 3 X-DOI: 10.1080/1351847X.2018.1521342 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1521342 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:4:p:338-368 Template-Type: ReDIF-Article 1.0 Author-Name: S. Lleo Author-X-Name-First: S. Author-X-Name-Last: Lleo Author-Name: W. T. Ziemba Author-X-Name-First: W. T. Author-X-Name-Last: Ziemba Title: Can Warren Buffett forecast equity market corrections? Abstract: Warren Buffett suggested that the ratio of the market value of all publicly traded stocks to the Gross National Product could identify potential overvaluations and undervaluations in the US equity market when this ratio deviates above 120% or below 80%. We investigate whether this ratio is a statistically significant predictor of equity market corrections and rallies. We find that Buffett's decision rule does not deliver satisfactory forecasts. However, when we adopt a time-varying decision rule, the ratio becomes a statistically significant predictor of equity market corrections. The two time-varying decision rules are: (i) predict an equity market correction when the ratio exceeds a 95% one-tail confidence interval based on a normal distribution, and (ii) predict an equity market correction when the ratio exceeds a threshold computed using Cantelli's inequality. These new decision rules are robust to changes in the two key parameters: the confidence level and the forecasting horizon. This paper also shows that the MV/GNP ratio performs relatively well against the four most popular equity market correction models, but the ratio is not a particularly useful predictor of equity market rallies. Journal: The European Journal of Finance Pages: 369-393 Issue: 4 Volume: 25 Year: 2019 Month: 3 X-DOI: 10.1080/1351847X.2018.1521859 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1521859 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:4:p:369-393 Template-Type: ReDIF-Article 1.0 Author-Name: Qiwei Chen Author-X-Name-First: Qiwei Author-X-Name-Last: Chen Author-Name: Xiuping Hua Author-X-Name-First: Xiuping Author-X-Name-Last: Hua Author-Name: Ying Jiang Author-X-Name-First: Ying Author-X-Name-Last: Jiang Title: Contrarian strategy and herding behaviour in the Chinese stock market Abstract: This paper investigates the profitability of several types of zero-cost price momentum and contrarian strategies in the Chinese stock market for the 1994–2013 period. Several distinct features of Chinese market are documented. We find that contrarian strategies that use Jegadeesh and Titman's (1993) method with weekly frequency are profitable. However, investment strategies based on the ‘nearness’ to of 52-week high or the recency of the 52-week high are not profitable. Our analysis also shows that contrarian profits are higher during the crisis period of 2008–2012. In addition, the return reversal of the winner and loser portfolios suggests that contrarian profits can be attributed to overreaction. Finally, we also find evidence of herding behaviour in the Chinese market; and the degree of herding behaviour is positively correlated with the profits of contrarian trading strategies. Journal: The European Journal of Finance Pages: 1552-1568 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2015.1071715 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1071715 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1552-1568 Template-Type: ReDIF-Article 1.0 Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Junhong Yang Author-X-Name-First: Junhong Author-X-Name-Last: Yang Title: Adjustment behavior of corporate cash holdings: the China experience Abstract: Using a panel of 1478 Chinese listed firms over the period 1998–2010, we examine the behavior of corporate cash holdings. Consistent with the trade-off theory, we document that Chinese firms tend to actively manage their cash balances toward a target level. We also observe a considerable heterogeneity in adjustment speeds of cash holdings across firms, due to the presence of different adjustment costs. Specifically, firms with a high level of excess cash, and firms that actively manage their cash balances through investment, dividend payments, and debt issuance, all display higher adjustment speeds. Finally, the institutional setting does not significantly affect adjustment speeds. Journal: The European Journal of Finance Pages: 1428-1452 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2015.1071716 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1071716 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1428-1452 Template-Type: ReDIF-Article 1.0 Author-Name: Douglas Cumming Author-X-Name-First: Douglas Author-X-Name-Last: Cumming Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Eliza Wu Author-X-Name-First: Eliza Author-X-Name-Last: Wu Title: Exchange trading rules, governance, and trading location of cross-listed stocks Abstract: This paper shows that stock exchange trading rules are of central importance for the trading location of cross-listed stocks. We consider various measures of sovereign governance and shareholder rights across both developed and emerging countries to assess the complementary effects of other legal and institutional drivers of trading activity. The data indicate that the proportion of trades that occurs on an exchange increases at a decreasing rate with the strength of stock exchange trading rules. The effectiveness of stock exchange rules increases with the strength of regulatory institutions in the country hosting the stock exchange. Furthermore, corroborating with our full sample findings, difference-in-difference tests indicate that the promulgation of the Markets in Financial Instruments Directive, which strengthened trading rules within the European Union (EU), has increased the amount of trade in the EU. Journal: The European Journal of Finance Pages: 1453-1484 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2015.1089522 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1089522 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1453-1484 Template-Type: ReDIF-Article 1.0 Author-Name: Arif Khurshed Author-X-Name-First: Arif Author-X-Name-Last: Khurshed Author-Name: Yan Tong Author-X-Name-First: Yan Author-X-Name-Last: Tong Author-Name: Mingzhu Wang Author-X-Name-First: Mingzhu Author-X-Name-Last: Wang Title: Split-share structure reform and the underpricing of Chinese initial public offerings Abstract: This paper analyses whether the extreme underpricing of initial public offerings (IPOs) in China has been alleviated by the split-share structure reform in 2005. As an external policy shock to IPO firms, this Reform was designed to convert non-tradable shares into tradable shares, with the potentials to restore the distorted supply–demand relationship of newly issued shares and reduce the information asymmetry in Chinese stock market. Analysing a sample of IPOs in China from 2000 to 2011, we find that the split-share structure reform significantly reduced the magnitude of IPO underpricing since 2005. It had different impacts on the IPO shares issued by state-owned enterprise (SOEs) and non-SOEs. While IPO shares issued by SOEs and non-SOEs had similar underpricing rates before the Reform, non-SOE IPOs show lower underpricing than those of SOEs after the Reform. Furthermore, compared with IPOs issued by SOEs controlled by the central government, those issued by local governments controlled SOEs are more underpriced after the Reform. Journal: The European Journal of Finance Pages: 1485-1505 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2015.1107603 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1107603 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1485-1505 Template-Type: ReDIF-Article 1.0 Author-Name: Weiying Zhang Author-X-Name-First: Weiying Author-X-Name-Last: Zhang Title: Six understandings of corporate governance structure in the context of China Abstract: This paper discusses six misunderstandings about corporate governance in the context of China, particularly about the relationships between ownership and governance, between entrepreneurship and incentive, and between regulation and reputation. These misunderstandings exist not just in theoretical circles, but also in practice. The common characteristic of these misunderstandings is the distrust in the market mechanism and the neglect for the entrepreneurial spirit. Such distrust and neglect can be partly attributed to the misunderstanding of the market by the mainstream economic theories that do not take the entrepreneurs into consideration in their models. In order to have a more complete understanding of the market and corporate governance, we must transition from a manager-centered model towards an entrepreneur-centered model. We discuss the implications of this approach for public policy-making. Journal: The European Journal of Finance Pages: 1375-1387 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2015.1113194 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1113194 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1375-1387 Template-Type: ReDIF-Article 1.0 Author-Name: Hisham Farag Author-X-Name-First: Hisham Author-X-Name-Last: Farag Author-Name: Chris Mallin Author-X-Name-First: Chris Author-X-Name-Last: Mallin Title: The influence of CEO demographic characteristics on corporate risk-taking: evidence from Chinese IPOs Abstract: We investigate the influence of Chief Executive Officers’ (CEOs’) demographic characteristics (e.g. age, board experience, professional experience, education and gender) on corporate risk-taking for a sample of 892 IPOs floated in both the Shanghai and Shenzhen Stock Exchanges. Using fixed effects and system Generalized Method of Moments models we find that younger and shorter tenured CEOs and those with postgraduate qualifications are more likely to consider risky decisions. We also find a highly significant and positive relationship between CEO previous board experience and corporate risk-taking. Interestingly and consistent with the recent literature, we find that female CEOs are not risk averse compared with their male counterparts. Moreover, we find that corporate risk-taking is higher the greater the proportion of state ownership. Finally, our study may provide useful insights to shareholders as they generally seek to hire the most talented CEOs with the relevant set of skills to achieve shareholders’ objectives and improve the Chinese competitiveness in the global market. Journal: The European Journal of Finance Pages: 1528-1551 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2016.1151454 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151454 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1528-1551 Template-Type: ReDIF-Article 1.0 Author-Name: Dayong Zhang Author-X-Name-First: Dayong Author-X-Name-Last: Zhang Author-Name: Jing Cai Author-X-Name-First: Jing Author-X-Name-Last: Cai Author-Name: Jia Liu Author-X-Name-First: Jia Author-X-Name-Last: Liu Author-Name: Ali M. Kutan Author-X-Name-First: Ali M. Author-X-Name-Last: Kutan Title: Real estate investments and financial stability: evidence from regional commercial banks in China Abstract: The 2008 US subprime mortgage crisis demonstrated how developments in real estate markets can cause instability in the banking sector and raised concerns in many emerging economies with significant real estate development and a rapidly growing commercial banking sector, particularly in China. There is clear evidence that commercial banks in China, especially regional commercial banks, have lent significantly to the real estate sector. The recent slowdown in the housing market in China and the increase in nonperforming loans (NPLs) in China's commercial banking sector motivated us to investigate the connection between real estate markets and banking stability. This paper proposes three testable hypotheses linking the growth of investment in real estate and the stability of regional commercial banks in China, measured by NPLs. Our empirical results reveal a close connection between the growth of investment in real estate and the NPLs among regional commercial banks, and its sensitivity to real estate market cycles. When real estate market activity declines, our results suggest, regional commercial banks can find themselves in trouble if they have significant exposure to one type of (real estate) asset. In addition, we find that regional bank competition plays a critical role in defining the relationship between bank stability and real estate investment activity. Journal: The European Journal of Finance Pages: 1388-1408 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2016.1154083 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1154083 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1388-1408 Template-Type: ReDIF-Article 1.0 Author-Name: Qin Gou Author-X-Name-First: Qin Author-X-Name-Last: Gou Author-Name: Yiping Huang Author-X-Name-First: Yiping Author-X-Name-Last: Huang Author-Name: Jianguo Xu Author-X-Name-First: Jianguo Author-X-Name-Last: Xu Title: Does ownership matter in access to bank credit in China? Abstract: Employing two World Bank survey datasets of small- and medium-sized enterprises (SMEs), we investigate whether ownership discrimination exists in Chinese banks’ credit allocation. By comparing firms’ credit demand and loan availability, we identify two types of credit-rationing, self- and bank-rationing. We find that more than half of potential borrowers are credit-rationed, most of which is due to self-rationing. While several firm characteristics and macro-financial factors are important in determining chances of credit-rationing, there is no evidence to support the popular assertion of ownership discrimination in credit allocation in China. This also suggests that ownership reform alone is not sufficient for alleviating SMEs’ funding difficulties. Journal: The European Journal of Finance Pages: 1409-1427 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2016.1190391 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1190391 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1409-1427 Template-Type: ReDIF-Article 1.0 Author-Name: Alfredo De Massis Author-X-Name-First: Alfredo Author-X-Name-Last: De Massis Author-Name: Shujun Ding Author-X-Name-First: Shujun Author-X-Name-Last: Ding Author-Name: Josip Kotlar Author-X-Name-First: Josip Author-X-Name-Last: Kotlar Author-Name: Zhenyu Wu Author-X-Name-First: Zhenyu Author-X-Name-Last: Wu Title: Family involvement and R&D expenses in the context of weak property rights protection: an examination of non-state-owned listed companies in China Abstract: The impact of family involvement on firm behaviour is an issue of global interest, yet paradoxically few studies examine the behaviour of family firms in the unique socio-political environment of China. We investigate the cross-institutional generalizability of the behavioural agency model, emphasizing the non-economic goals of controlling families as a driver of unique yet predictable behaviours in Chinese family firms and examine the relationship between family involvement and the R&D expenses reported by these firms. We propose that in a context of weak property rights protection such as China’s, the opportunity for family owners to attain transgenerational control is subject to the additional risk of state predation. We consequently expect economic goals to prevail over family-centred non-economic goals in Chinese family firms and hypothesize that their reported R&D expenses increase with family involvement due to severe Type II agency problems. Moreover, we examine the effect of positive and negative performance feedback on this relationship. Longitudinal data from non-state-owned listed companies in China provide overall support for these contentions. We discuss the theoretical and practical implications of these findings. Journal: The European Journal of Finance Pages: 1506-1527 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2016.1200994 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1200994 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1506-1527 Template-Type: ReDIF-Article 1.0 Author-Name: Alessandra Guariglia Author-X-Name-First: Alessandra Author-X-Name-Last: Guariglia Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Xiuping Hua Author-X-Name-First: Xiuping Author-X-Name-Last: Hua Author-Name: Yiping Huang Author-X-Name-First: Yiping Author-X-Name-Last: Huang Title: Chinese capital markets: the importance of history for modern development Journal: The European Journal of Finance Pages: 1369-1374 Issue: 16 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2018.1496571 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1496571 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:16:p:1369-1374 Template-Type: ReDIF-Article 1.0 Author-Name: Jonathan Fletcher Author-X-Name-First: Jonathan Author-X-Name-Last: Fletcher Author-Name: Krishna Paudyal Author-X-Name-First: Krishna Author-X-Name-Last: Paudyal Author-Name: Timbul Santoso Author-X-Name-First: Timbul Author-X-Name-Last: Santoso Title: Exploring the benefits of international government bond portfolio diversification strategies Abstract: We use the Bayesian approach of Wang (1998) to examine the diversification benefits of investing in international government bonds. We find that no short-selling constraints substantially reduce but do not eliminate the diversification benefits when only investing in G7 government bonds with different maturities. There are significant diversification benefits when using the G7 bonds, an inflation-linked bond index, and emerging market bonds even in the presence of no short-selling constraints. The superior performance is driven by the emerging markets bonds. We also find that the diversification benefits vary across different economic states. Journal: The European Journal of Finance Pages: 1-15 Issue: 1 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1450279 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1450279 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:1:p:1-15 Template-Type: ReDIF-Article 1.0 Author-Name: Yun Feng Author-X-Name-First: Yun Author-X-Name-Last: Feng Author-Name: Binghua Huang Author-X-Name-First: Binghua Author-X-Name-Last: Huang Author-Name: Hai Zhang Author-X-Name-First: Hai Author-X-Name-Last: Zhang Title: Hedge fund seeding with fees-for-guarantee swaps Abstract: This paper introduces a new instrument in the context of hedge fund seeding, which we call fees-for-guarantee swap, with the aim of alleviating the early-stage funds (ESF) managers' financial constraint caused by severe asymmetric information between investors and managers. The swap plays a role in enhancing the ESFs manager's credibility by swapping part of her fees for an insurance on the behalf of seeding investors, whom would be fully refunded once the fund defaults. We set up a dynamic continuous-time framework within which closed-form prices for seed capital, guarantee costs and other claims have been derived. Our numerical findings indicate that incentive compensations, managerial ownership and hedge funds liquidation risks not only inhibit ESFs managers' risk-shifting incentive but align interests among ESFs manager, seeder and insurer as well. Journal: The European Journal of Finance Pages: 16-34 Issue: 1 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1456475 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1456475 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:1:p:16-34 Template-Type: ReDIF-Article 1.0 Author-Name: Andrea Eross Author-X-Name-First: Andrea Author-X-Name-Last: Eross Author-Name: Andrew Urquhart Author-X-Name-First: Andrew Author-X-Name-Last: Urquhart Author-Name: Simon Wolfe Author-X-Name-First: Simon Author-X-Name-Last: Wolfe Title: Investigating risk contagion initiated by endogenous liquidity shocks: evidence from the US and eurozone interbank markets Abstract: This paper investigates liquidity spillovers between the US and European interbank markets during turbulent and tranquil periods. We show that an endogenous model with time-varying transition probabilities is effective in describing the propagation of liquidity shocks within the interbank market, while predicting liquidity crashes characterised by changed dynamics. We show that liquidity shocks, originating from movements of the spread between the Asset Backed Commercial Paper and T-bill, drive regime changes in the euro fixed-float OIS swap rate. Our results support the idea of endogenous contagion from the US money market to the eurozone money market during the global financial crisis. Journal: The European Journal of Finance Pages: 35-53 Issue: 1 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1462840 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1462840 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:1:p:35-53 Template-Type: ReDIF-Article 1.0 Author-Name: Gong Cheng Author-X-Name-First: Gong Author-X-Name-Last: Cheng Author-Name: Dirk Mevis Author-X-Name-First: Dirk Author-X-Name-Last: Mevis Title: What happened to profitability? Shocks, challenges and perspectives for euro area banks Abstract: This paper analyses the evolution of bank profitability from 2005 to 2016, with a focus on the period covering both the global financial crisis and the euro area crisis. To accomplish this, we constructed a dataset that includes financial statement information from 310 euro area banks. Using a dual approach – a ‘bottom-up’ approach as applied by bank analysts and macroeconomists' ‘top-down’ approach, we find that the profitability of euro area banks was hit by two shocks of different nature. The Lehman Brothers collapse affected mostly big banks with diversified portfolios via losses in their securities investment. The subsequent euro area debt crisis and economic recession hit more traditional banks specialising in retail lending activities, mainly through increasing impairment costs. If the first shock had a one-off impact on bank profitability, the second shock is far more long-lasting and is still depressing the profitability of banks in peripheral Europe. Journal: The European Journal of Finance Pages: 54-78 Issue: 1 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1470994 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1470994 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:1:p:54-78 Template-Type: ReDIF-Article 1.0 Author-Name: William C. Johnson Author-X-Name-First: William C. Author-X-Name-Last: Johnson Author-Name: Sungwoo Nam Author-X-Name-First: Sungwoo Author-X-Name-Last: Nam Author-Name: Sangho Yi Author-X-Name-First: Sangho Author-X-Name-Last: Yi Title: The commitment value of takeover defenses Abstract: We investigate how takeover defenses can facilitate a firm’s value-increasing stakeholder relationships by bonding its commitment to respect stakeholders’ appropriable quasi-rents in the firm. For this purpose, we develop two variations of the B-index of takeover defenses which are specifically designed to capture the bonding benefit of takeover defenses. We find evidence that some takeover defenses, but not all, provide a bonding benefit in terms of facilitation of a firm’s value-increasing stakeholder relationships. This implies that a firm must selectively adopt the most effective takeover defenses to achieve the desired corporate goals. Journal: The European Journal of Finance Pages: 79-100 Issue: 1 Volume: 25 Year: 2019 Month: 1 X-DOI: 10.1080/1351847X.2018.1481444 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1481444 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:1:p:79-100 Template-Type: ReDIF-Article 1.0 Author-Name: Sheraz Ahmed Author-X-Name-First: Sheraz Author-X-Name-Last: Ahmed Author-Name: Jani Hirvonen Author-X-Name-First: Jani Author-X-Name-Last: Hirvonen Author-Name: Syed Mujahid Hussain Author-X-Name-First: Syed Mujahid Author-X-Name-Last: Hussain Title: Pricing of time-varying liquidity risk in Finnish stock market: new evidence Abstract: Using two recently developed illiquidity measures, we estimate a conditional version of liquidity-adjusted capital asset pricing model (LCAPM), which allows for a time-varying decomposition of the total illiquidity premium into a level component and three risk components. The total estimated annualized illiquidity premium for the Finnish equities during 1997–2015 is 1.13–1.90% depending on the illiquidity measure. Of the three systematic liquidity risk components, risk arising from hedging of wealth shocks is the most important followed by commonality in liquidity risk, whereas flight to liquidity risk is not significantly priced in the Finnish stock market. Our results show that the liquidity risk is time varying, therefore the models estimating the risk-return relationship should address the issue of conditionality. Journal: The European Journal of Finance Pages: 1147-1165 Issue: 13 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1577746 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1577746 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:13:p:1147-1165 Template-Type: ReDIF-Article 1.0 Author-Name: Giovanni Barone-Adesi Author-X-Name-First: Giovanni Author-X-Name-Last: Barone-Adesi Author-Name: Carlo Sala Author-X-Name-First: Carlo Author-X-Name-Last: Sala Title: Testing market efficiency with the pricing kernel Abstract: Market efficiency and the pricing kernel are closely related. A non-monotonic decreasing pricing kernel implies the existence of a trading strategy in contingent claims that stochastically dominates a direct investment in the market. Moreover, a market is assumed to be efficient only if no dominating strategies exist. Empirically, many studies of the pricing kernel find non-monotonicity, apparently ruling out market efficiency. However, these results are often unreliable, because the pricing measures of the pricing kernel are estimated using differing filtration sets. We show this effect both theoretically and empirically, and we discuss recent approaches in the literature for achieving more reliable estimates of the pricing kernel, potentially leading to better tests of market efficiency. Journal: The European Journal of Finance Pages: 1166-1193 Issue: 13 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1581638 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1581638 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:13:p:1166-1193 Template-Type: ReDIF-Article 1.0 Author-Name: Tung Liang Liao Author-X-Name-First: Tung Liang Author-X-Name-Last: Liao Author-Name: Li-Chueh Tsai Author-X-Name-First: Li-Chueh Author-X-Name-Last: Tsai Author-Name: Mei-Chu Ke Author-X-Name-First: Mei-Chu Author-X-Name-Last: Ke Author-Name: Yi-Chein Chiang Author-X-Name-First: Yi-Chein Author-X-Name-Last: Chiang Author-Name: Chuan-Hao Hsu Author-X-Name-First: Chuan-Hao Author-X-Name-Last: Hsu Title: Financial crisis and market efficiency: evidence from European stock markets Abstract: This study examines market efficiency levels for the 16 European major stock markets in response to the 2018 financial crisis. Stochastic dominance is used to investigate the existence of four popular value premium (VP) indicators, including book-to-market, earnings-to-price, cash earnings-to-price and dividend-to-price ratios, so a total of 64 $ (4 \times 16) $ (4×16) market-indicator observations are formed in the pre- and post-crisis periods, respectively. Stocks in the top (bottom) 30% of each indicator are defined as value (growth) portfolio, dubbed 30-40-30 splitting, and 20-60-20 and 10-80-10 partitions are also constructed in this study. Difference test shows that the ratio of the existence of the VP for each partition in the pre-crisis period is significantly higher than its corresponding partition in the post-crisis period, respectively, indicating that  market efficiency levels are impacted by financial crisis. Next, difference test also shows that the ratio of the existence of the VP for 30-40-30 partition is significantly lower than that for 20-60-20 partition in the per- and post-crisis periods, respectively. However, the ratio of the existence of the VP between 20-60-20 and 10-80-10 partitions is not significantly different in the pre- and post-crisis periods, respectively. Journal: The European Journal of Finance Pages: 1194-1210 Issue: 13 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1584579 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1584579 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:13:p:1194-1210 Template-Type: ReDIF-Article 1.0 Author-Name: Vu Tran Author-X-Name-First: Vu Author-X-Name-Last: Tran Author-Name: Rasha Alsakka Author-X-Name-First: Rasha Author-X-Name-Last: Alsakka Author-Name: Owain ap Gwilym Author-X-Name-First: Owain Author-X-Name-Last: ap Gwilym Title: Investors’ heterogeneous beliefs and the impact of sovereign credit ratings in foreign exchange and equity markets Abstract: We propose a model in which sovereign credit news from multiple rating agencies interacts with market heterogeneity. The model illustrates that the first messenger discloses new information while additional messengers play an important role of coordinating heterogeneous beliefs. Empirical investigations based on sovereign credit ratings, foreign exchange and equity markets confirm that rating news coordinates investors’ beliefs. Sovereign credit rating news from both types of messenger induces a significant impact on exchange rates and stock indices. Volatility measures increase in response to news from the first messenger while ex-post volatility reduces following news from an additional messenger. Journal: The European Journal of Finance Pages: 1211-1233 Issue: 13 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1586743 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1586743 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:13:p:1211-1233 Template-Type: ReDIF-Article 1.0 Author-Name: Jonathan Fletcher Author-X-Name-First: Jonathan Author-X-Name-Last: Fletcher Title: How many factors are important in U.K. stock returns? Abstract: I use the sequential approach of Harvey and Liu ([2018]. Lucky factors (Working Paper). Duke University) to build linear factor models in U.K. stock returns among a set of 13 candidate factors using individual stocks and three groups of test portfolios between July 1983 and December 2017. My study finds that the Market factor is the dominant factor in reducing mispricing in individual stocks and test portfolios regardless of the pricing error metric used. The Market factor has a bigger impact when using a value weighting pricing error metric. Whether a second factor is used or not depends upon which metric is used for mispricing and the time period examined. My study finds support for a two-factor model for the whole sample period of the Market factor and the Conservative Minus Aggressive (CMA) factor of Fama and French ([2015]. “A five-factor asset pricing model.” Journal of Financial Economics 116: 1–22) when giving greater weight to the mispricing of larger companies. Journal: The European Journal of Finance Pages: 1234-1249 Issue: 13 Volume: 25 Year: 2019 Month: 9 X-DOI: 10.1080/1351847X.2019.1586745 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1586745 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:13:p:1234-1249 Template-Type: ReDIF-Article 1.0 Author-Name: Adri De Ridder Author-X-Name-First: Adri Author-X-Name-Last: De Ridder Author-Name: David A. Burnie Author-X-Name-First: David A. Author-X-Name-Last: Burnie Title: Managerial actions and nominal stock price levels Abstract: We examine nominal and real stock prices and the sequential price pattern of stock dividends and stock splits. We find that the average stock price has been fairly stable over time except for two decades in the beginning and end of the twentieth century. Inclusion of these periods yield a decline over time which is generally consistent with the drop in price levels found by Chittenden et al. [2010. “A Note on Affordability and the Optimal Share Price.” Financial Review 45: 205–216]. In a multivariate setting, the frequency of stock dividends and stock splits is positively related to the frequency for these events the prior year and recent market return. In further tests of the price change we find a positive relationship to the median price change for stock dividends/splits and negatively to labour income growth for stock splits. These findings indicate that stock price reduction via stock dividends and splits attracts individual investors as income grows. One key conclusion is that the primary reason for any stock action, dividend or split, is to fit the ‘norm’ stock price level of the market. Journal: The European Journal of Finance Pages: 1435-1456 Issue: 14 Volume: 22 Year: 2016 Month: 11 X-DOI: 10.1080/1351847X.2015.1019644 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1019644 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:14:p:1435-1456 Template-Type: ReDIF-Article 1.0 Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Neil Kellard Author-X-Name-First: Neil Author-X-Name-Last: Kellard Author-Name: Jian Wang Author-X-Name-First: Jian Author-X-Name-Last: Wang Title: Commodity futures returns: more memory than you might think! Abstract: This paper investigates long-range dependence in 14 commodity and 3 other financial futures returns series from 1993 to 2009 and shows that long memory is a pervasive phenomenon in contrast to the extant evidence. Utilizing a semi-parametric wavelet-based estimator with time windows, the results provide overwhelming evidence of time-varying long-range dependence in all futures returns series. Structural break tests indicate multiple regimes of dependence, in the majority of which the persistence parameter is statistically significant. The results also provide evidence of predominantly negative parameter values which are known as anti-persistence. The latter is consistent with investor overreaction to shocks and suggests temporary departures from market efficiency. Journal: The European Journal of Finance Pages: 1457-1483 Issue: 14 Volume: 22 Year: 2016 Month: 11 X-DOI: 10.1080/1351847X.2015.1025989 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1025989 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:14:p:1457-1483 Template-Type: ReDIF-Article 1.0 Author-Name: Januj Juneja Author-X-Name-First: Januj Author-X-Name-Last: Juneja Author-Name: Kuntara Pukthuanthong Author-X-Name-First: Kuntara Author-X-Name-Last: Pukthuanthong Title: Model-free jump measures and interest rates: common patterns in US and UK monetary policy around major economic events Abstract: We employ model-free jump measures to study monetary policy operations in the UK and USA around major economic events by exploiting the relationship between jumps, interest rates, and macroeconomic news releases related to monetary policy. In our analysis, we explicitly account for the timing of jumps in UK and US interest rates and the correlation across jumps in the same two interest rates and whether these match Federal Open Market Committee (FOMC)/Monetary Policy Committee news releases. We find that FOMC news releases lag jumps in US interest rates, but lead jumps in UK Gilt rates. Overall, our analysis suggests that US Treasury Bills react to information in the aforementioned news releases before their announcement while UK Gilt yields react after them and that the Fed and Bank of England react similarly around major economic events. Journal: The European Journal of Finance Pages: 1388-1413 Issue: 14 Volume: 22 Year: 2016 Month: 11 X-DOI: 10.1080/1351847X.2015.1092164 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1092164 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:14:p:1388-1413 Template-Type: ReDIF-Article 1.0 Author-Name: David A. Bowen Author-X-Name-First: David A. Author-X-Name-Last: Bowen Author-Name: Mark C. Hutchinson Author-X-Name-First: Mark C. Author-X-Name-Last: Hutchinson Title: Pairs trading in the UK equity market: risk and return Abstract: In this paper, we provide the first comprehensive UK evidence on the profitability of the pairs trading strategy. Evidence suggests that the strategy performs well in crisis periods, so we control for both risk and liquidity to assess performance. To evaluate the effect of market frictions on the strategy, we use several estimates of transaction costs. We also present evidence on the performance of the strategy in different economic and market states. Our results show that pairs trading portfolios typically have little exposure to known equity risk factors such as market, size, value, momentum and reversal. However, a model controlling for risk and liquidity explains a far larger proportion of returns. Incorporating different assumptions about bid-ask spreads leads to reductions in performance estimates. When we allow for time-varying risk exposures, conditioned on the contemporaneous equity market return, risk-adjusted returns are generally not significantly different from zero. Journal: The European Journal of Finance Pages: 1363-1387 Issue: 14 Volume: 22 Year: 2016 Month: 11 X-DOI: 10.1080/1351847X.2014.953698 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.953698 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:14:p:1363-1387 Template-Type: ReDIF-Article 1.0 Author-Name: Qian Guo Author-X-Name-First: Qian Author-X-Name-Last: Guo Author-Name: Huw Rhys Author-X-Name-First: Huw Author-X-Name-Last: Rhys Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: The Friedman rule and inflation targeting Abstract: We use concepts from the financial economics discipline – and in particular the methods of continuous time finance – to develop a monetarist model under which the rate of inflation evolves in terms of a first-order mean reversion process based on a ‘white noise’ error structure. The Fokker–Planck (i.e. the Chapman–Kolmogorov) equation is then invoked to retrieve the steady-state (i.e. unconditional) probability distribution for the rate of inflation. Monthly data for the UK Consumer Price Index (CPI) covering the period from 1988 until 2012 are then used to estimate the parameters of the probability distribution for the UK inflation rate. The parameter estimates are compatible with the hypothesis that the UK inflation rate evolves in terms of a slightly skewed and highly leptokurtic probability distribution that encompasses non-convergent higher moments. We then determine the Hamilton–Jacobi–Bellman fundamental equation of optimality corresponding to a monetary policy loss function defined in terms of the squared difference between the targeted rate of inflation and the actual inflation rate. Optimising and then solving the Hamilton–Jacobi–Bellman equation shows that the optimal control for the rate of increase in the money supply will be a linear function of the difference between the current rate of inflation and the targeted inflation rate. The conditions under which the optimal control will lead to the Friedman rule are then determined. These conditions are used in conjunction with the Fokker–Planck equation and the mean reversion process describing the evolution of the inflation rate to determine the probability distribution for the inflation rate under the Friedman rule. This shows that whilst the empirically determined probability distribution for the UK inflation rate meets some of the conditions required for the application of the Friedman rule, it does not meet them all. Journal: The European Journal of Finance Pages: 1414-1434 Issue: 14 Volume: 22 Year: 2016 Month: 11 X-DOI: 10.1080/1351847X.2014.953700 File-URL: http://hdl.handle.net/10.1080/1351847X.2014.953700 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:22:y:2016:i:14:p:1414-1434 Template-Type: ReDIF-Article 1.0 Author-Name: Jonathan Fletcher Author-X-Name-First: Jonathan Author-X-Name-Last: Fletcher Title: Exploring the benefits of using stock characteristics in optimal portfolio strategies Abstract: I examine the benefits of using stock characteristics to model optimal portfolio weights in stock selection strategies using the characteristic portfolio approach of Brandt, Santa-Clara, and Valkanov. [2009. “Parametric Portfolio Policies: Exploiting Characteristics in the Cross-section of Equity Returns.” Review of Financial Studies 22: 3411–3447]. I find that there are significant out-of-sample performance benefits in using characteristics in stock selection strategies even after adjusting for trading costs, when investors can invest in the largest 350 UK stocks. Imposing short selling restrictions on the characteristic portfolio strategy leads to more consistent performance. The performance benefits are concentrated in the earlier part of the sample period and have disappeared in recent years. I find that there no performance benefits in using stock characteristics when using random subsets of the largest 350 stocks. Journal: The European Journal of Finance Pages: 192-210 Issue: 3 Volume: 23 Year: 2017 Month: 2 X-DOI: 10.1080/1351847X.2015.1062036 File-URL: http://hdl.handle.net/10.1080/1351847X.2015.1062036 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:3:p:192-210 Template-Type: ReDIF-Article 1.0 Author-Name: Marina Balboa Author-X-Name-First: Marina Author-X-Name-Last: Balboa Author-Name: José Martí Author-X-Name-First: José Author-X-Name-Last: Martí Author-Name: Álvaro Tresierra-Tanaka Author-X-Name-First: Álvaro Author-X-Name-Last: Tresierra-Tanaka Title: Are firms accessing venture funding more financially constrained? New evidence from capital structure adjustments Abstract: We analyze whether firms that receive venture capital (VC) at a later date face more financial constraints than a one-by-one matched sample of firms that did not receive VC funding (control group). The aim is to check whether their financial flexibility explains why they decide to seek external equity funding. In contrast with other papers, which focus on the sensitivity of investments to cash flow, we study this issue by applying a dynamic model to analyze the speed of adjustment to their target debt levels prior to receiving the first VC investment. We analyze a representative sample of 237 Spanish unlisted firms that received VC between 1995 and 2007 and its corresponding control group. We find that firms that receive VC funding show a significantly lower speed of adjustment than their matched peers before the initial VC round. It seems that the former are more concerned about funding the required investments than about adjusting the firm's debt ratio to a target level. Our results confirm the role of VC in filling the equity gap in constrained unlisted firms. From a capital structure perspective, VC may become a tool for these companies to balance their capital structure in a growth process. Journal: The European Journal of Finance Pages: 243-265 Issue: 3 Volume: 23 Year: 2017 Month: 2 X-DOI: 10.1080/1351847X.2016.1151803 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1151803 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:3:p:243-265 Template-Type: ReDIF-Article 1.0 Author-Name: M. Belén Lozano Author-X-Name-First: M. Belén Author-X-Name-Last: Lozano Author-Name: Rodrigo F. Durán Author-X-Name-First: Rodrigo F. Author-X-Name-Last: Durán Title: Family control and adjustment to the optimal level of cash holding Abstract: Given the predominance of family control in most European corporations, understanding how this type of ownership affects firms’ cash holding policy is important. The literature has yet to address this subject satisfactorily; therefore, we outline a way to model how family firms define their cash policy, specifically, the way in which they adjust their cash holding to an optimal level. We base our analysis on trade-off theory and the precautionary motive for holding cash. Our empirical results show that family firms adjust their cash holding level more aggressively than non-family firms, and, therefore, family firms are capable of achieving optimal cash holding faster and more efficiently than non-family firms. Further, we find that family firms have a heterogeneous cash policy; in particular, young family firms, financially constrained family firms, and family firms that operate in countries with strong investor protection adjust their cash holding more aggressively. Journal: The European Journal of Finance Pages: 266-295 Issue: 3 Volume: 23 Year: 2017 Month: 2 X-DOI: 10.1080/1351847X.2016.1168748 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1168748 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:3:p:266-295 Template-Type: ReDIF-Article 1.0 Author-Name: Tianna Yang Author-X-Name-First: Tianna Author-X-Name-Last: Yang Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Title: Venture capital trusts and the expiration of IPO lock-up provisions Abstract: Venture capital trusts (VCTs) were introduced to provide private equity capital for small expanding companies and to promote innovation. Investors in initial public offerings are rewarded with tax relief on the cost of lock-up provisions to stabilize the market. This paper examines the market reaction and trading activity around the expiration of lock-up provisions of 148 VCTs listed on the London Stock Exchange from 1995 to 2006. Downward-sloping demand curve theory suggests that an increased supply of VCT shares at the expiry date could shift their value to a new equilibrium at a lower price. Supporting this prediction, we document evidence of negative abnormal returns as well as permanent increases in the price discount relative to net asset value and trading volumes at and around the expiries of the required holding periods of VCTs. In addition, less negative abnormal returns, lower abnormal discounts and lower abnormal trading volumes are associated with VCTs that invest in AIM-listed companies due to lower information asymmetry, that experience lower prior performance due to a less pronounced disposition effect, and that are subject to a shorter lock-up horizon or are offering more generous tax benefits. Journal: The European Journal of Finance Pages: 211-242 Issue: 3 Volume: 23 Year: 2017 Month: 2 X-DOI: 10.1080/1351847X.2016.1169199 File-URL: http://hdl.handle.net/10.1080/1351847X.2016.1169199 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:23:y:2017:i:3:p:211-242 Template-Type: ReDIF-Article 1.0 Author-Name: Manzur Quader Author-X-Name-First: Manzur Author-X-Name-Last: Quader Author-Name: Karl Taylor Author-X-Name-First: Karl Author-X-Name-Last: Taylor Title: Corporate efficiency, credit status and investment Abstract: This paper considers the relationship between financial frictions and investment. In an effort to clarify the role of cash flow in examining the impact of capital market imperfections, endogenous switching regression models are estimated for a panel of 1122 UK firms listed on the London Stock Exchange over the period of 1981–2009. Not only is the financial regime which the firm faces endogenous, we also allow the regime to change over time via modeling efficiency using stochastic frontier analysis. The results reveal that a firm's constrained credit status changes with the improvement of its efficiency. Furthermore, the analysis reveals that financially constrained firm's investment is comparatively more sensitive to its cash flow. Moreover, this sensitivity is statistically significant and is negatively related with corporate efficiency. Journal: The European Journal of Finance Pages: 439-457 Issue: 6 Volume: 24 Year: 2018 Month: 4 X-DOI: 10.1080/1351847X.2017.1312475 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1312475 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:6:p:439-457 Template-Type: ReDIF-Article 1.0 Author-Name: Steven J. Jordan Author-X-Name-First: Steven J. Author-X-Name-Last: Jordan Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Author-Name: Mark E. Wohar Author-X-Name-First: Mark E. Author-X-Name-Last: Wohar Title: Stock returns forecasting with metals: sentiment vs. fundamentals Abstract: Using six prominent metal commodities, we provide evidence on the out-of-sample forecasting of stock returns for the market indices of the G7 countries, for which there is little prior evidence in this context. We find precious metals (gold and silver) can improve forecast accuracy relative to the benchmark and performs well compared to forecast combinations. From an economic gains perspective, forecasting returns provides certainty equivalent gains in a market timing strategy for the G7 countries. These certainty equivalent gains are large enough to make active portfolio management attractive, even for individual investors. Gains remain after considering reasonable transaction costs. Journal: The European Journal of Finance Pages: 458-477 Issue: 6 Volume: 24 Year: 2018 Month: 4 X-DOI: 10.1080/1351847X.2017.1323770 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1323770 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:6:p:458-477 Template-Type: ReDIF-Article 1.0 Author-Name: Magnus Blomkvist Author-X-Name-First: Magnus Author-X-Name-Last: Blomkvist Author-Name: Teemu Friman Author-X-Name-First: Teemu Author-X-Name-Last: Friman Author-Name: Timo Korkeamäki Author-X-Name-First: Timo Author-X-Name-Last: Korkeamäki Title: Bond market access and acquisitions: empirical evidence from the European market Abstract: We investigate whether access to bond markets affects acquisition activity of the European firms between 1999 and 2014. Our study provides insight into the effect that the growing European bond market has on corporate investment activity. We find that access to the bond markets, measured by the existence of a credit rating, has a significant effect on the tendency of firms to make acquisitions. The effect is strongest in Continental Europe and during times of high acquisition activity. We further find that consistent with prior U.S. evidence, bond market access has an inverse effect on abnormal returns generated by the acquisitions. That finding suggests that firms with superior access to financing pursue targets of lesser quality. Journal: The European Journal of Finance Pages: 478-498 Issue: 6 Volume: 24 Year: 2018 Month: 4 X-DOI: 10.1080/1351847X.2017.1323771 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1323771 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:6:p:478-498 Template-Type: ReDIF-Article 1.0 Author-Name: Dooruj Rambaccussing Author-X-Name-First: Dooruj Author-X-Name-Last: Rambaccussing Author-Name: David Power Author-X-Name-First: David Author-X-Name-Last: Power Title: Fluctuations in the UK equity market: what drives stock returns? Abstract: Present value parameters from a state-space model are estimated for the UK FT All-Share Index. The estimated parameters are used to construct a time series of expected future returns and expected future values of dividend growth, both of which are found to be time-varying with persistent components. Variations in the price-dividend ratio appear to be driven primarily by the variance in expected returns. A comparison with the findings from a present value-constrained vector autoregression model indicates that the latter forecasts future realized returns and dividend growth better than the series constructed using a state-space approach. Furthermore, when the model is estimated for monthly and quarterly data, expected dividend growth is found to be more persistent. Journal: The European Journal of Finance Pages: 499-516 Issue: 6 Volume: 24 Year: 2018 Month: 4 X-DOI: 10.1080/1351847X.2017.1335649 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1335649 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:6:p:499-516 Template-Type: ReDIF-Article 1.0 Author-Name: Mariya Gubareva Author-X-Name-First: Mariya Author-X-Name-Last: Gubareva Author-Name: Maria Rosa Borges Author-X-Name-First: Maria Rosa Author-X-Name-Last: Borges Title: Binary interest rate sensitivities of emerging market corporate bonds Abstract: We develop a framework to assess interest rate sensitivities of emerging market corporate debt. Our analysis, based on yield indexes, is applied to investment grade and high yield portfolios. We reach beyond correlation-based analyses of interest rate sensitivity and keep our scope centered at capital gains of emerging market corporates and U.S. government bonds portfolios. Our empirical analysis spans over the period 2002–2015. We address interest rate sensitivity of assets during the ignition, apogee, and the aftermath of the global financial crisis. Based on historical data series, we evidence that the emerging market corporate bonds exhibit two different regimes of sensitivity to interest rate changes. We observe switching from a positive sensitivity under the normal market conditions to a negative one during distressed phases of business cycles and provide economical explanations of such phenomena. We show that emerging market corporate bonds, which on average could appear rather insensitive to the interest rate risk, in fact, present binary interest rate sensitivities. This research sheds light on how financial institutions may approach interest rate risk management including the downside risk hedge. Our findings allow banks and financial institutions to optimize economic capital under Basel III regulatory capital rules. Journal: The European Journal of Finance Pages: 1569-1586 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2017.1400452 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1400452 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1569-1586 Template-Type: ReDIF-Article 1.0 Author-Name: Dalu Zhang Author-X-Name-First: Dalu Author-X-Name-Last: Zhang Author-Name: Meilan Yan Author-X-Name-First: Meilan Author-X-Name-Last: Yan Author-Name: Andreas Tsopanakis Author-X-Name-First: Andreas Author-X-Name-Last: Tsopanakis Title: Financial stress relationships among Euro area countries: an R-vine copula approach Abstract: One of the biggest challenges of keeping Euro area financial stability is the negative co-movement between the vulnerability of public finance, the financial sector, security markets stresses as well as economic growth, especially in peripheral economies. This paper utilizes a ARMA-GARCH based R-vine copula method to explore tail dependance between the Financial Stress Indices of 11 euro area countries with an aim of understanding how financial stress are interacting with each other. We find larger economies in the Euro area tend to have closer upper tail dependence in terms of positive shocks, while smaller economies tend to have closer lower tail dependence with respect to negative shocks. The R-vine copula results underline the complex dynamics of financial stress relations existing between Euro Area economies. The estimated R-vine shows Spain, Italy, France and Belgium are the most inter-connected nodes which underlying they might be more efficient targets to treat in order to achieve a quicker stabilizing. Our results relate to the fact that Eurozone is not a unified policy making area, therefore, it needs to follow divergent policies for taming the effects of financial instability to different regions or groups of economies that are more interconnected. Journal: The European Journal of Finance Pages: 1587-1608 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2017.1419273 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1419273 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1587-1608 Template-Type: ReDIF-Article 1.0 Author-Name: Jörn Obermann Author-X-Name-First: Jörn Author-X-Name-Last: Obermann Title: Can management-sponsored non-binding remuneration votes shape the executive compensation structure? Evidence from Say-on-Pay votes in Germany Abstract: In this paper, a hand-selected sample of 1676 annual general meetings with 268 management-sponsored Say-on-Pay votes in 164 different companies between 2010 and 2015 in the German two-tier system was analysed. The analysis focused on the structure, rather than the level, of executive compensation by applying a sample-selection model and panel data regression. Consistent with our hypotheses, shareholders favour long-term stock and stock option plans but oppose short-term cash-bonus payments. However, the positive effect of equity compensation decreases as the share of the total remuneration increases, suggesting that the alignment effect is limited. The negative effect of bonus payments on the voting results is stronger in cases in which the voting approval of the supervisory board is low. Thus, investors who are discontent with the bonus payments eventually punish the supervisory board in charge of negotiating the contract. The supervisory board reacts to such cases by reducing the bonuses and increasing the equity payments in the following year, but the total compensation or fixed annual salary is unaffected. Hence, Say-on-Pay in Germany affects the structure but not the level of compensation. The results show that shareholders assess the entire compensation structure and prefer a particular compensation mix. However, non-binding Say-on-Pay votes help to establish compensation schemes that are favoured by shareholders. Journal: The European Journal of Finance Pages: 1609-1630 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2017.1419982 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1419982 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1609-1630 Template-Type: ReDIF-Article 1.0 Author-Name: Jessica Y. Wang Author-X-Name-First: Jessica Y. Author-X-Name-Last: Wang Author-Name: Raphael N. Markellos Author-X-Name-First: Raphael N. Author-X-Name-Last: Markellos Title: Is there an Olympic gold medal rush in the stock market? Abstract: Investor sentiment and attention are often linked to the same non-economic events making it difficult to understand why and how asset prices are affected. We disentangle these two potential drivers of investment behaviour by analysing a new data-set of medals for the major participating countries and sponsor firms over four Summer Olympic Games. Our results show that trading volume and volatility are substantially reduced following Olympic success although returns appear to be largely unaffected. Analysis of data from online search volumes and surveys measuring investor sentiment also suggests that the market impact of the Olympics is linked to changes in attention. Journal: The European Journal of Finance Pages: 1631-1648 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2017.1421245 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1421245 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1631-1648 Template-Type: ReDIF-Article 1.0 Author-Name: Spiros Bougheas Author-X-Name-First: Spiros Author-X-Name-Last: Bougheas Author-Name: Hosung Lim Author-X-Name-First: Hosung Author-X-Name-Last: Lim Author-Name: Simona Mateut Author-X-Name-First: Simona Author-X-Name-Last: Mateut Author-Name: Paul Mizen Author-X-Name-First: Paul Author-X-Name-Last: Mizen Author-Name: Cihan Yalcin Author-X-Name-First: Cihan Author-X-Name-Last: Yalcin Title: Foreign currency borrowing, exports and firm performance: evidence from a currency crisis Abstract: This paper develops a simple signaling model of foreign currency borrowing that yields predictions about firm survival and performance during a currency crisis. Using a large panel of firm level data for South Korea we offer empirical support for many of the predictions of our model, while others support predictions that cannot be tested using our data. Our paper demonstrates that although firms that borrow in foreign currency are more likely to exit after the currency collapses, those that continue to produce perform better. Among them, the best performers are exporters whose foreign sales are more competitively priced under a devalued currency. Journal: The European Journal of Finance Pages: 1649-1671 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2017.1421246 File-URL: http://hdl.handle.net/10.1080/1351847X.2017.1421246 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1649-1671 Template-Type: ReDIF-Article 1.0 Author-Name: Jiawen Luo Author-X-Name-First: Jiawen Author-X-Name-Last: Luo Author-Name: Langnan Chen Author-X-Name-First: Langnan Author-X-Name-Last: Chen Title: Volatility dependences of stock markets with structural breaks Abstract: We develop a Vector Heterogeneous Autoregression model with Continuous Volatility and Jumps (VHARCJ) where residuals follow a flexible dynamic heterogeneous covariance structure. We employ the Bayesian data augmentation approach to match the realised volatility series based on high-frequency data from six stock markets. The structural breaks in the covariance are captured by an exogenous stochastic component that follows a three-state Markov regime-switching process. We find that the stock markets have higher volatility dependence during turmoil periods and that breakdowns in volatility dependence can be attributed to the increase in market volatilities. We also find positive correlations between the Asian stock markets, the European stock market, and the UK stock market. The US stock market has positive correlations with all other markets for most of the sample periods, indicating the leading position of US stock market in the global stock markets. In addition, the proposed three-state VHARCJ model with Dynamic Conditional Correlation (DCC) and break structure under student-t distribution has a superior density forecast performance as compared to the competing models. The forecast models with structural breaks outperform those without structural breaks based on the log predicted likelihood, the log Bayesian factor, and the root mean square loss function. Journal: The European Journal of Finance Pages: 1727-1753 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2018.1476394 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1476394 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1727-1753 Template-Type: ReDIF-Article 1.0 Author-Name: Małgorzata Olszak Author-X-Name-First: Małgorzata Author-X-Name-Last: Olszak Author-Name: Patrycja Chodnicka-Jaworska Author-X-Name-First: Patrycja Author-X-Name-Last: Chodnicka-Jaworska Author-Name: Iwona Kowalska Author-X-Name-First: Iwona Author-X-Name-Last: Kowalska Author-Name: Filip Świtała Author-X-Name-First: Filip Author-X-Name-Last: Świtała Title: Bank-type specific determinants of sensitivity of loan-loss provisions to business cycle Abstract: In this paper, we explore several new factors which may affect the procyclicality of loan-loss provisions in all commercial and cooperative banks operating in Poland between 2000 and 2012. More specifically, we test whether there are visible differences between commercial and cooperative banks in the sensitivity of those provisions to the business cycle. Our results show that whereas loan-loss provisions are procyclical in both cases, the procyclicality is particularly prominent and stronger in the case of commercial banks, than of the cooperative banks. Additionally, in contrast to existing findings, we establish that the negative impact of the business cycle on loan-loss provisions is greater in the case of small banks than of medium or large ones, this feature being common for both commercial and cooperative banks. We have identified two factors which affect procyclicality of loan-loss provisions in different ways for commercial and cooperative banks. The first factor is the empirical importance of capital adequacy ratio size. In commercial banks, the capital ratio size exerts a statistically significant impact on the procyclicality regardless of capitalization. The other factor is discretionary income-smoothing, as we find that the statistically significant increase of procyclicality due to the high discretionary income-smoothing is present only in cooperative banks. Journal: The European Journal of Finance Pages: 1672-1698 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2018.1501401 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1501401 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1672-1698 Template-Type: ReDIF-Article 1.0 Author-Name: Lidija Lovreta Author-X-Name-First: Lidija Author-X-Name-Last: Lovreta Author-Name: Zorica Mladenović Author-X-Name-First: Zorica Author-X-Name-Last: Mladenović Title: Do the stock and CDS markets price credit risk equally in the long-run? Abstract: In this paper, we examine the existence and stability of the long-run equilibrium relation between the price of credit risk in the stock and CDS markets for a sample of non-financial iTraxx Europe companies during the 2004–2017 period. We show that standard cointegration tests with no breaks frequently fail to detect cointegration. Once we formally account for the breaks in the cointegrating vector, we are able to detect cointegration over the entire sample period for the vast majority of the companies considered. An application of these results to CDS-equity trading shows that the profitability of traditional trading strategies crucially depends on the presence of cointegration and on the stability of the cointegrating vector. Finally, we find that CDS illiquidity factors decrease the likelihood of the stock and CDS market cointegration. Journal: The European Journal of Finance Pages: 1699-1726 Issue: 17 Volume: 24 Year: 2018 Month: 11 X-DOI: 10.1080/1351847X.2018.1501402 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1501402 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:24:y:2018:i:17:p:1699-1726 Template-Type: ReDIF-Article 1.0 Author-Name: Majid Haghani Rizi Author-X-Name-First: Majid Author-X-Name-Last: Haghani Rizi Author-Name: N. Kundan Kishor Author-X-Name-First: N. Kundan Author-X-Name-Last: Kishor Author-Name: Hardik A. Marfatia Author-X-Name-First: Hardik A. Author-X-Name-Last: Marfatia Title: The dynamic relationship among the money market mutual funds, the commercial paper market, and the repo market Abstract: In this paper, we present the short-run and the long-run relationships among the financial assets of the money market funds, the commercial paper market, and the repurchase agreement market by undertaking a cointegration analysis of quarterly data over the 1985–2017 period. This was based on the empirical observation that the commercial paper and repo markets account for 50 percent of the assets of money market funds. The evidence suggests that there exists a common long-term cointegrating trend among these three components of the shadow banking system. Any disequilibrium in this long-run relationship among these variables is corrected by movement in the financial assets of money market funds. The Beveridge-Nelson decomposition from the estimated cointegrating relationship shows that the cyclical component of money market funds is large and captures huge swings in these markets during the financial crisis. We also find evidence of change in these dynamic relationships in the post-crisis period, where in addition to the money market funds, the commercial paper market also exhibits a tendency to correct for the disequilbrium. Journal: The European Journal of Finance Pages: 395-414 Issue: 5 Volume: 25 Year: 2019 Month: 3 X-DOI: 10.1080/1351847X.2018.1522359 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1522359 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:5:p:395-414 Template-Type: ReDIF-Article 1.0 Author-Name: Anna Agapova Author-X-Name-First: Anna Author-X-Name-Last: Agapova Author-Name: Robert Ferguson Author-X-Name-First: Robert Author-X-Name-Last: Ferguson Author-Name: Dean Leistikow Author-X-Name-First: Dean Author-X-Name-Last: Leistikow Title: Stochastic portfolio theory and the low beta anomaly Abstract: Many studies have found that portfolios of low beta stocks have higher growth rates than portfolios of high beta stocks and have concluded that low beta stocks have higher growth rates than high beta stocks. Since rational investor behavior is thought to imply that additional risk is rewarded with additional return, the alleged higher growth rates of low beta versus high beta stocks has been termed a ‘Low Beta Anomaly’ (LBA). However, it is premature to conclude that these observed LBAs are due to stocks’ differential growth rates, because the tested portfolios are traded. Stochastic Portfolio Theory (SPT) shows that traded portfolios’ growth rates can exceed the growth rates of their stocks. This paper presents several SPT models of an LBA that do not require investment constraints, irrational investor behavior, or that low beta stocks have higher growth rates than high beta stocks. These LBAs are due to reconstitution relative volatility capture that favors portfolios of low vs. high beta stocks. They result from trading profit, not differential growth rates between low and high beta stocks. Monte Carlo simulations demonstrate a reconstitution relative volatility capture LBA that is consistent with the models and the literature. Journal: The European Journal of Finance Pages: 415-434 Issue: 5 Volume: 25 Year: 2019 Month: 3 X-DOI: 10.1080/1351847X.2018.1531901 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1531901 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:5:p:415-434 Template-Type: ReDIF-Article 1.0 Author-Name: Seyoung Park Author-X-Name-First: Seyoung Author-X-Name-Last: Park Author-Name: Hyunson Song Author-X-Name-First: Hyunson Author-X-Name-Last: Song Author-Name: Sungchul Lee Author-X-Name-First: Sungchul Author-X-Name-Last: Lee Title: Linear programing models for portfolio optimization using a benchmark Abstract: We consider the problem of constructing a perturbed portfolio by utilizing a benchmark portfolio. We propose two computationally efficient portfolio optimization models, the mean-absolute deviation risk and the Dantzig-type, which can be solved using linear programing. These portfolio models push the existing benchmark toward the efficient frontier through sparse and stable asset selection. We implement these models on two benchmarks, a market index and the equally-weighted portfolio. We carry out an extensive out-of-sample analysis with 11 empirical datasets and simulated data. The proposed portfolios outperform the benchmark portfolio in various performance measures, including the mean return and Sharpe ratio. Journal: The European Journal of Finance Pages: 435-457 Issue: 5 Volume: 25 Year: 2019 Month: 3 X-DOI: 10.1080/1351847X.2018.1536070 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1536070 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:25:y:2019:i:5:p:435-457 Template-Type: ReDIF-Article 1.0 Author-Name: Georgios A. Panos Author-X-Name-First: Georgios A. Author-X-Name-Last: Panos Author-Name: John O. S. Wilson Author-X-Name-First: John O. S. Author-X-Name-Last: Wilson Title: Financial literacy and responsible finance in the FinTech era: capabilities and challenges Abstract: A growing body of evidence suggests that financial literacy plays an important role in financial well-being, and that differences in financial knowledge acquired early in life can explain a significant part of financial and more general well-being in adult life. Financial technology (FinTech) is revolutionising the financial services industry at an unrivalled pace. Views differ regarding the likely impact that FinTech is likely to have on personal financial planning, well-being and societal welfare. In an era of mounting student debt, increased (digital) financial inclusion, and threats arising from instances of (online) financial fraud, financial education and enlightened financial advising appropriate policy interventions that enhance financial and overall well-being. This special issue engages in this important academic and policy agenda by presenting a set of seven new papers emanating from four parallel streams of literature related to financial literacy and responsible finance. Journal: The European Journal of Finance Pages: 297-301 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2020.1717569 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1717569 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:297-301 Template-Type: ReDIF-Article 1.0 Author-Name: Declan French Author-X-Name-First: Declan Author-X-Name-Last: French Author-Name: Donal McKillop Author-X-Name-First: Donal Author-X-Name-Last: McKillop Author-Name: Elaine Stewart Author-X-Name-First: Elaine Author-X-Name-Last: Stewart Title: The effectiveness of smartphone apps in improving financial capability Abstract: This study is the first to assess whether smartphone apps can be utilised to improve financially capable behaviours. In this study four smartphone apps, packaged together under the title ‘Money Matters’, were provided to working-age members (16–65 years) of the largest credit union in Northern Ireland (Derry Credit Union). The smartphone apps consisted of a loan interest comparison app, an expenditure comparison app, a cash calendar app, and a debt management app. The assessment methodology used was a Randomised Control Trial (RCT) with the U.K. Financial Capability Outcome Frameworks used to set the context for the assessment. For those receiving the apps (the treatment group) statistically significant improvements were found in a number of measures designed to gauge ‘financial knowledge, understanding and basic skills’ and ‘attitudes and motivations’. These improvements translated into better financially capable behaviours; those receiving the apps were more likely to keep track of their income and expenditure and proved to be more resilient when faced with a financial shock. Journal: The European Journal of Finance Pages: 302-318 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2019.1639526 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1639526 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:302-318 Template-Type: ReDIF-Article 1.0 Author-Name: Mais Sha'ban Author-X-Name-First: Mais Author-X-Name-Last: Sha'ban Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Author-Name: Anna Sarkisyan Author-X-Name-First: Anna Author-X-Name-Last: Sarkisyan Title: Cross-country variation in financial inclusion: a global perspective Abstract: Recent years have witnessed a global commitment to advancing financial inclusion as a key enabler for promoting equal opportunity and reducing poverty. In this paper, we use the IMF’s Financial Access Survey data and two different approaches to construct a multidimensional financial inclusion index for a global sample of 95 countries over 2004-15. Results reveal an overall progress in financial inclusion over the period under study, most markedly in the use and access dimensions. Financial inclusion appears to be positively and significantly associated with GDP per capita, employment, bank competition, human development, government integrity, and internet usage. Our evidence also points to the importance of considering the level of national income when designing policies to boost financial inclusion. Journal: The European Journal of Finance Pages: 319-340 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2019.1686709 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1686709 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:319-340 Template-Type: ReDIF-Article 1.0 Author-Name: J. Michael Collins Author-X-Name-First: J. Author-X-Name-Last: Michael Collins Author-Name: Carly Urban Author-X-Name-First: Carly Author-X-Name-Last: Urban Title: Measuring financial well-being over the lifecourse Abstract: Financial well-being is a relatively new construct that attempts to measure subjective financial status and perceived future financial trajectory. Using a large public cross-sectional dataset, we find that a standardized financial well-being score generally tracks income, wealth, and participation in investment markets, as well as markers of positive and negative financial behavior. However, financial well-being measures attributes that are distinct from general subjective well-being and financial literacy measures, especially over the life course. Financial well-being can be a useful construct to include in new surveys but can also be proxied in existing public datasets, as we demonstrate using separate survey data. Journal: The European Journal of Finance Pages: 341-359 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2019.1682631 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1682631 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:341-359 Template-Type: ReDIF-Article 1.0 Author-Name: Nikolaos D. Philippas Author-X-Name-First: Nikolaos D. Author-X-Name-Last: Philippas Author-Name: Christos Avdoulas Author-X-Name-First: Christos Author-X-Name-Last: Avdoulas Title: Financial literacy and financial well-being among generation-Z university students: Evidence from Greece Abstract: Financial knowledge has become an essential skill because of the instability of global markets, asymmetric information in those markets, increasing complexity of financial products, and the rapidly increasing growth in financial technology (Fintech). This study aims to be the first among its kind to evaluate the relation between financial literacy, financial fragility, and financial well-being in parallel with identifying their determinants. For this purpose, we design and distribute a questionnaire to a random sample of 456 university students in Greece. The university students represent Generation Z that experienced the effects of a unique in duration and consequences financial crisis. We analyze the data by using cross-tabulations, chi-square tests, logistic regressions, and a marginal effect analysis. The results show that male students, students who keep expense records, or their father is highly educated are more financially literate. We also examine the dimensions of financial fragility, and the results show that financially literate students are better able to cope with an unexpected financial shock. Thus, financial literacy can be a key driver of financial well-being among Greek university students. Furthermore, we discuss the likely policy prescriptions while accounting for related behavioral aspects and technological developments. Journal: The European Journal of Finance Pages: 360-381 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2019.1701512 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1701512 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:360-381 Template-Type: ReDIF-Article 1.0 Author-Name: Nikolaos Artavanis Author-X-Name-First: Nikolaos Author-X-Name-Last: Artavanis Author-Name: Soumya Karra Author-X-Name-First: Soumya Author-X-Name-Last: Karra Title: Financial literacy and student debt Abstract: Using a large sample of over 1000 students from a major, land-grant, public university in Massachusetts, we examine the financial literacy level of college students, and its implications on the repayment of student debt. We find low levels of financial literacy (39.5%), particularly among female (26%), minority (24%) and first-generation (33%) students. Based on survey responses, we show that students with a deficit in financial literacy are more likely to underestimate future student loan payments; 38.2% of low-literacy students underestimate future payments by more than $1000 annually, while high financial literacy reduces the probability of significant payment underestimation by 17–18 percentage points. Furthermore, we find evidence of a financial literacy wage gap as students with low financial literacy expect significantly lower starting salaries than their high-literacy peers. As a result, low-literacy students are more vulnerable to unexpected, adverse shocks on their payment-to-income ratios that can impair their future creditworthiness and undermine their ability to service debt post-graduation. Journal: The European Journal of Finance Pages: 382-401 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2019.1711435 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1711435 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:382-401 Template-Type: ReDIF-Article 1.0 Author-Name: Milena Migliavacca Author-X-Name-First: Milena Author-X-Name-Last: Migliavacca Title: Keep your customer knowledgeable: financial advisors as educators Abstract: Educational programmes aimed at increasing financial literacy are typically scarcely effective or have relatively quick ‘decay’ periods. In this paper, I provide evidence that financial advisors are an effective way to increase investors’ financial awareness. I check this relationship using three measures of financial literacy: basic, advanced and overall; and also test different typologies of advisors. Results indicate that financial advisors have a significant educational role; in particular, the presence of independent financial advisors tends to increase the ‘advanced’ financial literacy of their clients. The study has potentially important policy implications, as it provides robust evidence that investors’ financial literacy can be increased in a gradual and stable way that does not directly affect public funds. Journal: The European Journal of Finance Pages: 402-419 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2019.1700148 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1700148 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:402-419 Template-Type: ReDIF-Article 1.0 Author-Name: Christian Engels Author-X-Name-First: Christian Author-X-Name-Last: Engels Author-Name: Kamlesh Kumar Author-X-Name-First: Kamlesh Author-X-Name-Last: Kumar Author-Name: Dennis Philip Author-X-Name-First: Dennis Author-X-Name-Last: Philip Title: Financial literacy and fraud detection Abstract: Who is better at detecting fraud? This paper finds that more financially knowledgeable individuals have a higher propensity to detect fraud: a one standard deviation increase in financial knowledge increases fraud detection probabilities by 3 percentage points. The result is not driven by individuals' higher financial product usage and is observed to be moderated by individuals' low subjective well-being, effectively depleting skills to detect fraud. Interestingly, prudent financial behavior relating to basic money management is found to have negligible effects for detecting fraud. The findings attest to the fact that fraud tactics are increasingly complex and it is greater financial knowledge rather than basic money management skills that provide the degree of sophistication necessary to detect fraud. The paper draws policy implications for consumer education programs to go beyond cultivating money management skills, and provide advanced financial knowledge necessary for tackling fraud. Journal: The European Journal of Finance Pages: 420-442 Issue: 4-5 Volume: 26 Year: 2020 Month: 3 X-DOI: 10.1080/1351847X.2019.1646666 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1646666 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:4-5:p:420-442 Template-Type: ReDIF-Article 1.0 Author-Name: Diogo Duarte Author-X-Name-First: Diogo Author-X-Name-Last: Duarte Author-Name: Hamilton Galindo Gil Author-X-Name-First: Hamilton Author-X-Name-Last: Galindo Gil Author-Name: Alexis Montecinos Author-X-Name-First: Alexis Author-X-Name-Last: Montecinos Title: The effects of risk aversion and money illusion on the components of dividend growth rate Abstract: We evaluate the impact of risk aversion and money illusion in the equity and options markets when the expected dividend growth rate is endogenously determined as a function of the dividend-price ratio and expected inflation. The closed-form equilibrium expressions for the dividend-price ratio, expected inflation, and dividend growth rate allow us to perform comparative statics to understand their sensitivity relative to the agent's preference parameters. Our calibration exercise indicates that the sensitivity of the dividend-price ratio relative to risk aversion depends critically on the sign of the exposure of the expected dividend growth rate to the divided yield, while an increase in the degree of money illusion always raises the dividend-price ratio, irrespective of its exposure to the dividend yield. In addition, we show that expected inflation is much less sensitive to variations in risk aversion and money illusion than these parameters, while the price of a zero-coupon caplet is affected in the opposite direction by these parameters. Journal: The European Journal of Finance Pages: 443-460 Issue: 6 Volume: 26 Year: 2020 Month: 4 X-DOI: 10.1080/1351847X.2019.1687098 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1687098 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:6:p:443-460 Template-Type: ReDIF-Article 1.0 Author-Name: Yi Zhang Author-X-Name-First: Yi Author-X-Name-Last: Zhang Author-Name: Guangzi Li Author-X-Name-First: Guangzi Author-X-Name-Last: Li Author-Name: Yili Lian Author-X-Name-First: Yili Author-X-Name-Last: Lian Title: Labor unions and loan contracts Abstract: This paper investigates the relation between labor unions and loan contracting. We find that firms in more unionized industries tend to have lower loan spreads, longer maturity, a lower likelihood of security requirement, fewer and less strict loan covenants, and fewer performance- based covenants. Additionally, using firm-level union election data, we do not find lower loan spreads or longer maturity in unionized firms, but we show that bank loans to unionized firms are less likely to require security, have fewer and less strict loan covenants, and fewer performance-based covenants. While the results on loan spreads are mixed, we find consistent evidence that unionization has significant effect on loan covenants with industry and firm level unionization data as well as the instrument variable analysis. Labor unions’ risk preference is similar to that of creditors. Therefore, it helps align the interests between banks and labor unions, thus reducing the cost of bank loans in terms of loan covenants. Journal: The European Journal of Finance Pages: 461-479 Issue: 6 Volume: 26 Year: 2020 Month: 4 X-DOI: 10.1080/1351847X.2019.1686044 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1686044 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:6:p:461-479 Template-Type: ReDIF-Article 1.0 Author-Name: Doojin Ryu Author-X-Name-First: Doojin Author-X-Name-Last: Ryu Author-Name: Heejin Yang Author-X-Name-First: Heejin Author-X-Name-Last: Yang Title: Noise traders, mispricing, and price adjustments in derivatives markets Abstract: This study examines disagreements between actual and options-implied futures prices and the corresponding adjustments in a sophisticated setting. We identify the market that triggers each type of price disagreement and find that the market in which the disagreement is initiated adjusts more to eliminate the mispricing. Futures prices adjust less for options-initiated price disagreements with out-of-the-money (OTM) options-implied prices than they do for disagreements with at-the-money (ATM) prices. Options markets adjust more when disagreements are initiated by OTM options than they do when disagreements are initiated by ATM options. Adjustments in both the futures and options markets consistently suggest that OTM options trading provides inferior information. Price disagreements are positively correlated with the participation of domestic investors, especially when they trade OTM options, implying that domestic investors are noisier and less informed than foreign investors are.Highlights We examine disagreements between actual and options-implied futures prices and the corresponding adjustments.The market in which the disagreement is initiated adjusts more to eliminate the mispricing.Out-of-the-money options-initiated price disagreements are positively correlated with domestic investors’ trades. Journal: The European Journal of Finance Pages: 480-499 Issue: 6 Volume: 26 Year: 2020 Month: 4 X-DOI: 10.1080/1351847X.2019.1692887 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1692887 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:6:p:480-499 Template-Type: ReDIF-Article 1.0 Author-Name: Kyeong-Seop (KS) Choi Author-X-Name-First: Kyeong-Seop (KS) Author-X-Name-Last: Choi Title: National culture and R&D investments Abstract: By using time-collapsed data for 12,362 firms from 40 countries, I document that national culture is significantly associated with R&D investments, controlling for other determinants including a country’s financial development. In a more individualistic, less masculine, and more indulgent culture, firms tend to make more R&D investments. These findings are robust to alternative proxy variables for financial development and remain unchanged regardless of whether tested by instrumented two-stage least squares or fixed effects panel regressions. Culture’s impact is different depending on firm size and age. Further, its limited impact on equity issues suggests that it relates to R&D directly rather than being mediated by other financial market channels. Journal: The European Journal of Finance Pages: 500-531 Issue: 6 Volume: 26 Year: 2020 Month: 4 X-DOI: 10.1080/1351847X.2019.1697324 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1697324 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:6:p:500-531 Template-Type: ReDIF-Article 1.0 Author-Name: Justin Chircop Author-X-Name-First: Justin Author-X-Name-Last: Chircop Author-Name: Monika Tarsalewska Author-X-Name-First: Monika Author-X-Name-Last: Tarsalewska Title: 10-K Filing length and M&A returns Abstract: This study examines the association between 10-K filing length and M&A returns. We posit that 10-K filing length influences shareholder information acquisition and processing costs. Longer 10-K filings reduce information acquisition costs by making more information about the target available to the shareholder, but may increase information processing costs by increasing the difficulty of extracting that information. Which effect dominates ultimately determines the association between 10-K filing length and M&A returns. We find that 10-K filing length is positively related to M&A returns, suggesting that the reduction in information acquisition costs dominates the increase in information processing costs. This relation is stronger when the acquirer has limited access to private information about the target, and when 10-K filings contain text denoting risk. The relation is weaker when 10-K filings contain complex text and financial statements exhibiting high accounting quality. Journal: The European Journal of Finance Pages: 532-553 Issue: 6 Volume: 26 Year: 2020 Month: 4 X-DOI: 10.1080/1351847X.2019.1694959 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1694959 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:6:p:532-553 Template-Type: ReDIF-Article 1.0 Author-Name: Julio Pindado Author-X-Name-First: Julio Author-X-Name-Last: Pindado Author-Name: Ignacio Requejo Author-X-Name-First: Ignacio Author-X-Name-Last: Requejo Author-Name: Juan C. Rivera Author-X-Name-First: Juan C. Author-X-Name-Last: Rivera Title: Does money supply shape corporate capital structure? International evidence from a panel data analysis Abstract: We investigate how the growth rate of money supply, as a key dimension of the monetary policy, affects corporate debt decisions using a broad sample of companies from developed and emerging economies. Although expansionary measures increase market liquidity and encourage the use of debt, our results show that there is an optimal level of money supply beyond which additional liquidity discourages firms from using debt. However, the intensity of the effect of money growth on debt and the level of liquidity at which firms’ access to debt financing is maximized depends on the characteristics of the banking system. The effect is mitigated in countries where banks hold a higher fraction of liquid assets. By contrast, the relation between money supply and corporate leverage is more pronounced when a higher proportion of banks’ resources are allocated to private credit. Journal: The European Journal of Finance Pages: 554-584 Issue: 6 Volume: 26 Year: 2020 Month: 4 X-DOI: 10.1080/1351847X.2019.1695645 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1695645 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:6:p:554-584 Template-Type: ReDIF-Article 1.0 Author-Name: Philip Molyneux Author-X-Name-First: Philip Author-X-Name-Last: Molyneux Author-Name: Ornella Ricci Author-X-Name-First: Ornella Author-X-Name-Last: Ricci Title: Editorial for EJF special edition policy actions & stability Journal: The European Journal of Finance Pages: 585-588 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2020.1720263 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1720263 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:585-588 Template-Type: ReDIF-Article 1.0 Author-Name: Laura Chiaramonte Author-X-Name-First: Laura Author-X-Name-Last: Chiaramonte Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Author-Name: Milena Migliavacca Author-X-Name-First: Milena Author-X-Name-Last: Migliavacca Author-Name: Federica Poli Author-X-Name-First: Federica Author-X-Name-Last: Poli Title: Deposit insurance schemes and bank stability in Europe: how much does design matter? Abstract: Using a detailed set of deposit insurance schemes (DIS) features for 27 EU countries, we assess the impact of national deposit insurance features on bank stability and investigate the existence of non-linearities in the relationship between coverage and bank stability both in crisis and normal times. Our results suggest that more protective DIS do not necessarily lead to greater bank risk. However, during the crisis some features that generate moral hazard incentives can decrease bank stability. We find an inverse U-shaped relation with bank stability decreasing at high levels of coverage during the crisis period. However, our evidence also suggests that the introduction of temporary measures like blanket guarantees are crucial to avoid panic among depositors and restore stability. Finally, our results seem to imply that the stabilizing effect of deposit insurance can be different along the economic cycle, so regulators should consider that to be able to achieve an optimal DIS that minimizes moral hazard incentives a ‘dynamic’ approach may be necessary. Journal: The European Journal of Finance Pages: 589-615 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1607763 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1607763 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:589-615 Template-Type: ReDIF-Article 1.0 Author-Name: Margarita Rubio Author-X-Name-First: Margarita Author-X-Name-Last: Rubio Author-Name: D. Filiz Unsal Author-X-Name-First: D. Filiz Author-X-Name-Last: Unsal Title: Macroprudential policy under incomplete information Abstract: In this paper, we use a DSGE model to study the passive and time-varying implementation of macroprudential policy when policy-makers have noisy and lagged data. The model features an economy with two agents; households and entrepreneurs. Entrepreneurs are the borrowers in this economy and need capital as collateral to obtain loans. The macroprudential regulator uses the collateral requirement as the policy instrument. In this set-up, we compare policy performances of permanently increasing the collateral requirement (passive policy) versus a time-varying (active) policy which responds to credit developments. Results show that with perfect and timely information, an active approach is welfare superior, since it is more effective in providing financial stability with no long-run output cost. If the policy-maker is not able to observe the economic conditions perfectly or observe with a lag, a cautious (less aggressive) policy or even a passive approach may be preferred. However, the latter comes at the expense of increasing inequality and a long-run output cost, which could outweigh their macroeconomic and financial stability benefits. Journal: The European Journal of Finance Pages: 616-639 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1679209 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1679209 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:616-639 Template-Type: ReDIF-Article 1.0 Author-Name: Livia Pancotto Author-X-Name-First: Livia Author-X-Name-Last: Pancotto Author-Name: Owain ap Gwilym Author-X-Name-First: Owain Author-X-Name-Last: ap Gwilym Author-Name: Jonathan Williams Author-X-Name-First: Jonathan Author-X-Name-Last: Williams Title: Market reactions to the implementation of the Banking Union in Europe Abstract: How did announcements about the implementation of the Banking Union (BU) in Europe impact on financial markets? This paper investigates the effect of the overall bank regulatory reform, considering each associated individual announcement, on Credit Default Swaps (CDS), bank stocks and stock futures during 2012–14. Announcements related to the implementation of the supervisory mechanism, as well as those on the new resolution framework, led to a surge in bank CDS spreads, while having a detrimental effect on the wealth of banks’ shareholders. The CDS market response to sub-events associated with the ECB’s 2014 Comprehensive Assessment (CA) was positive and reflected in a decrease in bank CDS spreads. Furthermore, CDS of Global Systemically Important Banks (G-SIBs) demonstrated a significant reaction to the implementation steps in the BU. Banks’ stock prices reacted in a consistent manner with the CDS market. The stock futures market did not reveal any strong reaction to the changes in the European regulatory landscape. Cross-sectional analysis reveals that bank capitalization is positively associated with responses of G-SIBs’ CDS spreads, but is inversely related to responses of CDS spreads for other bank groups. Weak underlying credit quality is also a relevant factor in explaining abnormal increases in CDS spreads. For the stock market, positive associations of the cumulative abnormal returns (CARs) with capital levels and with the business model orientation are revealed. Journal: The European Journal of Finance Pages: 640-665 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1661264 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1661264 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:640-665 Template-Type: ReDIF-Article 1.0 Author-Name: Zhehao Jia Author-X-Name-First: Zhehao Author-X-Name-Last: Jia Author-Name: Yukun Shi Author-X-Name-First: Yukun Author-X-Name-Last: Shi Author-Name: Cheng Yan Author-X-Name-First: Cheng Author-X-Name-Last: Yan Author-Name: Meryem Duygun Author-X-Name-First: Meryem Author-X-Name-Last: Duygun Title: Bankruptcy prediction with financial systemic risk Abstract: Financial systemic risk – defined as the risk of collapse of an entire financial system vis-à-vis any one individual financial institution – is making inroads into academic research in the aftermath of the late 2000s Global Financial Crisis. We shed light on this new concept by investigating the value of various systemic financial risk measures in the corporate failure predictions of listed nonfinancial firms. Our sample includes 225,813 firm-quarter observations covering 8,604 US firms from 2000 Q1 to 2016 Q4. We find that financial systemic risk is incrementally useful in forecasting corporate failure over and above the predictions of the traditional accounting-based and market-based factors. Our results are stronger when the firm in consideration has higher equity volatility relative to financial sector volatility, smaller size relative to the market, and more debts in current liabilities. The combined evidence suggests that systemic risk is a useful supplementary source of information in capital markets. Journal: The European Journal of Finance Pages: 666-690 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1656095 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1656095 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:666-690 Template-Type: ReDIF-Article 1.0 Author-Name: Peng Sui Author-X-Name-First: Peng Author-X-Name-Last: Sui Author-Name: Sailesh Tanna Author-X-Name-First: Sailesh Author-X-Name-Last: Tanna Author-Name: Dandan Zhou Author-X-Name-First: Dandan Author-X-Name-Last: Zhou Title: Financial contagion in a core-periphery interbank network Abstract: This paper studies financial contagion in a core-periphery interbank network where core banks are large in balance sheet size while periphery banks are smaller and link only with the core banks. Core banks are all bilaterally linked and intermediate liquidity for periphery banks. We establish analytic conditions under which financial contagion propagates in the core-periphery network and examine the extent to which heterogeneity associated with size and number of banks affects these conditions. We show that the failure of core banks does not necessarily imply contagious failure of periphery banks; the core-periphery network structure exhibits a ‘robust-yet-fragile’ tendency with increased size of core banks; and the resilience of the network to contagion depends on the number of core banks, the number of periphery banks, and the level of interbank liquidity intermediated between the core banks. We also find that, under certain conditions, the core-periphery network is more resilient than the complete network with increased size of core banks. Journal: The European Journal of Finance Pages: 691-710 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1630460 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1630460 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:691-710 Template-Type: ReDIF-Article 1.0 Author-Name: Benno Kammann Author-X-Name-First: Benno Author-X-Name-Last: Kammann Author-Name: Jörg Prokop Author-X-Name-First: Jörg Author-X-Name-Last: Prokop Author-Name: Matthias Walting Author-X-Name-First: Matthias Author-X-Name-Last: Walting Title: Informational effects of MiFID: the case of equity analysts Abstract: We conduct an event study spanning the period from 2004 to 2013 to examine the information content of financial analysts’ stock recommendation revisions before and after implementation of the European Markets in Financial Instruments Directive in 2007 (MiFID). We find that, compared to the pre-MiFID period, stock recommendations issued by investment bank analysts are more informative in the post-MiFID period. Further, exploiting a difference in how MiFID addresses analyst-specific conflicts of interest, we show that MiFID has widened the gap in informational content between recommendations issued by investment bank analysts and those issued by independent brokerage firm analysts, with the former having significantly higher stock price impact than the latter. Overall, our findings suggest that investors perceive MiFID as effective in mitigating biases in investment bank analysts’ research and that investors are well aware of remaining adverse incentives facing independent analysts, and discount their recommendations accordingly. Journal: The European Journal of Finance Pages: 711-727 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1697322 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1697322 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:711-727 Template-Type: ReDIF-Article 1.0 Author-Name: Andrea Mc Namara Author-X-Name-First: Andrea Author-X-Name-Last: Mc Namara Author-Name: Sheila O'Donohoe Author-X-Name-First: Sheila Author-X-Name-Last: O'Donohoe Author-Name: Pierluigi Murro Author-X-Name-First: Pierluigi Author-X-Name-Last: Murro Title: Lending infrastructure and credit rationing of European SMEs Abstract: We examine the influence of countries’ lending infrastructure on credit rationing for European SMEs (small and medium sized enterprises). This lending infrastructure, conceptualised by Berger and Udell [2006] is comprised of a country’s information, legal, judicial, bankruptcy, social and regulatory environment. Using a sample of 13,957 SMEs from eleven European countries, we find that SMEs in countries with more efficient judicial systems, less efficient bankruptcy systems and with greater levels of trust are less likely to be credit rationed. The results are robust for different forms of credit rationing and different measures of lending infrastructure. The paper also shows some variation in the results across different sub-samples, considering firm size, age and riskiness. We also exploit the variation between core and periphery European countries and the peculiarity of the sovereign debt crisis period. Journal: The European Journal of Finance Pages: 728-745 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1637357 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1637357 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:728-745 Template-Type: ReDIF-Article 1.0 Author-Name: A. Baldini Author-X-Name-First: A. Author-X-Name-Last: Baldini Author-Name: M. Causi Author-X-Name-First: M. Author-X-Name-Last: Causi Title: Restoring credit market stability conditions in Italy: evidences on Loan and Bad Loan dynamics Abstract: In this paper we study the effect of credit deterioration on loan dynamics in the Italian non financial sector. The aim is to analyze, from a macroeconometric point of view, if credit growth rate is simply affected by bad loans stock variation or if there are other proxies of credit worsening that could have an influence on it. We use a factor model approach to capture all the pervasive factors that could affect the cyclical dynamics of the credit market, and we take into account the structural breaks induced by the Great Recession using quarterly data for the period 1998:4–2014:4. We reach the conclusion that new bad loans entry rate is the credit quality proxy that seems to express a significant and robust impact on lending dynamics. An increase of this ratio seems to cause a loans contraction after only 3 months and this evidence is useful in formulating some policy conclusions about banking system stability. We provide also results on new bad loans entry rate dynamics, finding a significant relation with GDP at infra-annual period (6 months). Journal: The European Journal of Finance Pages: 746-773 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1663229 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1663229 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:746-773 Template-Type: ReDIF-Article 1.0 Author-Name: Vu Quang Trinh Author-X-Name-First: Vu Quang Author-X-Name-Last: Trinh Author-Name: Marwa Elnahass Author-X-Name-First: Marwa Author-X-Name-Last: Elnahass Author-Name: Aly Salama Author-X-Name-First: Aly Author-X-Name-Last: Salama Author-Name: Marwan Izzeldin Author-X-Name-First: Marwan Author-X-Name-Last: Izzeldin Title: Board busyness, performance and financial stability: does bank type matter? Abstract: This study examines the impact of board busyness (i.e. multiple directorships of outside board members) on the performance and financial stability of banks in a dual banking system (Islamic and conventional). We consider banks from 14 countries for the period 2010–2015. The results provide strong evidence that conventional banks with busy boards exhibit high bank performance (i.e. high profitability and low cost to income) and greater financial stability (i.e. low insolvency risk, credit risk, liquidity risk, asset risk, and operational risk). These findings are in line with the reputation hypothesis, which asserts that the expertise and connections of busy outside directors lead to better decision making, more efficient resource utilisation and more effective monitoring. In contrast, Islamic banks’ performance and stability are adversely affected by the presence of busy board members, with Islamic banks show low profitability, high cost to income and high risk-taking. This result might be attributed to the complex governance structure of Islamic banks and the uniqueness of their financial products, which require additional effective monitoring. Journal: The European Journal of Finance Pages: 774-801 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1636842 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1636842 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:774-801 Template-Type: ReDIF-Article 1.0 Author-Name: Linh Nguyen Author-X-Name-First: Linh Author-X-Name-Last: Nguyen Author-Name: John O. S. Wilson Author-X-Name-First: John O. S. Author-X-Name-Last: Wilson Title: How does credit supply react to a natural disaster? Evidence from the Indian Ocean Tsunami Abstract: The supply of credit may increase or decrease following a natural disaster, depending on the extent to which banks can absorb risk, and the economic prospects and demand for finance by affected firms and households. In this paper, we assess the impact of a natural disaster (Indian Ocean Tsunami of 2004) on the aggregate supply of credit to provinces throughout Thailand. The results of our investigation suggest that the tsunami has long-lasting negative effects on bank lending, albeit the effects are spread unevenly across geographic areas with most of the reduction in aggregate lending occurring in severely affected provinces. We also find that the presence of bank branches in affected regions mitigates some of the adverse lending effects that follow the tsunami. Journal: The European Journal of Finance Pages: 802-819 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2018.1562952 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1562952 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:802-819 Template-Type: ReDIF-Article 1.0 Author-Name: Giampaolo Gabbi Author-X-Name-First: Giampaolo Author-X-Name-Last: Gabbi Author-Name: Michele Giammarino Author-X-Name-First: Michele Author-X-Name-Last: Giammarino Author-Name: Massimo Matthias Author-X-Name-First: Massimo Author-X-Name-Last: Matthias Author-Name: Stefano Monferrà Author-X-Name-First: Stefano Author-X-Name-Last: Monferrà Author-Name: Gabriele Sampagnaro Author-X-Name-First: Gabriele Author-X-Name-Last: Sampagnaro Title: Does face-to-face contact matter? Evidence on loan pricing Abstract: This paper focuses on the economic impact of the lender–borrower relationship on loan interest rates and tests whether repeated bank-firm contact significantly reduces these rates. We find strong evidence of the ‘relationship intensity’ hypothesis, and we detect a contribution of physical contact between banks and firms to loan pricing, controlling for the location where contact occurs. Finally, we report new evidence on the hold-up problem; in particular, we find that under certain circumstances, a closer relationship may alleviate extra borrowing costs. Journal: The European Journal of Finance Pages: 820-836 Issue: 7-8 Volume: 26 Year: 2020 Month: 5 X-DOI: 10.1080/1351847X.2019.1703023 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1703023 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:7-8:p:820-836 Template-Type: ReDIF-Article 1.0 Author-Name: Siqi Liu Author-X-Name-First: Siqi Author-X-Name-Last: Liu Author-Name: Adrian Melia Author-X-Name-First: Adrian Author-X-Name-Last: Melia Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Title: Singular diffusions, constant elasticity of variance processes and logarithmic rates of return Abstract: The singular diffusion processes developed by William Feller occupy a central role in a number of disciplines including economics and finance. We identify a fundamental inconsistency between the probability densities stated in the Feller papers for these singular diffusion processes. Moreover, we apply the method of group-invariance to resolve this inconsistency. Since logarithmic returns are of considerable importance in economics and finance, we also illustrate a procedure for determining the conditional expected logarithmic rate of return for state variables which evolve in terms of the singular diffusion processes on which the Feller papers are based. Journal: The European Journal of Finance Pages: 837-853 Issue: 9 Volume: 26 Year: 2020 Month: 6 X-DOI: 10.1080/1351847X.2019.1709526 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1709526 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:9:p:837-853 Template-Type: ReDIF-Article 1.0 Author-Name: Wolfgang Breuer Author-X-Name-First: Wolfgang Author-X-Name-Last: Breuer Author-Name: Can K. Soypak Author-X-Name-First: Can K. Author-X-Name-Last: Soypak Author-Name: Bertram I. Steininger Author-X-Name-First: Bertram I. Author-X-Name-Last: Steininger Title: Magnitude effects in lending and borrowing: empirical evidence from a P2P platform Abstract: For varying borrowing and lending amounts, the corresponding subjective discount rates will also vary. A situation where high amounts correspond to lower discount rates is called a conventional magnitude effect, while the opposite is called a reverse magnitude effect. We present an overview of the theoretical arguments for both kinds of magnitude effects. Against this background, we then offer the first comprehensive empirical analysis of this issue based on real-life transaction data. To do so, we rely on more than 9,000 credit applications from the formerly largest German peer-to-peer (P2P) lending platform, Smava, between February 2007 and April 2013. We confirm that there is a conventional magnitude effect for lending money to others but a reverse magnitude effect for borrowing decisions. We suggest, as an explanation for our findings, the prevalence of cost-based determinants of magnitude effects in this special setting. Journal: The European Journal of Finance Pages: 854-873 Issue: 9 Volume: 26 Year: 2020 Month: 6 X-DOI: 10.1080/1351847X.2019.1709525 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1709525 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:9:p:854-873 Template-Type: ReDIF-Article 1.0 Author-Name: Amey Pramodkumar Kansara Author-X-Name-First: Amey Pramodkumar Author-X-Name-Last: Kansara Author-Name: Ming-Chien Sung Author-X-Name-First: Ming-Chien Author-X-Name-Last: Sung Author-Name: Tiejun Ma Author-X-Name-First: Tiejun Author-X-Name-Last: Ma Author-Name: Johnnie E. V. Johnson Author-X-Name-First: Johnnie E. V. Author-X-Name-Last: Johnson Title: Towards a better understanding of the full impact of the left digit effect on individual trading behaviour: unearthing a trading profit effect Abstract: Investors’ perceptions of price have been shown to be disproportionately affected by the left-most digit(s). However, a similar left digit effect (LDE) in relation to another important determinant of investors’ behaviour (i.e. trading profit) has not been explored. We examine over 7,314,570 trades made by 25,766 individuals and find a LDE in profit that is 1.71 times stronger than that related to closing price; suggesting that individuals focus more on left digits in profit than price when deciding when to close a trade. In addition, we observe a positive synergistic relationship between the LDE related to profit and price, suggesting that its total influence may result in losses of billions of dollars per financial year for investors. We suggest that these results make a strong case for educating investors against this bias. Journal: The European Journal of Finance Pages: 874-891 Issue: 9 Volume: 26 Year: 2020 Month: 6 X-DOI: 10.1080/1351847X.2020.1717976 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1717976 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:9:p:874-891 Template-Type: ReDIF-Article 1.0 Author-Name: Marco Realdon Author-X-Name-First: Marco Author-X-Name-Last: Realdon Title: Affine and quadratic models with many factors and few parameters Abstract: ‘Classic’ affine and quadratic term structure models in the literature usually have three or four factors and tens of parameters. However affine and quadratic term structure models with many factors and few parameters (MFFP), i.e. with up to twenty factors and with six to seven parameters, fit and predict U.S. and Euro sovereign yields better than ‘classic’ affine and quadratic models. MFFP models also fit the volatility of and the correlations between changes in yields of different maturities better than ‘classic’ models. MFFP models outperform because fewer parameters reduce in sample over-fitting and because more factors give models more flexibility to match yields of different maturities. Among MFFP models, a type of affine model with stochastic volatility is usually preferable to the homoschedastic affine model, but for U.S. yields the quadratic model seems preferable among five factor MFFP models. Journal: The European Journal of Finance Pages: 1019-1046 Issue: 11 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1701511 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1701511 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:11:p:1019-1046 Template-Type: ReDIF-Article 1.0 Author-Name: Jonatan Groba Author-X-Name-First: Jonatan Author-X-Name-Last: Groba Author-Name: Pedro Serrano Author-X-Name-First: Pedro Author-X-Name-Last: Serrano Title: Foreign monetary policy and firms' default risk Abstract: This study documents the relationship between foreign monetary policy and firms' ex-ante forward-looking default probability measures. We analyze market-based measures of default for large non-financial firms in the US and the EMU area. We propose two transmission mechanisms of foreign policy shocks: the foreign demand channel and the foreign debt channel. We show that foreign monetary policy influences firms' default probability largely through the foreign demand channel. We find that the foreign debt channel only played a role for European firms during the early 2000s due to the higher exposure to USD denominated obligations. These results highlight the need for macro-prudential authorities to pay more attention to the foreign demand channel in the struggle against large default events, as the results show that the foreign debt channel is less relevant. Journal: The European Journal of Finance Pages: 1047-1074 Issue: 11 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1710225 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1710225 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:11:p:1047-1074 Template-Type: ReDIF-Article 1.0 Author-Name: Suzanne G. M. Fifield Author-X-Name-First: Suzanne G. M. Author-X-Name-Last: Fifield Author-Name: David G. McMillan Author-X-Name-First: David G. Author-X-Name-Last: McMillan Author-Name: Fiona J. McMillan Author-X-Name-First: Fiona J. Author-X-Name-Last: McMillan Title: Is there a risk and return relation? Abstract: Traditional finance theory posits that the relation between the risk and return of stocks is positive. Equally, investment practice is often based on the contention that high (low) beta stocks earn higher (lower) returns. However, this fundamental relation is questioned by several researchers, who present mixed evidence. The purpose of this paper is to shed further light on this question by examining both market- and firm-level price data; employing a battery of tests, including individual market, panel and quantile regressions; analysing the nature of the relation during periods of high and low volatility and in bull and bear markets. The results indicate that there is no single robust relation between risk and return. Notably, the results suggest a positive relation when returns are high and during bear markets. Further, the finding of a positive relation is stronger at the market-level than the firm-level and over long time periods. However, a negative relation exists at low return levels, during bull markets and, even more so, at the individual firm level. Overall, the results suggest that the risk-return relation is switching in nature and is primarily driven by changing risk preferences. A positive relation exists when macroeconomic risk plays a larger role. Journal: The European Journal of Finance Pages: 1075-1101 Issue: 11 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2020.1724551 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1724551 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:11:p:1075-1101 Template-Type: ReDIF-Article 1.0 Author-Name: Paula Cruz-García Author-X-Name-First: Paula Author-X-Name-Last: Cruz-García Author-Name: Juan Fernández de Guevara Author-X-Name-First: Juan Author-X-Name-Last: Fernández de Guevara Title: Determinants of net interest margin: the effect of capital requirements and deposit insurance scheme Abstract: This paper analyzes the determinants of net interest margin with a focus on the impact of capital regulation and deposit insurance. We extend the Ho and Saunders (1981) family of models to explicitly include both capital requirement and the deposit insurance premium as determinants of net interest margin. The model predicts that the higher the capital requirements and deposit insurance premium, the higher banks’ interest rates will be. We test the theoretical model using panel data for OECD countries between 2000 and 2014. Our results support the positive relationship between both the capital requirement and the deposit insurance premium on interest margins. The most important determinants of the net interest margin are implicit payments, efficiency, average operating costs, the intensity of competition, the deposit insurance premium and capital stringency. Journal: The European Journal of Finance Pages: 1102-1123 Issue: 11 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1700149 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1700149 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:11:p:1102-1123 Template-Type: ReDIF-Article 1.0 Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Author-Name: Neil Kellard Author-X-Name-First: Neil Author-X-Name-Last: Kellard Title: Banks and financial markets in times of uncertainty Journal: The European Journal of Finance Pages: 893-896 Issue: 10 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2020.1725084 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1725084 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:893-896 Template-Type: ReDIF-Article 1.0 Author-Name: F. Arnaboldi Author-X-Name-First: F. Author-X-Name-Last: Arnaboldi Author-Name: B. Casu Author-X-Name-First: B. Author-X-Name-Last: Casu Author-Name: E. Kalotychou Author-X-Name-First: E. Author-X-Name-Last: Kalotychou Author-Name: A. Sarkisyan Author-X-Name-First: A. Author-X-Name-Last: Sarkisyan Title: The performance effects of board heterogeneity: what works for EU banks? Abstract: We examine the impact of board heterogeneity on the performance of EU-listed banks in the wake of the global financial crisis. In a comprehensive set-up, we consider standard board features (type, tenure, size, and age of board members) as well as board diversity features (gender diversity, employee representation, internationalisation, and age diversity). We propose a diversity index, which summarises the different dimensions of diversity, and control for unobserved heterogeneity and reverse causality. Our analysis uncovers a complex relationship between board heterogeneity and bank performance, which is influenced by market conditions and by national culture. Overall board diversity does not seem to affect bank performance, but it does decrease performance variability during the Eurozone crisis and in countries culturally more open to diversity. Different board and diversity features have a positive impact on bank performance (size, tenure, and employee representation); the relationship is non-linear, with the effect of diversity being more relevant when there is a significant proportion of minority representatives. While substantial board internationalisation has a negative impact on bank performance, the presence of foreign directors appears to be less detrimental during the Eurozone crisis and in countries that are more welcoming towards diversity. Journal: The European Journal of Finance Pages: 897-924 Issue: 10 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2018.1479719 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1479719 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:897-924 Template-Type: ReDIF-Article 1.0 Author-Name: René Kumsta Author-X-Name-First: René Author-X-Name-Last: Kumsta Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Title: The financial strength anomaly in the UK: information uncertainty or liquidity? Abstract: This paper examines two potential key drivers of the financial strength (F-Score) investment strategy: information uncertainty and liquidity. We use novel, direct measures of information uncertainty related to the variability of financial strength signals themselves. However, financial strength strategy returns are not generally strongly related to these information uncertainty proxies. We also examine two proxies for liquidity. Financial strength strategy returns are generally substantially larger for illiquid firms. A zero-cost arbitrage strategy based on F-Score generates a 20% return in illiquid UK stocks and 12% in liquid UK stocks. The enhanced F-Score effect is driven by a flight from illiquidity amongst financially weak stocks. Overall, the profitability of the F-Score investment strategy appears more closely related to liquidity than to information uncertainty. Journal: The European Journal of Finance Pages: 925-957 Issue: 10 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1641532 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1641532 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:925-957 Template-Type: ReDIF-Article 1.0 Author-Name: Sebastian de-Ramon Author-X-Name-First: Sebastian Author-X-Name-Last: de-Ramon Author-Name: Michael Straughan Author-X-Name-First: Michael Author-X-Name-Last: Straughan Title: The evolution of competition in the UK deposit-taking sector, 1989–2013 Abstract: Improving competition was one of the key objectives of the UK banking and building society deregulation that came into effect in the 1980s. We use data for banks and building societies for the period 1989–2013 and a number of measures of competition, to examine whether competition did improve over the longer term, and whether the financial crisis changed this trend. We find that following a period of heightened competition in the 1990s between banks and building societies in UK retail markets, consolidation in the sector in the late 1990s saw the emergence of large banking groups and a reduction in competition in the 2000s, ahead of the financial crisis. We also find no evidence that competition subsequently improved following the crisis. Lastly, we find that market power, as measured by the Lerner index, is likely to be considerably less for building societies than for other firms. Journal: The European Journal of Finance Pages: 958-977 Issue: 10 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1574270 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1574270 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:958-977 Template-Type: ReDIF-Article 1.0 Author-Name: R. Barrell Author-X-Name-First: R. Author-X-Name-Last: Barrell Author-Name: D. Karim Author-X-Name-First: D. Author-X-Name-Last: Karim Author-Name: C. Macchiarelli Author-X-Name-First: C. Author-X-Name-Last: Macchiarelli Title: Towards an understanding of credit cycles: do all credit booms cause crises? Abstract: Macroprudential policy is now based around a countercyclical buffer, relating capital requirements for banks to the degree of excess credit in the economy. We consider the construction of the credit to GDP gap looking at different ways of extracting the cyclical indicator for excess credit. We compare different smoothing mechanisms for the credit gap, and demonstrate that some countries require an AR(2) smoother whilst other do not. We embed these different estimates of the credit gap in Logit models of financial crises, and show that the AR(2) cycle is a much better contributor to their explanation than is the HP filter suggested by the BIS and currently in use in policy making. We show that our results are robust to changes in assumptions, and we make criticisms of current policy settings. Journal: The European Journal of Finance Pages: 978-993 Issue: 10 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2018.1521341 File-URL: http://hdl.handle.net/10.1080/1351847X.2018.1521341 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:978-993 Template-Type: ReDIF-Article 1.0 Author-Name: Nikos Paltalidis Author-X-Name-First: Nikos Author-X-Name-Last: Paltalidis Author-Name: Victoria Patsika Author-X-Name-First: Victoria Author-X-Name-Last: Patsika Title: Asymmetric dependence in international currency markets Abstract: We find new channels for the transmission of shocks in international currencies, by developing a model in which shock propagations evolve from domestic stock markets, liquidity, credit risk and growth channels. We employ symmetric and asymmetric copulas to quantify joint downside risks and document that asset classes tend to experience concurrent extreme shocks. The time-varying spillover intensities cause a significant increase in cross-asset linkages during periods of high volatility, which is over and above any expected economic fundamentals, providing strong evidence of asymmetric investor induced contagion. The critical role of the credit crisis is amplified, as the beginning of an important reassessment of emerging currencies which lead to changes in the dependence structure, a revaluation and recalibration of their risk characteristics. By modelling tail risks, we also find patterns consistent with the domino effect. Journal: The European Journal of Finance Pages: 994-1017 Issue: 10 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1650089 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1650089 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:994-1017 Template-Type: ReDIF-Article 1.0 Author-Name: The Editors Title: Annual thanks to referees Journal: The European Journal of Finance Pages: (i)-(v) Issue: 10 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2020.1752042 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1752042 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:10:p:(i)-(v) Template-Type: ReDIF-Article 1.0 Author-Name: Kim J. Heyden Author-X-Name-First: Kim J. Author-X-Name-Last: Heyden Author-Name: Florian Röder Author-X-Name-First: Florian Author-X-Name-Last: Röder Title: The smart money effect in Germany – do investment focus and bank-affiliation matter? Abstract: We investigate the smart money effect in the German mutual fund market from 2001 to 2016. Results show a positive relation between fund flows and subsequent performance for mutual funds with a European or international diversified investment focus. Funds that invest domestically, however, show no signs of a smart money effect. Moreover, evidence suggests that flows to funds managed by bank-affiliated investment companies are smart. We argue that less sophisticated investors rather invest domestically and that financial advice improves retail investors’ mutual fund investment decisions. Journal: The European Journal of Finance Pages: 1125-1145 Issue: 12 Volume: 26 Year: 2020 Month: 8 X-DOI: 10.1080/1351847X.2020.1720261 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1720261 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:12:p:1125-1145 Template-Type: ReDIF-Article 1.0 Author-Name: M. Karanasos Author-X-Name-First: M. Author-X-Name-Last: Karanasos Author-Name: S. Yfanti Author-X-Name-First: S. Author-X-Name-Last: Yfanti Title: On the macro-drivers of realized volatility: the destabilizing impact of UK policy uncertainty across Europe Abstract: This paper studies the bivariate HEAVY system of daily and intra-daily volatility equations and its macro-augmented asymmetric power extension. We focus on economic drivers that exacerbate stock market volatility and can be proved to be major threats for financial stability. Our study proves the inflammatory effects of UK Policy Uncertainty alongside global credit and commodity factors that spread across European financial markets. This UK-led spillover phenomenon should be considered by world market participants and recognized, monitored and mitigated by policymakers amid the Brexit fears and the associated highly probable harm for Europe. Other findings are as follows. First, once we allow for power transformations, asymmetries, and macro-effects in the benchmark specification, it is found that both powered conditional variances are significantly affected by the powers of squared negative returns and realized measure, further improving the HEAVY framework's forecasting accuracy. Second, the structural breaks applied to the bivariate system capture the time-varying behavior of the parameters, in particular during the global financial crisis of 2007/08. Third, higher UK uncertainty levels increase the leverage and global macro-effects from credit and commodity markets on all European stock markets' realized volatilities. Journal: The European Journal of Finance Pages: 1146-1183 Issue: 12 Volume: 26 Year: 2020 Month: 8 X-DOI: 10.1080/1351847X.2020.1732437 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1732437 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:12:p:1146-1183 Template-Type: ReDIF-Article 1.0 Author-Name: Shiyu Song Author-X-Name-First: Shiyu Author-X-Name-Last: Song Author-Name: Guanying Wang Author-X-Name-First: Guanying Author-X-Name-Last: Wang Author-Name: Yongjin Wang Author-X-Name-First: Yongjin Author-X-Name-Last: Wang Title: Pricing European options under a diffusion model with psychological barriers and leverage effect Abstract: This paper derives closed-form formulae for European options under a diffusion model when there exist psychological barriers and leverage effect in underlying dynamics. The state space of the proposed model is divided into different subregions by psychological barriers, and in each subregion, the model behaves like a constant elasticity of variance process. Within this framework, we derive both Laplace transform- and spectral expansion-based analytical solutions, which allow fast and accurate calculation of option prices. Numerical results are presented to explore the nontrivial properties of our model. Journal: The European Journal of Finance Pages: 1184-1206 Issue: 12 Volume: 26 Year: 2020 Month: 8 X-DOI: 10.1080/1351847X.2020.1725083 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1725083 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:12:p:1184-1206 Template-Type: ReDIF-Article 1.0 Author-Name: Gema Fernández-Avilés Author-X-Name-First: Gema Author-X-Name-Last: Fernández-Avilés Author-Name: José-María Montero Author-X-Name-First: José-María Author-X-Name-Last: Montero Author-Name: Lidia Sanchis-Marco Author-X-Name-First: Lidia Author-X-Name-Last: Sanchis-Marco Title: Extreme downside risk co-movement in commodity markets during distress periods: a multidimensional scaling approach Abstract: We analyze the co-movement of a number of commodity markets in extreme financial episodes worldwide. More specifically, we provide extreme downside risk co-movement maps of these markets during six recent distress periods. We follow an expected shortfall-multidimensional scaling approach, which allows for an easy classification of markets according to their dynamics in risky episodes. No clear risk co-movement patterns are observed, nor spillover effects are detected. Financialization and speculation might have played some role in the dynamics of price and risk only in food commodity markets during the oil price increase 2007–2008. Journal: The European Journal of Finance Pages: 1207-1237 Issue: 12 Volume: 26 Year: 2020 Month: 8 X-DOI: 10.1080/1351847X.2020.1724171 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1724171 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:12:p:1207-1237 Template-Type: ReDIF-Article 1.0 Author-Name: Flavio Bazzana Author-X-Name-First: Flavio Author-X-Name-Last: Bazzana Author-Name: Giacomo De Laurentis Author-X-Name-First: Giacomo Author-X-Name-Last: De Laurentis Author-Name: Raoul Pisani Author-X-Name-First: Raoul Author-X-Name-Last: Pisani Author-Name: Renata Trinca Colonel Author-X-Name-First: Renata Author-X-Name-Last: Trinca Colonel Title: Can domestic trade credit insurance contracts be effective collateral for banks? A quantitative study of the Italian market Abstract: A domestic credit insurance contract is a policy that covers the risk of the non-payment of future commercial credit as a result of the failure to pay within the agreed terms and conditions (protracted default) or the insolvency of the buyer. To evaluate the effective level of financial protection offered by trade credit policies, we collected a database of contracts issued between 2006 and 2013 by a number of Italian insurance companies, which account for 80-85% of the Italian market. We find that, to be considered as able to mitigate credit risk, the policies must have their contract clauses changed. In that case, such a policy, if accepted by the supervisory authority, could permit banks to reduce the capital requirement connected with the discount of trade credits. These results are particularly important for insurance companies. Journal: The European Journal of Finance Pages: 1239-1252 Issue: 13 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1627377 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1627377 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:13:p:1239-1252 Template-Type: ReDIF-Article 1.0 Author-Name: Margarida Abreu Author-X-Name-First: Margarida Author-X-Name-Last: Abreu Author-Name: Victor Mendes Author-X-Name-First: Victor Author-X-Name-Last: Mendes Title: Do individual investors trade differently in different financial markets? Abstract: We investigate the hypothesis that the same investors trade differently in different markets. More precisely, we discuss the hypothesis that the same investors trade derivatives differently than stocks. We use a proprietary database containing the transaction records of 129,461 investors over a 10-year period, and we select investors holding both stocks and warrants in their portfolios. We compare the trading behavior of these investors in the stock market and in the warrant market, controlling for investors’ sociodemographic characteristics and behavioral biases (overconfidence, the disposition effect and pursuit of the pleasure of gambling).Even though investors are the same in both markets, our results clearly show that the determinants of the trading activity in stocks and in warrants are not all the same, implying that investors trade stocks differently than warrants. More precisely, overconfident investors have higher warrant trading activity and lower domestic stock trading activity, and investors who are pursuing gambling pleasure or are prone to the disposition effect trade warrants more frequently (but do not more frequently trade stocks). Journal: The European Journal of Finance Pages: 1253-1270 Issue: 13 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1709524 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1709524 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:13:p:1253-1270 Template-Type: ReDIF-Article 1.0 Author-Name: João M. Pinto Author-X-Name-First: João M. Author-X-Name-Last: Pinto Author-Name: Mário C. Santos Author-X-Name-First: Mário C. Author-X-Name-Last: Santos Title: The choice between corporate and structured financing: evidence from new corporate borrowings Abstract: We examine the factors that influence nonfinancial firms’ choice of issuing standard corporate bonds vis-à-vis contracting structured finance, in the form of project finance or asset securitization arrangements. Using a data set of deals closed by 4,700 European borrowers between 2000 and 2016, we find that informational frictions and issuance costs affect public firms’ borrowing source choices. Findings suggest that borrowers choose structured finance when they are relatively smaller, less profitable, have lower asset tangibility, and seek long-term financing. Our findings also document that borrowers resorting to asset securitization tend to have larger growth opportunity sets. Borrowers resorting to project finance are less creditworthy than corporate bond issuers and, on average, asset securitization deals have an 87.6 basis points borrowing cost advantage over corporate bond deals for switchers. Journal: The European Journal of Finance Pages: 1271-1300 Issue: 13 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2019.1697323 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1697323 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:13:p:1271-1300 Template-Type: ReDIF-Article 1.0 Author-Name: Riccardo Bramante Author-X-Name-First: Riccardo Author-X-Name-Last: Bramante Author-Name: Gimmi Dallago Author-X-Name-First: Gimmi Author-X-Name-Last: Dallago Author-Name: Silvia Facchinetti Author-X-Name-First: Silvia Author-X-Name-Last: Facchinetti Title: Nonlinear relative dynamics Abstract: Covariance and correlation are two widespread tools in statistics and finance to measure how two entities vary together. Correlation measures the linear relationship between two variables and is not an adequate measure when the two exhibit nonlinear relationships. In this paper, we extend linear correlation to an α-grade monomial one; α values that maximize correlation indicate which type of nonlinear relationship data exhibit. Lagrange representation allows us to define a contro-correlation measure to represent how two entities are not related and a measure of relative variability. Finally, a simulation study and a real-world data application are performed to assess the performance of the proposed methodology. Journal: The European Journal of Finance Pages: 1301-1314 Issue: 13 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2020.1742757 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1742757 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:13:p:1301-1314 Template-Type: ReDIF-Article 1.0 Author-Name: Guanying Wang Author-X-Name-First: Guanying Author-X-Name-Last: Wang Author-Name: Xingchun Wang Author-X-Name-First: Xingchun Author-X-Name-Last: Wang Author-Name: Xinjian Shao Author-X-Name-First: Xinjian Author-X-Name-Last: Shao Title: The valuation of vulnerable European options with risky collateral Abstract: This paper presents a model for valuing vulnerable European options with risky collateral under the assumption that the holder of vulnerable options could recover a proportion of the option value using the collateral account when default occurs. We describe the underlying asset and the risky collateral using correlated geometric Brownian motions and consider default risk in a reduced form model. An integral pricing formula of call options is derived when the default intensity follows an Ornstein–Uhlenbeck process. For practical purposes, we work under the default intensity captured by Cox–Ingersoll–Ross and Ornstein–Uhlenbeck processes respectively, and numerical results show that the differences in the values of vulnerable options under these two intensity processes are tiny. The impacts of risky collateral and default risk on option prices are illustrated. Specially, the effect of wrong (right) way risk can be reflected by the correlation between the underlying asset and default intensity. Journal: The European Journal of Finance Pages: 1315-1331 Issue: 13 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2020.1730419 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1730419 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:13:p:1315-1331 Template-Type: ReDIF-Article 1.0 Author-Name: Lei Gao Author-X-Name-First: Lei Author-X-Name-Last: Gao Author-Name: Zabihollah Rezaee Author-X-Name-First: Zabihollah Author-X-Name-Last: Rezaee Author-Name: Ji Yu Author-X-Name-First: Ji Author-X-Name-Last: Yu Title: Peer firms’ earnings predictability and pricing efficiency – evidence from IPOs* Abstract: We examine the effect of peer firms’ earnings predictability on initial public offering (IPO) underpricing by investigating whether peer firms’ financial characteristics affect IPO pricing and whether the information disseminated by the IPO firm changes product market competition. Analyzing 5,264 IPOs in the 1976–2012 period using data from multiple sources, we find that IPO firms whose peer firms have long-run earnings predictability tend to have lower underpricing compared to those with short-run earnings predictability. Our study makes three central contributions. First, it shows that investors do not consider IPO firms in isolation from their peer firms and that IPO underpricing is highly dependent on peer firms’ earnings characteristics. Second, it demonstrates that the market does not always consider earnings predictability to be a desirable attribute, which has practical implications for regulators and firms. Third, we find that product market competition from peer firms and managerial ability both affect IPO underpricing. These results suggest that investors might interpret short-run peer firms’ earnings predictability as evidence that a majority of the firms in the industry engage in myopic behaviors, while they might interpret long-run peer firms’ earnings predictability as a signal that the majority of firms in the industry have stable cash flows. Journal: The European Journal of Finance Pages: 1332-1353 Issue: 13 Volume: 26 Year: 2020 Month: 7 X-DOI: 10.1080/1351847X.2020.1732436 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1732436 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:13:p:1332-1353 Template-Type: ReDIF-Article 1.0 Author-Name: Imen Derouiche Author-X-Name-First: Imen Author-X-Name-Last: Derouiche Author-Name: Anke Muessig Author-X-Name-First: Anke Author-X-Name-Last: Muessig Author-Name: Véronique Weber Author-X-Name-First: Véronique Author-X-Name-Last: Weber Title: The effect of risk disclosure on analyst following Abstract: Prior research shows that financial analysts play an important information intermediary role in France. This study extends earlier research to examine the effect of risk disclosure on the number of analysts following listed firms. Using a unique dataset of French firms on the 120 SBF index over 2007−2015, the results show a positive and significant relation between risk disclosure and analyst following, suggesting that firms having greater risk disclosure attract more financial analysts. These findings provide empirical support to the argument that analysts incur lower costs of information gathering in firms with greater risk disclosure. The demand for analyst services is also more valuable in these firms, given their potentially high exposure to risks, implying greater analyst following. Overall, our results are in line with prior literature highlighting that analysts’ activities complement annual report disclosures and, generally, corporate disclosures. Journal: The European Journal of Finance Pages: 1355-1376 Issue: 14 Volume: 26 Year: 2020 Month: 9 X-DOI: 10.1080/1351847X.2020.1726428 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1726428 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:14:p:1355-1376 Template-Type: ReDIF-Article 1.0 Author-Name: Alan J. Hanna Author-X-Name-First: Alan J. Author-X-Name-Last: Hanna Author-Name: John D. Turner Author-X-Name-First: John D. Author-X-Name-Last: Turner Author-Name: Clive B. Walker Author-X-Name-First: Clive B. Author-X-Name-Last: Walker Title: News media and investor sentiment during bull and bear markets Abstract: The news media have been described by Shiller ([2000]. Irrational Exuberance. Princeton, NJ: Princeton University Press.) as fundamental propagators of speculative price movements. We test whether investors react differently to sentiment in bull and bear markets using the tone of reporting in the Financial Times as a proxy for sentiment. Our sentiment proxy is a daily measure covering the period from 1899 to 2010. We find that the tone of the Financial Times influences trading volume during bull markets. These findings are consistent with noise traders driving trade during speculative booms and Shiller’s press-as-propagators hypothesis. Journal: The European Journal of Finance Pages: 1377-1395 Issue: 14 Volume: 26 Year: 2020 Month: 9 X-DOI: 10.1080/1351847X.2020.1743734 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1743734 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:14:p:1377-1395 Template-Type: ReDIF-Article 1.0 Author-Name: Shaen Corbet Author-X-Name-First: Shaen Author-X-Name-Last: Corbet Author-Name: Charles Larkin Author-X-Name-First: Charles Author-X-Name-Last: Larkin Author-Name: Brian M. Lucey Author-X-Name-First: Brian M. Author-X-Name-Last: Lucey Author-Name: Andrew Meegan Author-X-Name-First: Andrew Author-X-Name-Last: Meegan Author-Name: Larisa Yarovaya Author-X-Name-First: Larisa Author-X-Name-Last: Yarovaya Title: The impact of macroeconomic news on Bitcoin returns Abstract: This paper examines the relationship between news coverage and Bitcoin returns. Previous studies have provided evidence to suggest that macroeconomic news affects stock returns, commodity prices and interest rates. We construct a sentiment index based on news stories that follow the announcements of four macroeconomic indicators: GDP, unemployment, Consumer Price Index (CPI) and durable goods. By controlling for a number of potential biases we determine as to whether each of the series' have a significant impact on Bitcoin returns. While an increase in positive news surrounding unemployment rates and durable goods would typically result in a corresponding increase in equity returns, we observe the opposite to be true in the case of Bitcoin. Increases in positive news after unemployment and durable goods announcements result in a decrease in Bitcoin returns. Conversely, an increase in the percentage of negative news surrounding these announcements is linked with an increase in Bitcoin returns. News relating to GDP and CPI are found not to have any statistically significant relationships with Bitcoin returns. Our results indicate that this developing cryptocurrency market is further maturing through interactions with macroeconomic news. Journal: The European Journal of Finance Pages: 1396-1416 Issue: 14 Volume: 26 Year: 2020 Month: 9 X-DOI: 10.1080/1351847X.2020.1737168 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1737168 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:14:p:1396-1416 Template-Type: ReDIF-Article 1.0 Author-Name: Darren Duxbury Author-X-Name-First: Darren Author-X-Name-Last: Duxbury Author-Name: Tommy Gärling Author-X-Name-First: Tommy Author-X-Name-Last: Gärling Author-Name: Amelie Gamble Author-X-Name-First: Amelie Author-X-Name-Last: Gamble Author-Name: Vian Klass Author-X-Name-First: Vian Author-X-Name-Last: Klass Title: How emotions influence behavior in financial markets: a conceptual analysis and emotion-based account of buy-sell preferences Abstract: We develop a conceptual analysis and account of how emotions influence behavior in financial markets. To motivate our approach and to establish the need for such research, we first review the increasingly important literature on emotions in financial markets. While emotions influence investors in financial markets, there is a lack of precision concerning the exact nature of these influences. To remedy this, we identify and address a number of issues deriving from the current state of the finance literature. One issue concerns the lack of clarity in defining different emotion constructs. Another is the lack of a general emotion-based account of financial behavior. Our contribution is a classification of emotion-related phenomena and an emotion-based account of how anticipatory and anticipated emotions interact to determine investors’ buy and sell preferences in asset markets. Preliminary experimental results support our emotion-based account. Journal: The European Journal of Finance Pages: 1417-1438 Issue: 14 Volume: 26 Year: 2020 Month: 9 X-DOI: 10.1080/1351847X.2020.1742758 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1742758 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:14:p:1417-1438 Template-Type: ReDIF-Article 1.0 Author-Name: Gbenga Ibikunle Author-X-Name-First: Gbenga Author-X-Name-Last: Ibikunle Author-Name: Davide Mare Author-X-Name-First: Davide Author-X-Name-Last: Mare Author-Name: Yuxin Sun Author-X-Name-First: Yuxin Author-X-Name-Last: Sun Title: The paradoxical effects of market fragmentation on adverse selection risk and market efficiency Abstract: Unlike the US’s Regulation National Market System (RNMS), the EU’s Markets in Financial Instruments Directive (MiFID) does not impose a formal exchange trading linkage or guarantee a best execution price. This raises concerns about consolidated market quality in increasingly fragmented European markets. We investigate the impact of visible trading fragmentation on the quality of the London equity market and find a non-linear relationship between fragmentation and adverse selection risk. At moderate levels of fragmentation, order flow competition reduces adverse selection risk and enhances market efficiency by reducing arbitrage opportunities. Contrarily, high levels of fragmentation heighten adverse selection issues. Journal: The European Journal of Finance Pages: 1439-1461 Issue: 14 Volume: 26 Year: 2020 Month: 9 X-DOI: 10.1080/1351847X.2020.1745861 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1745861 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:14:p:1439-1461 Template-Type: ReDIF-Article 1.0 Author-Name: Hüseyin Öztürk Author-X-Name-First: Hüseyin Author-X-Name-Last: Öztürk Author-Name: Emili Tortosa-Ausina Author-X-Name-First: Emili Author-X-Name-Last: Tortosa-Ausina Author-Name: Meryem Duygun Author-X-Name-First: Meryem Author-X-Name-Last: Duygun Author-Name: Mohamed Shaban Author-X-Name-First: Mohamed Author-X-Name-Last: Shaban Title: Quo Vadis, Raters? A frontier approach to identify overratings and underratings in sovereign credit risk Abstract: This study analyses overratings and underratings in sovereign credit risk. The analysis uses partial frontier methods, a technique rarely applied in this literature. By combining a robust variant of the free disposal hull (FDH) estimator, we measure both underratings and overratings for individual countries and groups of countries. Particular attention is paid to comparing pre-crisis and crisis years in order to assess possible changes in the magnitude of the deviations. Our findings indicate a remarkable degree of both overratings and underratings during the analysed period (1999–2010), which partially vanish during the last years of the sample (2008–2010) – corresponding to the financial crisis – when many downgrades took place, especially in Eurozone countries. The results allow us to emphasize the importance of monitoring these deviations for sustainable financial stability. Our results also show the potential benefits of using partial frontier methods for measuring both underratings and overratings. Journal: The European Journal of Finance Pages: 1463-1483 Issue: 15 Volume: 26 Year: 2020 Month: 10 X-DOI: 10.1080/1351847X.2020.1748678 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1748678 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:15:p:1463-1483 Template-Type: ReDIF-Article 1.0 Author-Name: Ahmed S. Alanazi Author-X-Name-First: Ahmed S. Author-X-Name-Last: Alanazi Title: The bullish and the bearish engulfing patterns: beating the forex market or being beaten? Abstract: The paper investigates the bullish and the bearish engulfing patterns in the forex spot market. We scanned over 112,792 in-sample daily candles and 148,992 out-of-sample four-hour candles and used more than three million spot quote observations among 24 currency pairs from 2000 to 2018. The findings are of great interest. First, we document the significance of profitability of technical analysis in the forex market, particularly for the seven majors. This presumably lends support to the inefficiency of the forex market. Second, we document the significance importance of transactions costs. Third, we document the superiority of the American dollar over the other major currencies. Journal: The European Journal of Finance Pages: 1484-1505 Issue: 15 Volume: 26 Year: 2020 Month: 10 X-DOI: 10.1080/1351847X.2020.1748679 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1748679 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:15:p:1484-1505 Template-Type: ReDIF-Article 1.0 Author-Name: Ravel Sami Jabbour Author-X-Name-First: Ravel Sami Author-X-Name-Last: Jabbour Author-Name: Nithya Sridharan Author-X-Name-First: Nithya Author-X-Name-Last: Sridharan Title: The ECB's in-comprehensive SSM-ent: the higher they go, the harder they fall Abstract: The first ECB stress testing exercise took place in 2014 and aimed at forming a comprehensive assessment of the Eurozone banking sector resilience. The ECB's analysis of the outcome revealed that impairments and loan losses were the main causes behind the fall in participating banks' capital ratios. However, the assessment was incomprehensive in that, aside from bank size and country of origin, no further analysis was conducted to uncover other potential factors which could shed light on the predisposition of some banks to experience higher reductions in their capital ratios compared to peers. Based on the unique dataset provided by the ECB, our study reveals which characteristics of a bank's ex-ante balance-sheet position are helpful in understanding the fall in bank capital under stress. This is important for all market players to take into account when assessing banks' resilience on the basis of capital ratios. Our findings strengthen the case for combining different solvency ratios to promote financial stability as well as advocating for further international cooperation and disclosure of stress testing results. Journal: The European Journal of Finance Pages: 1506-1528 Issue: 15 Volume: 26 Year: 2020 Month: 10 X-DOI: 10.1080/1351847X.2020.1752276 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1752276 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:15:p:1506-1528 Template-Type: ReDIF-Article 1.0 Author-Name: Philippe Oster Author-X-Name-First: Philippe Author-X-Name-Last: Oster Title: When all concern is gone: the impact of call provisions on gone-concern Tier 2 bond spreads in Europe Abstract: For the right to redeem a bond before its maturity date, an issuer usually has to pay a call premium to its investors. This article examines the effect of call provisions on callable versus non-callable Tier 2 Contingent Convertible (CoCo) bonds in the Eurozone, Norway and Switzerland on a spread to worst basis – hence, an investors’ perspective. Thereby, I consider seven types of Tier 2 security designs, while controlling for bond, issuer, regulatory and country specific variables. The empirical results for non-rated Tier 2 CoCos show statistically significant call premiums averaging 84.1 basis points (bp). Conversely, callable Tier 2 bonds with a credit rating trade at an average discount of 12.0 bp against their non-callable pendants, in an environment with low or negative yields and a low risk aversion of investors. Consistent with the signaling theory, the value of the call provision is on average lower for investment-grade Tier 2 bonds (−18.1 bp) than for non-investment-grade (8.1 bp) bail-in-able instruments. Journal: The European Journal of Finance Pages: 1529-1568 Issue: 15 Volume: 26 Year: 2020 Month: 10 X-DOI: 10.1080/1351847X.2020.1750449 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1750449 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:15:p:1529-1568 Template-Type: ReDIF-Article 1.0 Author-Name: Florian Schroeder Author-X-Name-First: Florian Author-X-Name-Last: Schroeder Author-Name: Andrew Lepone Author-X-Name-First: Andrew Author-X-Name-Last: Lepone Author-Name: Henry Leung Author-X-Name-First: Henry Author-X-Name-Last: Leung Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Title: Flash crash in an OTC market: trading behaviour of agents in times of market stress Abstract: We examine the 21-minute flash crash in the spot rate for Pound Sterling (GBP/USD) in October 2016. During this period, the sterling price fell 9%. Proprietary data reported to the Financial Conduct Authority show that the round-trip costs of dealers are 60 times higher during the flash crash compared to normal times given liquidity constraints. Further, dealers reduce their trading volume to 1% of the level during normal times. This may be attributable to the collapse of the inter-dealer market during the crash, where dealers could only hedge 31% of their clients’ trades with each other. Journal: The European Journal of Finance Pages: 1569-1589 Issue: 15 Volume: 26 Year: 2020 Month: 10 X-DOI: 10.1080/1351847X.2020.1748893 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1748893 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:15:p:1569-1589 Template-Type: ReDIF-Article 1.0 Author-Name: R. Bhar Author-X-Name-First: R. Author-X-Name-Last: Bhar Author-Name: C. Chiarella Author-X-Name-First: C. Author-X-Name-Last: Chiarella Title: Transformation of Heath?Jarrow?Morton models to Markovian systems Abstract: A class of volatility functions for the forward rate process is considered, which allows the bond price dynamics in the Heath-Jarrow-Morton (HJM) framework to be reduced to a finite-dimensional Markovian system. The use of this Markovian system in estimation of parameters of the volatility function via use of the Kalman filter is discussed. Further, the Markovian system allows the link to be drawn between the HJM and the Vasicek/Cox-Ingersoll-Ross (CIR) frameworks for modelling the term structure of interest rates. Journal: The European Journal of Finance Pages: 1-26 Issue: 1 Volume: 3 Year: 1997 Month: 3 X-DOI: 10.1080/135184797337516 File-URL: http://hdl.handle.net/10.1080/135184797337516 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:1:p:1-26 Template-Type: ReDIF-Article 1.0 Author-Name: G. C. Reid Author-X-Name-First: G. C. Author-X-Name-Last: Reid Author-Name: N. G Terry Author-X-Name-First: N. Author-X-Name-Last: G Terry Author-Name: J. A. Smith Author-X-Name-First: J. A. Author-X-Name-Last: Smith Title: Risk management in venture capital investor-investee relations Abstract: This paper provides an empirical analysis of risk handling arrangements adopted in the relationship between the venture capital investor and his investee. The theoretical framework adopted is principal-agent analysis, which views the investee as a risk averse agent entering into a risk sharing contract with the investor, a risk neutral Fully diversified) principal. The sample analysed is made up of twenty venture capital investors in the UK over the period 1992-93, and (where available) their corresponding investee(s). These investors accounted for about three-quarters of venture capital activity in the UK over this period. The paper reports on evidence gathered by semi-structured interviews with investors and investees, on expected returns, portfolio balance, screening and risk sharing. Journal: The European Journal of Finance Pages: 27-47 Issue: 1 Volume: 3 Year: 1997 Month: 3 X-DOI: 10.1080/135184797337525 File-URL: http://hdl.handle.net/10.1080/135184797337525 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:1:p:27-47 Template-Type: ReDIF-Article 1.0 Author-Name: P. L. Varson Author-X-Name-First: P. L. Author-X-Name-Last: Varson Author-Name: M. J. P. Selby Author-X-Name-First: M. J. P. Author-X-Name-Last: Selby Title: Option prices as predictors of stock prices: intraday adjustments to information releases Abstract: This study tests for intraday lead/lag relationships between a given stock price and the stock value implied by the prices of call options on that stock. The results indicate that throughout the five trading days preceding earnings announcements with significant unanticipated information content, implied stock values lead their corresponding observed stock prices by about fifteen minutes. On the announcement day itself, this lead lengthens to the point that call option prices usually adjust at least one hour before the public announcement. Under most circumstances, evidence of this lead disappears immediately after the announcement and prices remain synchronous between the two markets. Journal: The European Journal of Finance Pages: 49-72 Issue: 1 Volume: 3 Year: 1997 Month: 3 X-DOI: 10.1080/135184797337534 File-URL: http://hdl.handle.net/10.1080/135184797337534 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:1:p:49-72 Template-Type: ReDIF-Article 1.0 Author-Name: C. J. Corrado Author-X-Name-First: C. J. Author-X-Name-Last: Corrado Author-Name: Tie Su Author-X-Name-First: Tie Author-X-Name-Last: Su Title: Implied volatility skews and stock return skewness and kurtosis implied by stock option prices Abstract: The Black-Scholes* option pricing model is commonly applied to value a wide range of option contracts. However, the model often inconsistently prices deep in-the-money and deep out-of-the-money options. Options professionals refer to this well-known phenomenon as a volatility ‘skew’ or ‘smile’. In this paper, we examine an extension of the Black-Scholes model developed by Corrado and Su that suggests skewness and kurtosis in the option-implied distributions of stock returns as the source of volatility skews. Adapting their methodology, we estimate option-implied coefficients of skewness and kurtosis for four actively traded stock options. We find significantly nonnormal skewness and kurtosis in the option-implied distributions of stock returns. Journal: The European Journal of Finance Pages: 73-85 Issue: 1 Volume: 3 Year: 1997 Month: 3 X-DOI: 10.1080/135184797337543 File-URL: http://hdl.handle.net/10.1080/135184797337543 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:1:p:73-85 Template-Type: ReDIF-Article 1.0 Author-Name: C. D. Sinclair Author-X-Name-First: C. D. Author-X-Name-Last: Sinclair Author-Name: D. M. Power Author-X-Name-First: D. M. Author-X-Name-Last: Power Author-Name: A. A. Lonie Author-X-Name-First: A. A. Author-X-Name-Last: Lonie Author-Name: C. V. Helliar Author-X-Name-First: C. V. Author-X-Name-Last: Helliar Title: An investigation of the stability of returns in Western European equity markets Abstract: This paper investigates the temporal stability of various dimensions of the returns of 16 European stock markets that are relevant to an analysis of international portfolio diversification. The basic data consist of daily stock market price indices for these markets. This group of indices comprehends a wide range of stock markets differentiated by size, age and technological sophistication, but in each case located in Western Europe. Two main tests were conducted: (a) ANOVA to identify inter-temporal variability and inter-market variability over 24 three-month sub-periods from January 1989 to December 1994, and (b) cluster analysis to identify groups of markets that exhibit similar behaviour patterns. The findings suggest that, while the potential gains from an internationally diversified portfolio restricted to the equities of Western European markets appear to be substantial, the lack of inter-temporal stability in the composition of the optimal portfolio from one period to another makes these gains difficult to achieve in practice. Journal: The European Journal of Finance Pages: 87-106 Issue: 1 Volume: 3 Year: 1997 Month: 3 X-DOI: 10.1080/135184797337552 File-URL: http://hdl.handle.net/10.1080/135184797337552 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:3:y:1997:i:1:p:87-106 Template-Type: ReDIF-Article 1.0 Author-Name: Rashad Ahmed Author-X-Name-First: Rashad Author-X-Name-Last: Ahmed Author-Name: Mohammad S. Hasan Author-X-Name-First: Mohammad S. Author-X-Name-Last: Hasan Author-Name: Jahangir Sultan Author-X-Name-First: Jahangir Author-X-Name-Last: Sultan Title: Meteor showers and global asset allocation Abstract: Cross-market linkages allow transmission of shocks among markets. Previous measures of such spillovers are based on broader stock market indexes, which cannot identify the industries that are the principal drivers of spillovers and the industries that are most exposed to the spillovers. Using investable equity indexes, we show that basic materials, financials, industrials, technologies, and telecommunication equity sectors were the primary exporters of volatility from the U.S. and that the magnitude of the spillovers increased primarily during and post-2008 financial crisis. There is evidence that Canada was most vulnerable to spillovers, while China’s exposure was the lowest among the countries in the sample. Based on the minimum variance portfolio optimization, we find that investing in foreign industries with low exposure to spillovers from the U.S. generates high Sharpe ratios for U.S. portfolio managers, especially during the financial crisis. Journal: The European Journal of Finance Pages: 1703-1724 Issue: 17 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1774406 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1774406 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:17:p:1703-1724 Template-Type: ReDIF-Article 1.0 Author-Name: See-Woo Kim Author-X-Name-First: See-Woo Author-X-Name-Last: Kim Author-Name: Jeong-Hoon Kim Author-X-Name-First: Jeong-Hoon Author-X-Name-Last: Kim Title: Volatility and variance swaps and options in the fractional SABR model Abstract: Appropriate capturing the nature of financial market volatility is a significant factor for the pricing of volatility derivatives. A recent study by Gatheral, Jaisson and Rosenbaum [2018. “Volatility is Rough.” Quantitative Finance 18 (6): 933–949] has found that log-volatility behaves as a fractional Brownian motion with a small Hurst exponent at any reasonable time scale. Also, there are several empirical works showing that a stochastic volatility model driven by the fractional Brownian motion well approximates at-the-money volatility skew near expiration. In this paper, we choose the log-normal SABR model with fractional stochastic volatility to valuate variance and volatility swaps. We derive a closed-form exact solution for the fair strike price of the variance swap by using fractional Ito calculus, while we obtain an approximate solution for the fair strike price of the volatility swap by exploiting the shifted log-normal approximation. Also, solution formulas for the variance and volatility option prices are derived. Their accuracy is confirmed through numerical studies. Calibration to market variance swap rates demonstrates the strength of fractional SABR model compared to the Heston and SABR models. Journal: The European Journal of Finance Pages: 1725-1745 Issue: 17 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1775671 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1775671 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:17:p:1725-1745 Template-Type: ReDIF-Article 1.0 Author-Name: Hany Ahmed Author-X-Name-First: Hany Author-X-Name-Last: Ahmed Author-Name: Richard Fairchild Author-X-Name-First: Richard Author-X-Name-Last: Fairchild Author-Name: Yilmaz Guney Author-X-Name-First: Yilmaz Author-X-Name-Last: Guney Title: Is corporate hedging always beneficial? A theoretical and empirical analysis Abstract: This paper investigates, theoretically and empirically, the impact of corporate hedging activities on firm value/performance. In a perfect market, with self-less management, aiming to maximise shareholder wealth, it may be expected that hedging would improve firm performance and add value. Our major contribution in this paper is that we first demonstrate theoretically the conditions under which hedging can increase or decrease firm value. Our theoretic model demonstrates that the ambiguous relationship between hedging and firm value may be due to a subtle combination of economic (managerial self-interest, agency problems/moral hazard, managerial ability, managerial risk aversion) and behavioural factors (overconfidence). Our empirical analysis confirms the ambiguous effect of hedging on firm performance. Empirically, we focus on the use of derivatives in the corporate hedging of three types of financial risk (foreign currency, interest rate and commodity price risks), and examine the effect on value and performance of listed UK corporations during 2005–2017. We demonstrate that the positive or negative effects of the hedging strategies varies significantly across both the financial risk that is hedged and the type of derivatives contracts used in the hedging as well as the time period in consideration. Journal: The European Journal of Finance Pages: 1746-1780 Issue: 17 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1785909 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1785909 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:17:p:1746-1780 Template-Type: ReDIF-Article 1.0 Author-Name: Irene Pablos Nuevo Author-X-Name-First: Irene Author-X-Name-Last: Pablos Nuevo Title: Has the new bail-in framework increased the yield spread between subordinated and senior bonds? Abstract: This paper investigates the impact of the introduction and implementation of the new EU bail-in framework on the banks' subordinated bond yield spreads over senior unsecured bonds, and links the bond yields developments with the characteristics of the issuing entities and the economic and financial environment. The analysis does not show evidence of a significant and generalized increase in the spreads as a result of a higher risk perception in the sample under review. The results reinforce the relevance of the Tier 1 capital ratio for making subordinated debt safer, while markets price the higher risk of banks with less stable sources of funding in their liability/capital structures. Market conditions and economic environment variables also play a key role in explaining bond spreads. Interestingly, after the introduction of the new bail-in framework, there is a convergence between the bond yields of the GSIBs and the non-GSIBs, which could point out to a reduction in the market perception of the so-called too big to fail public implicit guarantee. Nonetheless, this convergence is mostly driven by the reduction of the yields of bonds issued by banks not categorized as GSIBs, and not by significant increases in the GSIBs' bond yields. Journal: The European Journal of Finance Pages: 1781-1797 Issue: 17 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1776353 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1776353 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:17:p:1781-1797 Template-Type: ReDIF-Article 1.0 Author-Name: Yuxiang Bian Author-X-Name-First: Yuxiang Author-X-Name-Last: Bian Author-Name: Xiong Xiong Author-X-Name-First: Xiong Author-X-Name-Last: Xiong Author-Name: Jinqiang Yang Author-X-Name-First: Jinqiang Author-X-Name-Last: Yang Title: Leverage and valuation of hedge funds under model uncertainty Abstract: We extend the model of dynamic leverage and valuation of hedge funds [Lan, Y., N. Wang, and J. Yang. 2013. The Economics of Hedge Funds.” Journal of Financial Economics 110: 300–323.] by incorporating model uncertainty. Our theoretical model predicts that concerns about model uncertainty induce risk-neutral managers to behave more endogenously risk-averse and to choose a more conservative leverage strategy. Moreover, it shows that model uncertainty may reduce the valuations of hedge funds, including incentive fees, and total fees for the manager as well as the investors' payoff, while model uncertainty has ambiguous effects on the valuations of managers' management fees. Finally, we find that model uncertainty significantly increases the break-even alpha at the founding of a hedge fund. Journal: The European Journal of Finance Pages: 1798-1816 Issue: 17 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1778054 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1778054 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:17:p:1798-1816 Template-Type: ReDIF-Article 1.0 Author-Name: Giovanni Cerulli Author-X-Name-First: Giovanni Author-X-Name-Last: Cerulli Author-Name: Vincenzo D’Apice Author-X-Name-First: Vincenzo Author-X-Name-Last: D’Apice Author-Name: Franco Fiordelisi Author-X-Name-First: Franco Author-X-Name-Last: Fiordelisi Author-Name: Francesco Masala Author-X-Name-First: Francesco Author-X-Name-Last: Masala Title: Benchmarking non-performing loans Abstract: This paper provides a new perspective to evaluate the economic role played by banks in non-performing loans (NPLs) accumulation. We estimate benchmark NPL levels on the judicial inefficiency dimension, controlling for country- and bank-specific factors. To this aim, we first empirically establish whether judicial inefficiency is a key determinant of NPLs in the European banking system for the period 2006–2017. Using the dynamic-Generalized Method of Moments estimations, we show that higher contract enforcement inefficiency increases NPLs. Then, we estimate NPLs benchmark levels using a dose response function based on judicial inefficiency. Our results show that Norway, Sweden, and Italy performed better than the European countries, while Austria, Germany, Spain, Ireland, Cyprus, and Greece performed worse than the European mean. Our results have several policy implications. Journal: The European Journal of Finance Pages: 1591-1605 Issue: 16 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1794923 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1794923 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:16:p:1591-1605 Template-Type: ReDIF-Article 1.0 Author-Name: Hyun Jin Jang Author-X-Name-First: Hyun Jin Author-X-Name-Last: Jang Author-Name: Longjie Jia Author-X-Name-First: Longjie Author-X-Name-Last: Jia Author-Name: Harry Zheng Author-X-Name-First: Harry Author-X-Name-Last: Zheng Title: Why should we invest in CoCos than stocks? An optimal growth portfolio approach Abstract: We investigate an optimal growth portfolio problem with contingent convertible bonds (CoCos). As the conversion risk in CoCos is closely associated with the issuer's capital structure and the stock price at conversion, we model both equity and credit risk to frame this optimisation problem. This study aims to answer two questions that (i) how investors should optimally allocate their financial wealth between a CoCo and a risk-free bond; and (ii) which approach – investing in a CoCo or in a stock issued by the same bank – could result in higher expected returns. First, we derive the dynamic of a coupon-paying CoCo price under a reduced-form approach. We then decompose the problem into pre- and post-conversion regimes to obtain closed-form optimal strategies. A comparative simulation leads us to conclude that, under various market conditions, investing in a CoCo with a risk-free bond provides a higher expected growth than investing in stock. Journal: The European Journal of Finance Pages: 1606-1622 Issue: 16 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1770826 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1770826 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:16:p:1606-1622 Template-Type: ReDIF-Article 1.0 Author-Name: Dongcheol Kim Author-X-Name-First: Dongcheol Author-X-Name-Last: Kim Author-Name: Ren-Raw Chen Author-X-Name-First: Ren-Raw Author-X-Name-Last: Chen Author-Name: Tai-Yong Roh Author-X-Name-First: Tai-Yong Author-X-Name-Last: Roh Author-Name: Durga Panda Author-X-Name-First: Durga Author-X-Name-Last: Panda Title: An examination of ex ante risk and return in the cross-section using option-implied information Abstract: This paper examines cross-sectional relations between ex ante expected returns and betas. As a proxy for ex ante expected returns, we use implied returns obtained from the risk-adjusted option pricing model suggested in this paper. We find that implied returns have a positive and significant cross-sectional relation with implied betas in all maturity groups considered. This significant relation is maintained regardless of the inclusion of the well-known CAPM-anomaly variables such as firm size, book-to-market, past returns, earnings-to-price ratio, and liquidity. Ex ante market risk premium estimates have a statistical significance as well as an economic significance in that they contain significant forward-looking information on future macroeconomic conditions. Thus, market betas are priced on an ex ante basis. Journal: The European Journal of Finance Pages: 1623-1645 Issue: 16 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1767171 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1767171 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:16:p:1623-1645 Template-Type: ReDIF-Article 1.0 Author-Name: Andrea Landi Author-X-Name-First: Andrea Author-X-Name-Last: Landi Author-Name: Alex Sclip Author-X-Name-First: Alex Author-X-Name-Last: Sclip Author-Name: Valeria Venturelli Author-X-Name-First: Valeria Author-X-Name-Last: Venturelli Title: The effect of the Fed zero-lower bound announcement on bank profitability and diversification Abstract: In this paper, we investigate the impact of the Federal Reserve's decision to maintain the zero-lower bound for at least two years on bank profitability and strategies. Using a difference in difference setting, we find that banks with lower reliance on deposit funding are more sensitive to the policy event. Our evidence suggests that, compared to high deposit banks, the reduction in net worth of low deposit banks, induced them to change their strategies toward an increase in fee income to maintain the targeted level of performance. This increase is mainly explained by fiduciary and insurance-related revenues that entail a lower threat for financial stability. Journal: The European Journal of Finance Pages: 1646-1672 Issue: 16 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1782961 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1782961 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:16:p:1646-1672 Template-Type: ReDIF-Article 1.0 Author-Name: George Chalamandaris Author-X-Name-First: George Author-X-Name-Last: Chalamandaris Author-Name: Nikos E. Vlachogiannakis Author-X-Name-First: Nikos E. Author-X-Name-Last: Vlachogiannakis Title: Adverse-selection considerations in the market-making of corporate bonds Abstract: We examine the effect of adverse selection considerations in the market-making of investment-grade corporate bonds. Our sample consists of bonds participating in the JP Morgan’s JULI index that represents the most traded subset of the market. We find that customer trades executed in the wholesale market segment are more informative than trades executed in the retail-market. However, this asymmetry is not reflected in transaction costs but only seems to affect the dealers’ learning process. Our evidence suggests that the dealers’ tendency to treat as more informative wholesale customer trades translates into statistically significant economic benefit. Moreover, when information asymmetry favors market-makers, we find that the latter perform better than usual. In particular, our evidence suggests that a significant portion of the dealers’ profits stems from their ability to exploit efficiently the arrival of public information. Journal: The European Journal of Finance Pages: 1673-1702 Issue: 16 Volume: 26 Year: 2020 Month: 11 X-DOI: 10.1080/1351847X.2020.1764995 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1764995 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:16:p:1673-1702 Template-Type: ReDIF-Article 1.0 Author-Name: Bruce Burton Author-X-Name-First: Bruce Author-X-Name-Last: Burton Author-Name: Satish Kumar Author-X-Name-First: Satish Author-X-Name-Last: Kumar Author-Name: Nitesh Pandey Author-X-Name-First: Nitesh Author-X-Name-Last: Pandey Title: Twenty-five years of The European Journal of Finance (EJF): a retrospective analysis Abstract: This study commemorates the 25th anniversary of The European Journal of Finance (EJF) by providing a detailed retrospective analysis of the journal’s output using a range of bibliometric tools. The evidence demonstrates that since its inception the journal has grown consistently in terms of dimension, breadth, quality and reach. The major themes that have come to define the EJF over this time include portfolio management, stock return persistence, risk management, financing decisions, corporate governance, spillover effects, mutual fund performance, volatility measurement and international finance trends. Co-authorship analysis reveals that the journal has fostered a global network of scholars, reflecting the pervasive nature of collaboration that now extends across the world. Journal: The European Journal of Finance Pages: 1817-1841 Issue: 18 Volume: 26 Year: 2020 Month: 12 X-DOI: 10.1080/1351847X.2020.1754873 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1754873 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:18:p:1817-1841 Template-Type: ReDIF-Article 1.0 Author-Name: Gamze Ozturk Danisman Author-X-Name-First: Gamze Ozturk Author-X-Name-Last: Danisman Author-Name: Amine Tarazi Author-X-Name-First: Amine Author-X-Name-Last: Tarazi Title: Financial inclusion and bank stability: evidence from Europe Abstract: The Great Recession of 2007–2009 piqued the interest of policymakers worldwide, prompting various initiatives to stabilize the financial system and advance financial inclusion. However, few studies have considered their interconnectedness or whether any synergies or trade-offs exist between them. This paper investigates how financial inclusion affects the stability of the European banking system. The findings indicate that advancements in financial inclusion through more account ownership and digital payments have a stabilizing effect on the banking industry. A deeper investigation shows that such a stabilizing impact is mainly driven by the targeting of disadvantaged adults who are young, undereducated, unemployed, and who live in rural areas. Hence, along with its known benefits to society as a whole, financial inclusion has the additional benefit of improving the stability of the financial system. Such findings call for policy configurations that are specifically designed to achieve financial inclusion for disadvantaged individuals. Journal: The European Journal of Finance Pages: 1842-1855 Issue: 18 Volume: 26 Year: 2020 Month: 12 X-DOI: 10.1080/1351847X.2020.1782958 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1782958 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:18:p:1842-1855 Template-Type: ReDIF-Article 1.0 Author-Name: Rubén García-Céspedes Author-X-Name-First: Rubén Author-X-Name-Last: García-Céspedes Author-Name: Manuel Moreno Author-X-Name-First: Manuel Author-X-Name-Last: Moreno Title: Random LGD adjustments in the Vasicek credit risk model Abstract: This paper proposes an approximate formula to measure the credit risk of portfolios under random recoveries. This formula is based on a Taylor expansion and enables having recoveries that are correlated with the default rates over the business cycle. We show how to calibrate the corresponding models and the accuracy of the approximation using defaulted corporate bonds data for the period 1982–2014. Our results show that the proposed formula can be used to approximate the loss distribution of a portfolio under random correlated recoveries in a very satisfactory way. Moreover, this kind of recovery models could be easily implemented under the Basel capital requirements regulation to improve the credit risk measurement. Journal: The European Journal of Finance Pages: 1856-1875 Issue: 18 Volume: 26 Year: 2020 Month: 12 X-DOI: 10.1080/1351847X.2020.1789685 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1789685 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:18:p:1856-1875 Template-Type: ReDIF-Article 1.0 Author-Name: Theodoros Bratis Author-X-Name-First: Theodoros Author-X-Name-Last: Bratis Author-Name: Nikiforos T. Laopodis Author-X-Name-First: Nikiforos T. Author-X-Name-Last: Laopodis Author-Name: Georgios P. Kouretas Author-X-Name-First: Georgios P. Author-X-Name-Last: Kouretas Title: Dynamics among global asset portfolios Abstract: We examine the dynamic correlations among several global financial assets with an eye to potential portfolio diversification benefits during the 2008 US financial crisis and EMU sovereign debt crisis of the 2010s. Our findings are summarized as follows: First, evidence for rigorous, dynamic cross-correlations among global equities around the 2008 crisis suggested a weak global diversification potential. Second, financial spillovers strengthened in the post-crisis period thus, exhibiting cycles of inter-linkages among various assets classes. Third, heterogeneous global portfolios (that is, portfolios formed by various asset classes) offered greater returns than homogeneous portfolios for the whole period and especially in the period preceding the 2008 crisis. Overall, we conclude that the US and EMU crisis periods did not affect assets in the same way and hence, risk managers should follow portfolio-construction strategies with risk-offsetting assets (such as commodities) with regard to their cyclical/countercyclical movements. Journal: The European Journal of Finance Pages: 1876-1899 Issue: 18 Volume: 26 Year: 2020 Month: 12 X-DOI: 10.1080/1351847X.2020.1791924 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1791924 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:18:p:1876-1899 Template-Type: ReDIF-Article 1.0 Author-Name: Matthew C. Chang Author-X-Name-First: Matthew C. Author-X-Name-Last: Chang Title: Market sentiment, marketable transactions, and returns Abstract: Using unique data from the Taiwanese stock market, I explore the transaction aggressiveness of mutual funds, foreign institutions, dealers and retail investors during periods of different market sentiment. Retail investors’ marketable transaction ratios are positively related to stocks’ systematic risk. In contrast, mutual funds and foreign institutions’ marketable transaction ratios are negatively related. Although the marketable transaction ratios of all the four types of investors are higher when market sentiment is more fearful, mutual funds’ trades on the sell side can mitigate the marketable transaction ratios during market panics. Marketable transaction ratios of the four types of investors have significant impacts on stock prices, both directly and indirectly through the influence on order imbalances. Journal: The European Journal of Finance Pages: 1900-1925 Issue: 18 Volume: 26 Year: 2020 Month: 12 X-DOI: 10.1080/1351847X.2020.1792961 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1792961 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:18:p:1900-1925 Template-Type: ReDIF-Article 1.0 Author-Name: Cathy Yi-Hsuan Chen Author-X-Name-First: Cathy Yi-Hsuan Author-X-Name-Last: Chen Author-Name: Sergey Nasekin Author-X-Name-First: Sergey Author-X-Name-Last: Nasekin Title: Quantifying systemic risk with factor copulas Abstract: We propose a tail dependence based network approach to study systemic risk in a network of systemically important financial institutions (SIFIs). We utilize a flexible factor copula based method which allows to measure the level of extreme risk in a portfolio when dependence is driven by one or several factors. We identify the most ‘connected’ SIFIs based on an eigenvector centrality approach applied to copula-implied dependence structures as ‘central’ SIFIs. We then demonstrate that the level of systemic risk implied by such SIFIs chosen as conditioning factors in the factor copula setup exceeds that which is implied by non-central SIFIs in terms of portfolio Value-at-Risk and the portfolio return under stress. This study contributes to quantification and ranking of the systemic importance of SIFIs which is important for setting adequate capital requirements in particular and stability of financial markets in general. Journal: The European Journal of Finance Pages: 1926-1947 Issue: 18 Volume: 26 Year: 2020 Month: 12 X-DOI: 10.1080/1351847X.2020.1828961 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1828961 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:26:y:2020:i:18:p:1926-1947 Template-Type: ReDIF-Article 1.0 Author-Name: Andreas G. F. Hoepner Author-X-Name-First: Andreas G. F. Author-X-Name-Last: Hoepner Author-Name: David McMillan Author-X-Name-First: David Author-X-Name-Last: McMillan Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Author-Name: Chardin Wese Simen Author-X-Name-First: Chardin Author-X-Name-Last: Wese Simen Title: Significance, relevance and explainability in the machine learning age: an econometrics and financial data science perspective Abstract: Although machine learning is frequently associated with neural networks, it also comprises econometric regression approaches and other statistical techniques whose accuracy enhances with increasing observation. What constitutes high quality machine learning is yet unclear though. Proponents of deep learning (i.e. neural networks) value computational efficiency over human interpretability and tolerate the ‘black box’ appeal of their algorithms, whereas proponents of explainable artificial intelligence (xai) employ traceable ‘white box’ methods (e.g. regressions) to enhance explainability to human decision makers. We extend Brooks et al.’s [2019. ‘Financial Data Science: The Birth of a New Financial Research Paradigm Complementing Econometrics?’ European Journal of Finance 25 (17): 1627–36.] work on significance and relevance as assessment critieria in econometrics and financial data science to contribute to this debate. Specifically, we identify explainability as the Achilles heel of classic machine learning approaches such as neural networks, which are not fully replicable, lack transparency and traceability and therefore do not permit any attempts to establish causal inference. We conclude by suggesting routes for future research to advance the design and efficiency of ‘white box’ algorithms. Journal: The European Journal of Finance Pages: 1-7 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2020.1847725 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1847725 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:1-7 Template-Type: ReDIF-Article 1.0 Author-Name: Alla A. Petukhina Author-X-Name-First: Alla A. Author-X-Name-Last: Petukhina Author-Name: Raphael C. G. Reule Author-X-Name-First: Raphael C. G. Author-X-Name-Last: Reule Author-Name: Wolfgang Karl Härdle Author-X-Name-First: Wolfgang Karl Author-X-Name-Last: Härdle Title: Rise of the machines? Intraday high-frequency trading patterns of cryptocurrencies Abstract: This research analyses high-frequency data of the cryptocurrency market in regards to intraday trading patterns related to algorithmic trading and its impact on the European cryptocurrency market. We study trading quantitatives such as returns, traded volumes, volatility periodicity, and provide summary statistics of return correlations to CRIX (CRyptocurrency IndeX), as well as respective overall high-frequency based market statistics with respect to temporal aspects. Our results provide mandatory insight into a market, where the grand scale employment of automated trading algorithms and the extremely rapid execution of trades might seem to be a standard based on media reports. Our findings on intraday momentum of trading patterns lead to a new quantitative view on approaching the predictability of economic value in this new digital market. Journal: The European Journal of Finance Pages: 8-30 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2020.1789684 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1789684 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:8-30 Template-Type: ReDIF-Article 1.0 Author-Name: Antoine Dechezleprêtre Author-X-Name-First: Antoine Author-X-Name-Last: Dechezleprêtre Author-Name: Cal B. Muckley Author-X-Name-First: Cal B. Author-X-Name-Last: Muckley Author-Name: Parvati Neelakantan Author-X-Name-First: Parvati Author-X-Name-Last: Neelakantan Title: Is firm-level clean or dirty innovation valued more? Abstract: We examine how Tobin's Q is linked to ‘clean’ and ‘dirty’ innovation and innovation efficiency at the firm level. Clean innovation relates to patented technologies in areas such as renewable energy generation and electric cars, whereas dirty innovation relates to fossil-based energy generation and combustion engines. We use a global patent data set, covering over 15,000 firms across 12 countries. We find strong and robust evidence that the stock market recognizes the value of clean innovation and innovation efficiency and accords higher valuations to those firms that engage in successful clean research and development activities. The results are substantively invariant across innovation measurement, model specifications, estimators adopted, select sub-samples of firms and United States and European patent offices. Journal: The European Journal of Finance Pages: 31-61 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2020.1785520 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1785520 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:31-61 Template-Type: ReDIF-Article 1.0 Author-Name: Panagiotis Asimakopoulos Author-X-Name-First: Panagiotis Author-X-Name-Last: Asimakopoulos Author-Name: Stylianos Asimakopoulos Author-X-Name-First: Stylianos Author-X-Name-Last: Asimakopoulos Author-Name: Aichen Zhang Author-X-Name-First: Aichen Author-X-Name-Last: Zhang Title: Dividend smoothing and credit rating changes Abstract: This paper examines the impact of credit rating changes on firms' dividend smoothing behavior, considering for the first time the ‘big three’ credit rating agencies (Standard and Poor's, Fitch and Moody's). Using a hand-collected sample of credit rating changes for firms listed at the S&P500 that are involved in dividend payments, we implement the traditional Lintner's [1956. “Distribution of Incomes of Corporations Among dividends, Retained Earnings and Taxes.” American Economic Review 46: 97–113] model and we initially verify the fact that firms smooth their dividend payments. Then we consider the effect of credit rating changes on smoothing behavior and we show the presence of an asymmetric impact on credit rating changes to dividend smoothing behavior. In particular, on average, a credit rating downgrade among any of the three credit rating agencies forces firms to engage in less smoothing, whereas a credit rating upgrade has only a marginal positive effect on dividend smoothing. Finally, our key results remain valid for firms with high level of financial pressure and under various robustness checks. Journal: The European Journal of Finance Pages: 62-85 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2020.1739101 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1739101 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:62-85 Template-Type: ReDIF-Article 1.0 Author-Name: David G. McMillan Author-X-Name-First: David G. Author-X-Name-Last: McMillan Title: Forecasting U.S. stock returns Abstract: We forecast quarterly US stock returns using a breadth of forecast variables, methods and metrics, including linear and non-linear regressions, rolling and recursive techniques, forecast combinations and statistical and economic evaluation. Thus, extending research in terms of the range of predictor series and the scope of analysis. Consistent with much of literature, a broad view over the full set of predictor variables indicates that such models are unable to beat the historical mean model. However, nuances reveal forecast success varies according to how the forecasts are evaluated and over time. Results reveal that the term structure of interest rates consistently provides the preferred forecast performance, especially when evaluated using the Sharpe ratio. The purchasing managers index also consistently provides a strong forecast performance. Further results reveal that forecast combinations over the full set of variables do not outperform the preferred single variable forecasts, while an interest rate forecast combination subset does perform well. The success of the term structure and the purchasing managers index highlights the importance of, respectively, investor and firm expectations of future economic performance in providing valuable stock return forecasts and is consistent with asset pricing models that indicate movements in returns are conditioned by such expectations. Journal: The European Journal of Finance Pages: 86-109 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2020.1719175 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1719175 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:86-109 Template-Type: ReDIF-Article 1.0 Author-Name: Loukia Meligkotsidou Author-X-Name-First: Loukia Author-X-Name-Last: Meligkotsidou Author-Name: Ekaterini Panopoulou Author-X-Name-First: Ekaterini Author-X-Name-Last: Panopoulou Author-Name: Ioannis D. Vrontos Author-X-Name-First: Ioannis D. Author-X-Name-Last: Vrontos Author-Name: Spyridon D. Vrontos Author-X-Name-First: Spyridon D. Author-X-Name-Last: Vrontos Title: Out-of-sample equity premium prediction: a complete subset quantile regression approach Abstract: This paper extends the complete subset linear regression framework to a quantile regression setting. We employ complete subset combinations of quantile forecasts in order to construct robust and accurate equity premium predictions. We show that our approach delivers statistically and economically significant out-of-sample forecasts relative to both the historical average benchmark, the complete subset mean regression approach and the single-variable quantile forecast combination approach. Our recursive algorithm that selects, in real time, the best complete subset for each predictive regression quantile succeeds in identifying the best subset in a time- and quantile-varying manner. Journal: The European Journal of Finance Pages: 110-135 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2019.1647866 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1647866 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:110-135 Template-Type: ReDIF-Article 1.0 Author-Name: Ming-Tsung Lin Author-X-Name-First: Ming-Tsung Author-X-Name-Last: Lin Author-Name: Olga Kolokolova Author-X-Name-First: Olga Author-X-Name-Last: Kolokolova Author-Name: Ser-Huang Poon Author-X-Name-First: Ser-Huang Author-X-Name-Last: Poon Title: Slow- and fast-moving information content of CDS spreads: new endogenous systematic factors Abstract: This paper proposes two new Credit Default Swap (CDS) endogenous systematic factors constructed from peer-CDS information. The factors capture slow-moving credit risk information, as well as fast-moving newly arrived market information embedded in the most recent CDS quotes. Using a sample of U.S. non-financial listed firms from 2002 to 2011, we find that these two endogenous systematic factors dominate firm-specific factors and other widely known systematic factors in in-sample and out-of-sample CDS spread predictions. Journal: The European Journal of Finance Pages: 136-157 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2019.1667846 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1667846 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:136-157 Template-Type: ReDIF-Article 1.0 Author-Name: Richard J. McGee Author-X-Name-First: Richard J. Author-X-Name-Last: McGee Author-Name: Jose Olmo Author-X-Name-First: Jose Author-X-Name-Last: Olmo Title: The size premium as a lottery Abstract: We investigate empirically the dependence of the size effect on the top performing stocks in a cross-section of risky assets separated by industry. We propose a test for a lottery-style factor payoff based on a stochastic utility model for an under-diversified investor. The associated conditional logit model is used to rank different investment portfolios based on size and we assess the robustness of the ranking to the inclusion/exclusion of the best performing stocks in the cross-section. Our results show that the size premium has a lottery-style payoff and is spurious for most industries once we remove the single best returning stock in an industry from the sample each month. Analysis in an asset pricing framework shows that standard asset pricing models fail to correctly specify the size premium on risky assets when industry winners are excluded from the construction of the size factor. Our findings have implications for stock picking, investment management and risk factor analysis. Journal: The European Journal of Finance Pages: 158-177 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2019.1644360 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1644360 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:158-177 Template-Type: ReDIF-Article 1.0 Author-Name: Myeong Hyeon Kim Author-X-Name-First: Myeong Hyeon Author-X-Name-Last: Kim Author-Name: Seyoung Park Author-X-Name-First: Seyoung Author-X-Name-Last: Park Author-Name: Jong Mun Yoon Author-X-Name-First: Jong Mun Author-X-Name-Last: Yoon Title: Industry portfolio allocation with asymmetric correlations Abstract: We develop a new framework of optimal consumption and portfolio choice at industry portfolio level under dynamic and asymmetric correlations between industry and market portfolios. We derive in closed form the optimal consumption and investment strategies under regime-dependent correlations environment. Overall, we find that ignoring time-varying and asymmetric correlations between portfolios can be costly to investors when applied to a construction of the optimal portfolio. Finally, we empirically test the performance of the model-based investment strategy. Journal: The European Journal of Finance Pages: 178-198 Issue: 1-2 Volume: 27 Year: 2021 Month: 1 X-DOI: 10.1080/1351847X.2020.1740287 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1740287 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:1-2:p:178-198 Template-Type: ReDIF-Article 1.0 Author-Name: Mohamed Janahi Author-X-Name-First: Mohamed Author-X-Name-Last: Janahi Author-Name: Yuval Millo Author-X-Name-First: Yuval Author-X-Name-Last: Millo Author-Name: Georgios Voulgaris Author-X-Name-First: Georgios Author-X-Name-Last: Voulgaris Title: CFO gender and financial reporting transparency in banks Abstract: We investigate the effect of CFO gender on the timeliness of loan loss provision (LLP) reporting using a large sample of US banks from 2007 to 2016. Our findings show that women CFOs are associated with timelier forward-looking provisioning than men counterparts, suggesting that they follow a more transparent approach to financial reporting policies. Our results hold under different model specifications, including the use of bank and CEO fixed effects. We further address endogeneity concerns by showing that the timeliness of LLP reporting improves significantly for banks experiencing a man-followed-by-woman CFO transition. Overall, our study supports the notion that women CFOs are associated with higher financial reporting transparency and provides further insights into how CFO gender affects risk-aversion and ethics in banks, with wider implications about the importance of women’s representation in the finance-based industry. Journal: The European Journal of Finance Pages: 199-221 Issue: 3 Volume: 27 Year: 2021 Month: 02 X-DOI: 10.1080/1351847X.2020.1801481 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1801481 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:3:p:199-221 Template-Type: ReDIF-Article 1.0 Author-Name: Ebenezer Asem Author-X-Name-First: Ebenezer Author-X-Name-Last: Asem Author-Name: Shamsul Alam Author-X-Name-First: Shamsul Author-X-Name-Last: Alam Title: The abnormal return associated with consecutive dividend increases Abstract: Several studies conclude that dividend changes that are seemingly predictable on a calendar basis attract abnormal returns. We study the abnormal returns associated with consecutive dividend increases to understand this puzzle. We use regression techniques to study the relation between the number of consecutive dividend increases and the abnormal return associated with the events. Further, we study whether this relation is sensitive to firm characteristics by partitioning the regressions by the characteristics that influence the abnormal return. Our results show that the abnormal returns associated with consecutive dividend increases decline at a diminishing rate and they do not disappear, consistent with the puzzle. In addition, the decline in returns is slowest among firms that are unprofitable, small, or have high payouts. These findings suggest that the abnormal returns persist because firms that are not expected to continue a dividend-increase streak based on their characteristics do so, surprising the market and perpetuating the abnormal return. Journal: The European Journal of Finance Pages: 222-238 Issue: 3 Volume: 27 Year: 2021 Month: 02 X-DOI: 10.1080/1351847X.2020.1801482 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1801482 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:3:p:222-238 Template-Type: ReDIF-Article 1.0 Author-Name: Ke Wu Author-X-Name-First: Ke Author-X-Name-Last: Wu Author-Name: Spencer Wheatley Author-X-Name-First: Spencer Author-X-Name-Last: Wheatley Author-Name: Didier Sornette Author-X-Name-First: Didier Author-X-Name-Last: Sornette Title: Inefficiency and predictability in the Brexit Pound market: a natural experiment Abstract: Exploiting the near-experimental conditions provided by the GBPUSD exchange rate during the Brexit vote of 2016, we quantify a significant delay of the market price in reflecting the increasing probability of a Brexit outcome over the vote counting period. We claim that the Brexit outcome could realistically have been predicted hours before the market adjusted to the outcome. This inefficiency is identified by comparing the market-implied probability of a Brexit outcome with a separate probability, estimated by a standard Monte-Carlo algorithm based on a simple linear regression model, representative of what should have been easily possible in real time. The core of the method is the real-time re-calibration of ex-ante ‘pollster’ predictions for the voting district outcomes by regressing the observed voting results onto them. For comparative purposes, a study of the MXNUSD exchange rate in the 2016 US Presidential Election was done, finding that the market-implied and model-estimated probabilities moved more consistently toward the Trump outcome. Put together, this identifies a somewhat anomalous breakdown in market efficiency in the case of the Brexit vote, which we attribute to its novelty as well as a kind of political bubble and subsequent crash, generated by confirmation bias and social herding. Journal: The European Journal of Finance Pages: 239-259 Issue: 3 Volume: 27 Year: 2021 Month: 02 X-DOI: 10.1080/1351847X.2020.1805781 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1805781 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:3:p:239-259 Template-Type: ReDIF-Article 1.0 Author-Name: Jieying Hong Author-X-Name-First: Jieying Author-X-Name-Last: Hong Author-Name: Na Wang Author-X-Name-First: Na Author-X-Name-Last: Wang Title: The effects of credit default swaps on corporate investment Abstract: This paper examines how credit default swaps (CDS) affect the corporate investment of the referenced entities. We document a significant reduction in corporate investment after CDS trading, a result that is robust to alternative model specifications and a set of endogeneity tests. Our findings of the increased firm risk and cost of capital support the costly external capital channel. The cross-sectional variations in CDS effects demonstrate that both reduced monitoring and the empty creditor problem might be the underlying forces driving the costly external capital channel. Our additional analysis implies that CDS trading is associated with an enhancement in investment efficiency for firms that are prone to overinvestment. Journal: The European Journal of Finance Pages: 260-277 Issue: 3 Volume: 27 Year: 2021 Month: 02 X-DOI: 10.1080/1351847X.2020.1806092 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1806092 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:3:p:260-277 Template-Type: ReDIF-Article 1.0 Author-Name: Savva Shanaev Author-X-Name-First: Savva Author-X-Name-Last: Shanaev Author-Name: Binam Ghimire Author-X-Name-First: Binam Author-X-Name-Last: Ghimire Title: Efficient scholars: academic attention and the disappearance of anomalies Abstract: This study examines the dynamics of ten most notable stock market anomalies through 1926–2018 and assesses the joint impact of academic attention, post-publication decay, data-snooping bias, institutional trading, and time trend on their disappearance. It proposes new and simple measures of academic attention attracted by stock market anomalies using the number of articles published on the relevant topic available via Google Scholar or respective citation counts. The study finds that academic attention is the most dominant factor explaining the diminishing abnormal returns of anomaly-exploiting strategies. The approach developed by this study can also be useful in determining whether a stock return regularity is a behavioural anomaly or a systematic risk factor. Journal: The European Journal of Finance Pages: 278-304 Issue: 3 Volume: 27 Year: 2021 Month: 02 X-DOI: 10.1080/1351847X.2020.1812684 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1812684 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:3:p:278-304 Template-Type: ReDIF-Article 1.0 Author-Name: Xiaoju Zhao Author-X-Name-First: Xiaoju Author-X-Name-Last: Zhao Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Jiafu An Author-X-Name-First: Jiafu Author-X-Name-Last: An Author-Name: Xianda Liu Author-X-Name-First: Xianda Author-X-Name-Last: Liu Author-Name: Yun Zhang Author-X-Name-First: Yun Author-X-Name-Last: Zhang Title: Initial Coin offerings: what rights do investors have? Abstract: This paper reviews the growing literature on initial coin offerings (ICOs) and provides original evidence of the investor protection on ICOs from 37 countries. We show that the anti-director rights and anti-self-dealing index are positively associated with the country-level raised fund of ICOs after controlling for economic and culture factors. The disclosure quality and investor rights as specified in the Whitepapers are generally poor and they are found to be important to raise more funds in ICOs. We argue that the lack of (self-) discipline poses a threat to investor protections. Around 60% Whitepaper do not disclose information on the use of proceeds or management team. Around 80% ICOs do not entitle investors the rights for dividend or vote. Our findings suggest the needs of regulating ICOs to protect investors. Journal: The European Journal of Finance Pages: 305-320 Issue: 4-5 Volume: 27 Year: 2021 Month: 03 X-DOI: 10.1080/1351847X.2020.1858130 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1858130 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:305-320 Template-Type: ReDIF-Article 1.0 Author-Name: Xiuping Hua Author-X-Name-First: Xiuping Author-X-Name-Last: Hua Author-Name: Yiping Huang Author-X-Name-First: Yiping Author-X-Name-Last: Huang Title: Understanding China’s fintech sector: development, impacts and risks Abstract: Financial technology (fintech) is rapidly transforming the economy as well as the financial landscape in China. This paper attempts to shed light on its contributing factors, current state, economic impacts and potential risks. We identify three key drivers for China’s fintech development, namely shortage of supply in formal financial market, strong government support for promoting financial inclusion through digital technology, and more ‘tolerant’ regulatory environment. The greatest value of the Chinese fintech sector is promotion of financial inclusion, enabling a vast number of small- and medium-sized enterprises (SMEs) and low-income households to access to financial services. Existing studies unveil some strong evidences of fintech development improving efficiency, increasing employment and supporting entrepreneurship. In the meantime, there are also serious challenges facing this sector, such as regulatory uncertainties, illegal transactions, data abuse, etc. We conclude the paper by presenting some key takeaways, including several lessons for financial regulation. Journal: The European Journal of Finance Pages: 321-333 Issue: 4-5 Volume: 27 Year: 2021 Month: 03 X-DOI: 10.1080/1351847X.2020.1811131 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1811131 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:321-333 Template-Type: ReDIF-Article 1.0 Author-Name: Jiafu An Author-X-Name-First: Jiafu Author-X-Name-Last: An Author-Name: Raghavendra Rau Author-X-Name-First: Raghavendra Author-X-Name-Last: Rau Title: Finance, technology and disruption Abstract: In this paper, we assess how recent technology advances have changed the way we coordinate. After a brief discussion of the common challenges to effective coordination, we highlight some important implications of technology on addressing informational and behavioral frictions. We focus on discussing the effects of three specific technology developments including artificial intelligence (AI), automation, and blockchain, on the choice of coordination modes. We argue that technology is shifting the boundaries between firms and markets and is opening the door to new research directions. Journal: The European Journal of Finance Pages: 334-345 Issue: 4-5 Volume: 27 Year: 2021 Month: 3 X-DOI: 10.1080/1351847X.2019.1703024 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1703024 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:334-345 Template-Type: ReDIF-Article 1.0 Author-Name: Tong Wang Author-X-Name-First: Tong Author-X-Name-Last: Wang Author-Name: Sheng Zhao Author-X-Name-First: Sheng Author-X-Name-Last: Zhao Author-Name: Xin Shen Author-X-Name-First: Xin Author-X-Name-Last: Shen Title: Why does regional information matter? evidence from peer-to-peer lending Abstract: In this paper, we study regional discrimination in a peer-to-peer lending scenario and provide novel empirical evidence for theories of soft information collection and information cost. We find that the regional information matters for borrowers' funding probabilities and that discrimination is profit-oriented or taste-oriented depending on the specific region. Moreover, using borrowers' birthplace as an instrumental variable, we find no evidence of genuine discrimination based purely on region in the peer-to-peer lending market. Journal: The European Journal of Finance Pages: 346-366 Issue: 4-5 Volume: 27 Year: 2021 Month: 3 X-DOI: 10.1080/1351847X.2020.1720262 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1720262 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:346-366 Template-Type: ReDIF-Article 1.0 Author-Name: Paul P. Momtaz Author-X-Name-First: Paul P. Author-X-Name-Last: Momtaz Title: The Pricing and Performance of Cryptocurrency Abstract: This paper examines the performance of cryptocurrencies issued in initial coin offerings (ICOs) over a three-year period after the initial exchange listing. Average (median) ICO underpricing amounts to 15% (3%), even though 4 out of 10 ICOs destroy value on the first trading day. Liquidity, market capitalization, and high-low price ratios predict returns. Long-run buy-and-hold returns are positive for the mean and negative for the median. For holding periods between one and twenty-four months, the median ICO depreciates by 30%. Evidently, there is substantial positive skewness in the cryptocurrency market. Further, a size effect emerges from the data as an empirical regularity: Large ICOs are more often overpriced and underperform in the long run. Journal: The European Journal of Finance Pages: 367-380 Issue: 4-5 Volume: 27 Year: 2021 Month: 3 X-DOI: 10.1080/1351847X.2019.1647259 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1647259 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:367-380 Template-Type: ReDIF-Article 1.0 Author-Name: Shimeng Shi Author-X-Name-First: Shimeng Author-X-Name-Last: Shi Author-Name: Yukun Shi Author-X-Name-First: Yukun Author-X-Name-Last: Shi Title: Bitcoin futures: trade it or ban it? Abstract: This paper examines the impact of South Korea’s ban on Bitcoin futures on intraday spot volatility, liquidity and volatility–volume relationship. The results show that while reducing the permanent component of intraday spot volatility, the imposition of a ban on Bitcoin futures trading increases the transitory component. For intraday spot liquidity, different liquidity proxies indicate heterogeneous results. Moreover, we identify a positive and unidirectional effect of intraday spot volume on volatility. This effect appears to be stronger in the post-ban period. Overall, over the past few months, South Korea’s Bitcoin futures ban generally has had a significant impact on the intraday dynamics of the Bitcoin spot market. Journal: The European Journal of Finance Pages: 381-396 Issue: 4-5 Volume: 27 Year: 2021 Month: 3 X-DOI: 10.1080/1351847X.2019.1647865 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1647865 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:381-396 Template-Type: ReDIF-Article 1.0 Author-Name: Rui Wang Author-X-Name-First: Rui Author-X-Name-Last: Wang Author-Name: Jiangtao Liu Author-X-Name-First: Jiangtao Author-X-Name-Last: Liu Author-Name: Hang(Robin) Luo Author-X-Name-First: Hang(Robin) Author-X-Name-Last: Luo Title: Fintech development and bank risk taking in China Abstract: This paper empirically tests the effect of FinTech development on bank risk taking using unbalanced bank-level panel data from China for the period from 2011 to 2018. We use the media's attention paid to FinTech-related information to gauge FinTech development. We find robust evidence that the development of FinTech exacerbates banks’ risk taking in general. The heterogeneity analysis further indicates that the asset quality deterioration effect brought about by prosperous FinTech is more salient in banks with larger sizes, lower efficiency, more shadow banking business and more interest-based income. Moreover, the nexus between FinTech and banks’ risk taking is a U-shaped trend, with FinTech initially intensifying and then weakening banks’ risk taking. Moreover, the banks’ responses regarding the U-shaped effect are heterogeneous among different ownership structures. The responses by state- and jointly owned banks are not notable, while those of city banks, foreign banks and rural banks are more sensitive. Journal: The European Journal of Finance Pages: 397-418 Issue: 4-5 Volume: 27 Year: 2021 Month: 03 X-DOI: 10.1080/1351847X.2020.1805782 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1805782 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:397-418 Template-Type: ReDIF-Article 1.0 Author-Name: Lan Di Author-X-Name-First: Lan Author-X-Name-Last: Di Author-Name: George X. Yuan Author-X-Name-First: George X. Author-X-Name-Last: Yuan Author-Name: Tu Zeng Author-X-Name-First: Tu Author-X-Name-Last: Zeng Title: The consensus equilibria of mining gap games related to the stability of Blockchain Ecosystems Abstract: The equity and currency tokens are typically two kinds of initial coin offerings (ICOs) like Bitcoin or Ethereum based on the platform of Blockchains to provide a particular product or service, it is very important to study the mechanism of Blockchain Ecosystems. The goal of this paper is to explain the stable in the sense for the existence of consensus equilibria for mining gap games by using one new concept called ‘consensus games (CG)’ under the framework of Blockchain Ecosystems which mainly mean the economic activities by taking into the account of three types of different factors which are expenses, reward mechanism and mining power for the work on blockschain by applying consensuses including the ‘Proof of Work’ due to Nakamoto in 2008 as a special case. Journal: The European Journal of Finance Pages: 419-440 Issue: 4-5 Volume: 27 Year: 2021 Month: 03 X-DOI: 10.1080/1351847X.2020.1776352 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1776352 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:419-440 Template-Type: ReDIF-Article 1.0 Author-Name: Anton Golub Author-X-Name-First: Anton Author-X-Name-Last: Golub Author-Name: Lidan Grossmass Author-X-Name-First: Lidan Author-X-Name-Last: Grossmass Author-Name: Ser-Huang Poon Author-X-Name-First: Ser-Huang Author-X-Name-Last: Poon Title: Ultra-short tenor yield curve for intraday trading and settlement Abstract: Due to the increasing prevalence of high-frequency algorithmic trading and fintech developments like blockchain, there is a shift towards very short trading horizons and immediate settlement. This creates a demand for an ultra-short tenor interest rate curve that is updated in real-time. Our paper develops a practical market model for the equilibrium intraday interest rates which provides market makers adequate incentives to attenuate flash crashes. Our model suggests that the intraday CHF interest rates should have been highly negative during the flash crash of EURCHF on 15 January 2015, which could potentially stop the long CHF short EUR strategy and reduce the severity of the crash. Journal: The European Journal of Finance Pages: 441-459 Issue: 4-5 Volume: 27 Year: 2021 Month: 3 X-DOI: 10.1080/1351847X.2019.1662821 File-URL: http://hdl.handle.net/10.1080/1351847X.2019.1662821 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:4-5:p:441-459 Template-Type: ReDIF-Article 1.0 Author-Name: Jerome Geyer-Klingeberg Author-X-Name-First: Jerome Author-X-Name-Last: Geyer-Klingeberg Author-Name: Markus Hang Author-X-Name-First: Markus Author-X-Name-Last: Hang Author-Name: Andreas Rathgeber Author-X-Name-First: Andreas Author-X-Name-Last: Rathgeber Title: Corporate financial hedging and firm value: a meta-analysis Abstract: This study is a quantitative review of the empirical literature analyzing firm value effects of corporate financial hedging. Using meta-regression analysis to accumulate a hand-collected data set of 1016 estimates for the hedging premium reported in 71 previous studies, we find that reported firm value effects of hedging are systematically larger for foreign exchange hedgers as compared to interest rate and commodity price hedgers, for studies published in lower-ranked journals, and for models estimated without firm fixed effects and without controls for endogeneity. Our results also suggest that hedging premiums increase significantly when a study considers operational hedging strategies in addition to financial hedging. Moreover, we find evidence for a larger hedging premium in less developed financial markets and countries with higher tax rates. Aggregating the previous hedging literature and assuming a ‘best practice’ study design, we find an overall hedging premium of 1.8% for foreign currency hedgers and a firm value discount of −0.8% (−0.6%) for interest rate (commodity price) hedgers. Journal: The European Journal of Finance Pages: 461-485 Issue: 6 Volume: 27 Year: 2021 Month: 04 X-DOI: 10.1080/1351847X.2020.1816559 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1816559 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:6:p:461-485 Template-Type: ReDIF-Article 1.0 Author-Name: Hongkang Xu Author-X-Name-First: Hongkang Author-X-Name-Last: Xu Author-Name: Duong Nguyen Author-X-Name-First: Duong Author-X-Name-Last: Nguyen Author-Name: Mai Dao Author-X-Name-First: Mai Author-X-Name-Last: Dao Title: Pilot CEOs and trade credit Abstract: By using a pilot license as a proxy for the sensation-seeking personality trait, we examine the relation between sensation-seeking CEOs and trade credit. With a sample of pilot CEOs and non-pilot CEOs from U.S. listed firms from 1993–2016, we find strong evidence that firms led by pilot CEOs are more likely to use trade credit than those led by non-pilot CEOs. The positive relation between pilot CEOs and trade credit is more pronounced for firms with high investment growth opportunities. The results are consistent with our conjecture that firms with pilot CEOs tend to have a higher level of trade credit, especially when they need capital to finance long-term investment activities to satisfy the CEOs’ desire for sensation. Our findings establish a link between a CEO personality trait and trade credit and suggest that this CEO personality trait might be a relevant factor in determining purchaser firms’ use of trade credit. Journal: The European Journal of Finance Pages: 486-509 Issue: 6 Volume: 27 Year: 2021 Month: 04 X-DOI: 10.1080/1351847X.2020.1816560 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1816560 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:6:p:486-509 Template-Type: ReDIF-Article 1.0 Author-Name: Oyakhilome Ibhagui Author-X-Name-First: Oyakhilome Author-X-Name-Last: Ibhagui Title: Inflation differential as a driver of cross-currency basis swap spreads Abstract: Over the last decade, the foreign exchange derivatives market has witnessed a collapse of covered interest parity (CIP). Not only does this collapse give rise to large deviations from CIP, it has unlocked a stream of exploitable arbitrage opportunities across currencies. In this paper, we introduce two new factors – inflation differential and relative economic performance – as potential drivers of deviations from CIP. Employing data on G10 cross-currency basis swap spreads viz a viz the U.S. dollar, we document a striking new evidence that higher inflation differential and incremental improvement in relative economic performance drive the basis wider, and hence arbitrage profits higher for U.S. dollar-based investors, in the post crisis period. Our main empirical results in general are robust to an extended number of controls, variations in sampling frequency, and consideration of alternative specifications, but the additional explanatory power is low. Journal: The European Journal of Finance Pages: 510-536 Issue: 6 Volume: 27 Year: 2021 Month: 04 X-DOI: 10.1080/1351847X.2020.1824928 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1824928 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:6:p:510-536 Template-Type: ReDIF-Article 1.0 Author-Name: Mingchen Sun Author-X-Name-First: Mingchen Author-X-Name-Last: Sun Author-Name: Raffaella Calabrese Author-X-Name-First: Raffaella Author-X-Name-Last: Calabrese Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Title: What affects bank debt rejections? Bank lending conditions for UK SMEs Abstract: Using the UK SMEs Finance Monitor data over 2011–2017, we explore the determinants of bank debt rejections for UK SMEs. In the wake of the global financial crisis, business overdrafts and term loans show slightly different trends although the factors affecting rejections are similar. We find that since 2014 rejection rates reduced for both facilities and they remained stable in the run-up to the Brexit referendum and its immediate aftermath, although export and import SMEs operating in industries with a high share of EU trade experienced tighter conditions. Further, we present robust evidence that firms with female owners, organised in partnerships, and with a higher initial credit balance are more likely to have their credit application approved. Finally, younger, smaller and more innovative SMEs are more likely to be rejected, while their chance of being successful in their credit applications increases substantially after 2014. Journal: The European Journal of Finance Pages: 537-563 Issue: 6 Volume: 27 Year: 2021 Month: 04 X-DOI: 10.1080/1351847X.2020.1799834 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1799834 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:6:p:537-563 Template-Type: ReDIF-Article 1.0 Author-Name: Tak Kuen Siu Author-X-Name-First: Tak Kuen Author-X-Name-Last: Siu Author-Name: Robert J. Elliott Author-X-Name-First: Robert J. Author-X-Name-Last: Elliott Title: Bitcoin option pricing with a SETAR-GARCH model Abstract: This paper aims to study the pricing of Bitcoin options with a view to incorporating both conditional heteroscedasticity and regime switching in Bitcoin returns. Specifically, a nonlinear time series model combining both the self-exciting threshold autoregressive (SETAR) model and the generalized autoregressive conditional heteroscedastic (GARCH) model is adopted for modeling Bitcoin return dynamics. Specifically, the SETAR model is used to model regime switching and the Heston-Nandi GARCH model is adopted to model conditional heteroscedasticity. Both the conditional Esscher transform and the variance-dependent pricing kernel are used to specify pricing kernels. Numerical studies on the Bitcoin option prices using real bitcoins data are presented. Journal: The European Journal of Finance Pages: 564-595 Issue: 6 Volume: 27 Year: 2021 Month: 04 X-DOI: 10.1080/1351847X.2020.1828962 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1828962 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:6:p:564-595 Template-Type: ReDIF-Article 1.0 Author-Name: Silke Rünger Author-X-Name-First: Silke Author-X-Name-Last: Rünger Title: Personal taxation and individual stock ownership Abstract: Under a differential taxation system, portfolio allocation decisions are based not only on the risk-return relationship of assets but also on their tax characteristics. The higher the tax burden on equity securities, the lower the share of stock investment in a tax-optimal portfolio. I use a multitude of changes in personal tax rates to assess the impact of personal taxes on individual stock ownership among a sample of 9,055 listed European firms. I observe lower levels of individual stock ownership, if relative personal taxes on stock ownership are higher than personal taxes on bonds. Cross-sectional evidence further reveals that the relation between personal taxation and individual stock ownership is significantly moderated by firm-specific risk. I additionally provide single country evidence of a tax clientele effect. Following an increase in the personal capital gains tax rate in Austria, I find individual owners to rebalance stock ownership to maximize after-tax returns in light of the new tax rules. Journal: The European Journal of Finance Pages: 596-611 Issue: 6 Volume: 27 Year: 2021 Month: 04 X-DOI: 10.1080/1351847X.2020.1837899 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1837899 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:6:p:596-611 Template-Type: ReDIF-Article 1.0 Author-Name: Joseba Luzarraga-Goitia Author-X-Name-First: Joseba Author-X-Name-Last: Luzarraga-Goitia Author-Name: Marta Regúlez-Castillo Author-X-Name-First: Marta Author-X-Name-Last: Regúlez-Castillo Author-Name: Arturo Rodríguez-Castellanos Author-X-Name-First: Arturo Author-X-Name-Last: Rodríguez-Castellanos Title: The dynamics between the stock market and exchange rates: Spain 1999–2015 Abstract: Despite the significance of the subprime crisis, there are few studies of its impact on the dynamics between stock markets and exchange rates in Eurozone countries. This study helps to remedy that shortage by analysing the dynamics between the stock market and exchange rates for the Spanish economy in the period 1999–2015 with sub-periods 1999–2007 and 2008–2015, both before and after the financial crisis. We analyse the Granger causality between the Spanish stock market and real effective exchange rates and EUR/USD, EUR/JPY, EUR/CNY and EUR/GBP bilateral rates, through the Toda and Yamamoto procedure. To check robustness and sign in the direction of causality we use impulse-response analysis. On the one hand, the results show that the relationships analysed are significant only in the crisis sub-period (2008–2015), in which bilateral exchange rates lead fluctuations in the stock market while the latter leads the real effective exchange rate. On the other hand, for bilateral exchange rates the directions that show the impulse-response analysis are consistent with those shown in the Granger-causality analysis and the sign coincides with the data on the merchandise trade balance with the countries in question. Journal: The European Journal of Finance Pages: 655-678 Issue: 7 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1832024 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1832024 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:7:p:655-678 Template-Type: ReDIF-Article 1.0 Author-Name: Doriana Cucinelli Author-X-Name-First: Doriana Author-X-Name-Last: Cucinelli Author-Name: Lorenzo Gai Author-X-Name-First: Lorenzo Author-X-Name-Last: Gai Author-Name: Federica Ielasi Author-X-Name-First: Federica Author-X-Name-Last: Ielasi Author-Name: Arturo Patarnello Author-X-Name-First: Arturo Author-X-Name-Last: Patarnello Title: Preventing the deterioration of bank loan portfolio quality: a focus on unlikely-to-pay loans Abstract: This study examines determinants of: (a) new flows of unlikely-to-pay loans (UTPs), comparing them to determinants of bad loans; and (b) out-flows from UTPs to performing and bad loans. A novel panel data-set covering the period 2010–2016 is used to test hypotheses relating to lending policy, bank capitalization, bad management, and procyclical credit policy. Determinants identified by the existing literature on the wider category of all non-performing loans are in part confirmed for UTPs and in part rejected. The main findings show: (i) a positive relationship exists between bank capitalization and new flows of both UTPs and bad loans; (ii) reducing cost efficiency increases both new flows of UTPs and the worsening of UTPs towards bad loans; and (iii) having a specific unit/office to manage impaired loans increases flows from UTPs to performing loans, but does not decrease flows to bad loans. Our study is useful for banks seeking to prevent new impaired exposures, to accelerate the transition from UTPs to performing loans, and to prevent UTPs worsening to bad loans. The findings reveal the importance of sound and proactive UTP management, given the need for banks to increase provisions for covering UTPs in the near future. Journal: The European Journal of Finance Pages: 613-634 Issue: 7 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1830143 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1830143 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:7:p:613-634 Template-Type: ReDIF-Article 1.0 Author-Name: Antonio F. Miguel Author-X-Name-First: Antonio F. Author-X-Name-Last: Miguel Title: Do fund flows moderate persistence? Evidence from a global study Abstract: We investigate whether fund flows eliminate future abnormal performance and persistence as in Berk and Green (2004. “Mutual Fund Flows and Performance in Rational Markets.” Journal of Political Economy 112: 1269–1295) using a sample of open-end domestic equity mutual funds from 32 countries. We show that flows have only a small moderating effect on persistence even in the United States, where fund industry conditions most closely resemble the Berk and Green assumptions. In fact, we find that most countries do not have decreasing returns to scale in fund management and, as a result, flows have limited impact on mutual fund performance persistence. Journal: The European Journal of Finance Pages: 635-654 Issue: 7 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1830820 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1830820 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:7:p:635-654 Template-Type: ReDIF-Article 1.0 Author-Name: Yingjie Niu Author-X-Name-First: Yingjie Author-X-Name-Last: Niu Author-Name: Yaoyao Wu Author-X-Name-First: Yaoyao Author-X-Name-Last: Wu Author-Name: Zhentao Zou Author-X-Name-First: Zhentao Author-X-Name-Last: Zou Title: Irreversible investment, asset returns, and time-inconsistent preferences Abstract: This paper introduces time-inconsistent preferences into the standard model of capacity choice and investigates its influences on entrepreneurial firms' investment decisions and asset returns. With time-inconsistent preferences, the entrepreneurial firm's expansion decision becomes more conservative. In addition, we find the value reduction caused by time-inconsistent preferences is more substantial in growth opportunities than assets in place. For asset returns, we show that time inconsistency lowers the beta of the firm through the channel of growth opportunities since the beta of assets in place is not affected by time-inconsistent preferences. Finally, the impacts on the capacity choice, firm value and asset returns also depend on such factors as whether entrepreneurs are sophisticated or naive in their expectations regarding future time-inconsistent behavior. Journal: The European Journal of Finance Pages: 706-720 Issue: 7 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1863244 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1863244 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:7:p:706-720 Template-Type: ReDIF-Article 1.0 Author-Name: René Ferland Author-X-Name-First: René Author-X-Name-Last: Ferland Author-Name: Simon Lalancette Author-X-Name-First: Simon Author-X-Name-Last: Lalancette Title: Portfolio choices and hedge funds: a disappointment aversion analysis Abstract: The inclusion of hedge funds in large institutional portfolios is controversial. We use a disappointment aversion utility-based framework to investigate this issue. We empirically model the end-of-period wealth directly as opposed to the joint return distribution. This approach captures the interconnections between different asset categories without resorting to complex modeling. We observe that several hedge-fund strategies produce incremental economic benefits that generally weaken at higher levels of disappointment aversion. Portfolio weights are also constrained to match those of a generic pension fund. Results show that significant economic benefits are possible but only under restrictive conditions. Journal: The European Journal of Finance Pages: 679-705 Issue: 7 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1832552 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1832552 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:7:p:679-705 Template-Type: ReDIF-Article 1.0 Author-Name: Subhadip Mukherjee Author-X-Name-First: Subhadip Author-X-Name-Last: Mukherjee Author-Name: Soumyatanu Mukherjee Author-X-Name-First: Soumyatanu Author-X-Name-Last: Mukherjee Author-Name: Tapas Mishra Author-X-Name-First: Tapas Author-X-Name-Last: Mishra Author-Name: Udo Broll Author-X-Name-First: Udo Author-X-Name-Last: Broll Author-Name: Mamata Parhi Author-X-Name-First: Mamata Author-X-Name-Last: Parhi Title: Spot exchange rate volatility, uncertain policies and export investment decision of firms: a mean-variance decision approach Abstract: This paper studies characteristics of optimal investment decisions of risk-averse firms who engage in exports under two types of risks: endogenous and background risks. While endogenous risk arises from the fluctuations in spot exchange rate and affects directly the profit of an exporting firm, background risk arises from uncertain changes in firm- and industry-specific domestic and foreign policies. We propose a mean-variance decision-theoretic model to trace out impact of perturbations in the distributions of these uncertainties on the optimal investment strategy. A testable empirical model is derived and applied to a panel of 840 exporting Indian manufacturing firms for the period 1995–2015. Our results suggest that Indian manufacturing exporters depict decreasing absolute risk aversion and that firms’ risk preferences are prone to variance vulnerability. Journal: The European Journal of Finance Pages: 752-773 Issue: 8 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1842785 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1842785 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:8:p:752-773 Template-Type: ReDIF-Article 1.0 Author-Name: Xiaodong Wang Author-X-Name-First: Xiaodong Author-X-Name-Last: Wang Author-Name: Liang Han Author-X-Name-First: Liang Author-X-Name-Last: Han Author-Name: Xing Huang Author-X-Name-First: Xing Author-X-Name-Last: Huang Author-Name: Biao Mi Author-X-Name-First: Biao Author-X-Name-Last: Mi Title: The financial and operational impacts of European SMEs’ use of trade credit as a substitute for bank credit Abstract: We study the impacts of the use of trade credit on SME financial performance and operational distress in a sample of 74,036 SMEs across 19 EU countries between 2006 and 2015. Under the premise that trade credit acts as a substitute for bank credit, our results show that supplying trade credit improves profitability, but we show little evidence that such an investment is more profitable for bank credit richer SMEs, although such firms did redistribute more bank fund through trade credit to their customers. For receivers, we show that the use of trade credit finance alleviates operational distress, especially for those SMEs facing liquidity constraints, such as those which have less access to bank credit or under credit tightened periods. This distress reduction effect is also reflected in their profitability indicators. However, the longer the average collection period and credit period, the less effective the trade credit effects respectively on improving SME profitability and reducing operational distress. Journal: The European Journal of Finance Pages: 796-825 Issue: 8 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1846576 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1846576 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:8:p:796-825 Template-Type: ReDIF-Article 1.0 Author-Name: Javier Rojo-Suárez Author-X-Name-First: Javier Author-X-Name-Last: Rojo-Suárez Author-Name: Ana Belén Alonso-Conde Author-X-Name-First: Ana Belén Author-X-Name-Last: Alonso-Conde Author-Name: Ricardo Ferrero-Pozo Author-X-Name-First: Ricardo Author-X-Name-Last: Ferrero-Pozo Title: Can the seasonal pattern of consumption growth reproduce habits in the cross-section of stock returns? Evidence from the European equity market Abstract: This paper examines the prevalence for Europe of some well-documented seasonal patterns in consumption data, which allow classic consumption-based asset pricing models to omit an explicit habit specification. We use the Campbell-Cochrane habit model as a reference, proxying habit persistence by the serial correlation of consumer sentiment. Our results show that consumption data for the third and fourth quarters allow the classic power utility function to perform very similarly to the Campbell-Cochrane model, while the serial correlation of consumer sentiment helps improve the explanatory power of habits. Journal: The European Journal of Finance Pages: 721-739 Issue: 8 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1838936 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1838936 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:8:p:721-739 Template-Type: ReDIF-Article 1.0 Author-Name: Ran Tao Author-X-Name-First: Ran Author-X-Name-Last: Tao Author-Name: Chris Brooks Author-X-Name-First: Chris Author-X-Name-Last: Brooks Author-Name: Adrian Bell Author-X-Name-First: Adrian Author-X-Name-Last: Bell Title: Tomorrow's fish and chip paper? Slowly incorporated news and the cross-section of stock returns Abstract: The link between news and investor decision making is widely discussed in the literature. Utilising unique U.S. firm-level news data between 1979 and 2016, we document a cross-sectional difference in the speed of the diffusion of information contained in news. We distinguish news articles as being either slowly or quickly incorporated into contemporaneous stock prices. The return spread between stocks classified according to these two types of news yields a statistically significant profit of 139 basis points per month. This abnormal return cannot be explained by other well-known risk factors and is robust when allowing for trading costs. Overall, our research refines the role of news regarding information dissemination in the financial markets. Journal: The European Journal of Finance Pages: 774-795 Issue: 8 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1846575 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1846575 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:8:p:774-795 Template-Type: ReDIF-Article 1.0 Author-Name: Bo Liu Author-X-Name-First: Bo Author-X-Name-Last: Liu Author-Name: Hongli Wang Author-X-Name-First: Hongli Author-X-Name-Last: Wang Author-Name: Jinqiang Yang Author-X-Name-First: Jinqiang Author-X-Name-Last: Yang Title: Dynamic financing and hedging under model uncertainty Abstract: We extend the classic framework to investigate a firm's optimal financing, investment, payout and hedging strategies under model uncertainty (or ambiguity). It shows that model uncertainty has essentially different effects on liquidity policies compared to traditional business risk. A firm facing model uncertainty prefers refinancing less and payout earlier, and the marginal value may be increased when the refinancing option is in the money. Moreover, our model demonstrates that hedging tools play an important role in mitigating the negative impacts on firm value caused by model uncertainty, which illustrates an interesting result that traditional risk management method works well not only on business risk but also on model uncertainty. Journal: The European Journal of Finance Pages: 740-751 Issue: 8 Volume: 27 Year: 2021 Month: 05 X-DOI: 10.1080/1351847X.2020.1841665 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1841665 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:8:p:740-751 Template-Type: ReDIF-Article 1.0 Author-Name: Stefano Filomeni Author-X-Name-First: Stefano Author-X-Name-Last: Filomeni Author-Name: Gregory F. Udell Author-X-Name-First: Gregory F. Author-X-Name-Last: Udell Author-Name: Alberto Zazzaro Author-X-Name-First: Alberto Author-X-Name-Last: Zazzaro Title: Hardening soft information: does organizational distance matter? Abstract: A large literature has developed on the distinction between hard and soft information with much of this literature focused on displacement of soft information with hard information. We investigate whether the propensity of loan officers at local branches to incorporate soft information in the credit scoring process is affected by the geographical distance between the branch and the bank’s headquarters. We find that hardening soft information is significantly sensitive to branch-to-headquarters distance. We also find that organizational distance affects time for loan approval, increasing approval time for applicants receiving a good credit score (i.e. low probability of default) originated at distant branches and reducing approval time for applicants with poor credit scores (i.e. high probability of default). Finally, we find that on average organizational distance has no direct impact on the likelihood of the occurrence of negative credit events. However, the final rating being equal, the hardening of soft information has an influence on loan performance that varies with organizational distance. Overall, our findings are consistent with the presence of spatially based communication frictions within banking organizations. Journal: The European Journal of Finance Pages: 897-927 Issue: 9 Volume: 27 Year: 2021 Month: 06 X-DOI: 10.1080/1351847X.2020.1857812 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1857812 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:9:p:897-927 Template-Type: ReDIF-Article 1.0 Author-Name: Zaghum Umar Author-X-Name-First: Zaghum Author-X-Name-Last: Umar Author-Name: Francisco Jareño Author-X-Name-First: Francisco Author-X-Name-Last: Jareño Author-Name: Ana Escribano Author-X-Name-First: Ana Author-X-Name-Last: Escribano Title: Static and dynamic connectedness between oil price shocks and Spanish equities: a sector analysis Abstract: This paper explores the static and dynamic connectedness between oil price shocks (risk, demand and supply shocks) and Spanish sector equity indices from January-2000 to July-2019. We document sizable system-wide connectedness between the variables under study. Among the oil shocks, demand and risk shocks are the main transmitter (receiver) of shocks to (from) the system and are overall net receiver of shocks from the system. Among the equity indices, Industrials, Financials, Utilities and Telecommunications as the major net transmitters whereas; Consumer Goods, Technology, Retail and Telecommunications are the main net receivers. The dynamic connectedness changes over time and between sectors. We document important differences over time and between sectors, mainly during the recent global financial crisis and the European sovereign debt crisis. Overall, Financials, Telecommunications, Industrials and Utilities as the most influential sectors. Journal: The European Journal of Finance Pages: 880-896 Issue: 9 Volume: 27 Year: 2021 Month: 06 X-DOI: 10.1080/1351847X.2020.1854809 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1854809 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:9:p:880-896 Template-Type: ReDIF-Article 1.0 Author-Name: Paolo Coccorese Author-X-Name-First: Paolo Author-X-Name-Last: Coccorese Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Title: Bank capital and profitability: evidence from a global sample Abstract: This study employs bank-level data for a global sample of 125 countries to examine the relationship between capital and profitability for a period of 19 years (2000–2018) that includes both normal and crisis time. Our evidence suggests that bank capital is positively related to bank profitability, although the estimated impact is relatively weak. The relationship depends on environmental conditions as well as bank size. It is typically stronger in crisis periods, in lower and middle income countries and for larger banks (but not for Global Systemically Important Banks, or GSIBs). Finally, for banks operating in more corrupt environments, the same increase in capital is associated with more profitable institutions compared with banks based in countries with lower corruption levels. Our findings are robust to different specifications of the baseline model, and carry useful implications for policy reforms aimed at ensuring stability to the banking sector globally. Journal: The European Journal of Finance Pages: 827-856 Issue: 9 Volume: 27 Year: 2021 Month: 06 X-DOI: 10.1080/1351847X.2020.1832902 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1832902 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:9:p:827-856 Template-Type: ReDIF-Article 1.0 Author-Name: Mikica Drenovak Author-X-Name-First: Mikica Author-X-Name-Last: Drenovak Author-Name: Vladimir Ranković Author-X-Name-First: Vladimir Author-X-Name-Last: Ranković Author-Name: Branko Urošević Author-X-Name-First: Branko Author-X-Name-Last: Urošević Author-Name: Ranko Jelic Author-X-Name-First: Ranko Author-X-Name-Last: Jelic Title: Bond portfolio management under Solvency II regulation Abstract: We develop a novel approach to the bond portfolio optimization for insurance companies that are subject to the new Solvency II regulation. The regulatory efficient portfolios are determined using the Non-dominated Sorting Genetic Algorithm II (NSGA-II). The characteristics of the estimated efficient portfolios are examined in different market regimes. Our findings suggest low cardinality of all estimated efficient portfolios despite explicit regulatory penalties for highly concentrated portfolios. The efficient portfolios are dominated by short term and BBB rated bonds. The lack of diversification and over-exposure to bonds with higher credit risk in different market regimes represents a weakness of the Solvency II regulation with unintended consequences for management of insurance companies. Journal: The European Journal of Finance Pages: 857-879 Issue: 9 Volume: 27 Year: 2021 Month: 06 X-DOI: 10.1080/1351847X.2020.1850499 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1850499 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:9:p:857-879 Template-Type: ReDIF-Article 1.0 Author-Name: Konstantinos Gkillas Author-X-Name-First: Konstantinos Author-X-Name-Last: Gkillas Author-Name: Christos Floros Author-X-Name-First: Christos Author-X-Name-Last: Floros Author-Name: Muhammad Tahir Suleman Author-X-Name-First: Muhammad Tahir Author-X-Name-Last: Suleman Title: Quantile dependencies between discontinuities and time-varying rare disaster risks Abstract: We study the role of rare disaster risks in discontinuities (jumps) in the US equity market. To this end, we use data from Dow Jones Industrial Average and International Crisis Behavior database (as a proxy for rare disaster risks) over the period January 1918 – December 2013. We apply a quantile dependence approach in order to detect directional predictability from rare disaster risks to various types of jumps, realized skewness and realized kurtosis risks at different quantiles and lags. We find an asymmetric relationship between jumps and rare disaster risks, as we report a heterogenous dependency across different quantiles and lag orders. Although rare disaster risks can significantly help in the predictability of jumps, large jumps due to large price movements happened in the market do not associate with rare disasters. Journal: The European Journal of Finance Pages: 932-962 Issue: 10 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1809487 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1809487 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:932-962 Template-Type: ReDIF-Article 1.0 Author-Name: Lukáš Pfeifer Author-X-Name-First: Lukáš Author-X-Name-Last: Pfeifer Author-Name: Martin Hodula Author-X-Name-First: Martin Author-X-Name-Last: Hodula Title: New kid on the block: leverage ratio and its implications for banking regulation Abstract: The capital regulation reform package (CRR2) proposed for the EU banking sector introduces a minimum leverage ratio as a (non-risk-weighted) prudential backstop. In this paper, we use Czech bank-level data to explore the implications of introducing a leverage ratio into the capital regulatory framework. Specifically, we create an artificial ‘laboratory’ environment where we study the relationship between the two regulatory tools and selected bank-specific variables. We identify channels through which the capital and leverage ratios might be affected and test the functionality of those channels. Our results confirm that the capital and leverage ratios complement each other and that the leverage ratio is far less procyclical than the capital ratio. We also demonstrate an over-the-cycle functionality of our proposed channels of interaction between the capital and leverage ratios. We show that the leverage ratio (or similar microprudential backstops, such as an output floor) could be an important tool for maintaining resilience, especially for banking sectors with a high share of banks using the internal rating-based approach to risk weight setting. Journal: The European Journal of Finance Pages: 1009-1028 Issue: 10 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1789185 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1789185 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:1009-1028 Template-Type: ReDIF-Article 1.0 Author-Name: Gaganis Chrysovalantis Author-X-Name-First: Gaganis Author-X-Name-Last: Chrysovalantis Author-Name: Peter Molnár Author-X-Name-First: Peter Author-X-Name-Last: Molnár Title: Economic policies and their effects on financial market Journal: The European Journal of Finance Pages: 929-931 Issue: 10 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2021.1899955 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1899955 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:929-931 Template-Type: ReDIF-Article 1.0 Author-Name: Olga Fullana Author-X-Name-First: Olga Author-X-Name-Last: Fullana Author-Name: Javier Ruiz Author-X-Name-First: Javier Author-X-Name-Last: Ruiz Author-Name: David Toscano Author-X-Name-First: David Author-X-Name-Last: Toscano Title: Stock market bubbles and monetary policy effectiveness Abstract: In this paper, we provide evidence on the role of conventional monetary policy in the dynamics of stock market bubbles. We analyze the response of stock market returns to monetary policy shocks but condition the analysis on both the direction of monetary policy surprises and business conditions. Following a two-step approach, we first use a structural vector autoregressive (SVAR) model to identify a proxy variable of monetary policy shocks, and then we apply a conditional regression to contemporary stock market returns and these monetary policy shocks to extract the implicit relationship between these variables in different scenarios. Our results show that monetary policy does not impact on stock market returns in a significant form in the scenario defined by positive shocks and expansion periods, i.e. the lower effectiveness of restrictive monetary policy shocks coincides with the phase of the business cycle in which bubbles arise. Journal: The European Journal of Finance Pages: 963-975 Issue: 10 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1782960 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1782960 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:963-975 Template-Type: ReDIF-Article 1.0 Author-Name: Emilios Galariotis Author-X-Name-First: Emilios Author-X-Name-Last: Galariotis Author-Name: Konstantinos Karagiannis Author-X-Name-First: Konstantinos Author-X-Name-Last: Karagiannis Title: Cultural dimensions, economic policy uncertainty, and momentum investing: international evidence Abstract: Culture, i.e. our values, norms, beliefs, and expected behaviors, has a significant influence on all aspects of social behavior. In addition, the economic policy-making of governments has been shown to have a significant impact on financial markets. In this paper, for the first time, we combine these two findings to examine whether, and if so how, culture and economic policy uncertainty have an impact on style investing, and more specifically on the popular momentum investing. We also extend previous studies in that we employ additional cultural dimensions, rather than just individualism, such as power distance, uncertainty avoidance, masculinity, and long-term orientation (Hofstede [1980]. Culture's Consequences: International Differences in Work-Related Values. Beverly Hills, CA: Sage, [1991]. Cultures and Organizations: Software of the Mind. London: McGraw-Hill, [2001]. Culture's Consequences. 2nd ed. Beverly Hills, CA: Sage, [2011]. “Dimensionalizing Cultures: The Hofstede Model in Context.” Online Readings in Psychology and Culture 2 (1): 1–26). Our results indicate a strong link between cultural dimensions, economic policy uncertainty, and momentum investing in international financial markets. We argue that this link is not affected by differences in the economic cycle, and/or global variables such as oil prices and global market-related uncertainty, and that apart from individualism, there are other cultural elements, which may influence momentum investing. Journal: The European Journal of Finance Pages: 976-993 Issue: 10 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1782959 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1782959 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:976-993 Template-Type: ReDIF-Article 1.0 Author-Name: Athanasios P. Fassas Author-X-Name-First: Athanasios P. Author-X-Name-Last: Fassas Author-Name: Dimitris Kenourgios Author-X-Name-First: Dimitris Author-X-Name-Last: Kenourgios Author-Name: Stephanos Papadamou Author-X-Name-First: Stephanos Author-X-Name-Last: Papadamou Title: U.S. unconventional monetary policy and risk tolerance in major currency markets Abstract: This paper studies the effects of U.S. unconventional monetary policy announcements on the implied volatility of three major currency pairs, Dollar/Euro, Dollar/British Pound and Dollar/Yen by using panel data analysis along with several model specifications and robustness tests. Monetary policy announcements not only have an effect on the realized behavior of asset prices, but also influence market participants’ expectations regarding future volatility. Our empirical findings show that Federal Reserve’s unconventional monetary policy announcements significantly reduce the market expectations about future realized volatility of exchange rates, suggesting that lax monetary policy leads to elevated risk-tolerance in currency markets. Furthermore, our findings indicate that market participants’ expectations respond differently to the different rounds of U.S. quantitative easing. Journal: The European Journal of Finance Pages: 994-1008 Issue: 10 Volume: 27 Year: 2021 Month: 7 X-DOI: 10.1080/1351847X.2020.1775105 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1775105 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:994-1008 Template-Type: ReDIF-Article 1.0 Author-Name: George N. Leledakis Author-X-Name-First: George N. Author-X-Name-Last: Leledakis Author-Name: Emmanuel C. Mamatzakis Author-X-Name-First: Emmanuel C. Author-X-Name-Last: Mamatzakis Author-Name: Emmanouil G. Pyrgiotakis Author-X-Name-First: Emmanouil G. Author-X-Name-Last: Pyrgiotakis Author-Name: Nickolaos G. Travlos Author-X-Name-First: Nickolaos G. Author-X-Name-Last: Travlos Title: Does it pay to acquire private firms? Evidence from the U.S. banking industry Abstract: We extend the U.S. bank M&As literature by examining bidder announcement abnormal returns in deals involving both public and private targets over a 32-years examination period. Our main findings document the existence of a listing effect in our sample. Banks gain when they acquire private firms and lose when they acquire public firms. Gains in private offers are even higher when bidders employ financial advisors, whereas the opposite is true for public deals. We argue that this adverse advisor effect relates to the different levels of information asymmetry between public and private targets. Our results remain robust when we control for usual determinants of bidder abnormal returns, such as the method of payment, size, or relative size and when we control for sample selection and endogeneity problems. Journal: The European Journal of Finance Pages: 1029-1051 Issue: 10 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1799835 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1799835 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:10:p:1029-1051 Template-Type: ReDIF-Article 1.0 Author-Name: Jiafu An Author-X-Name-First: Jiafu Author-X-Name-Last: An Author-Name: Jiaman Xu Author-X-Name-First: Jiaman Author-X-Name-Last: Xu Title: International spillovers of corporate scandal: evidence from the Harvey Weinstein event Abstract: Exploiting a representative survey which overlapped with the revelation of the Harvey Weinstein scandal, we firstly discover that the scandal in the United States causally increased the preference for gender equality in Italy. Consistent with prospect theory, we then show that firms in the entertainment industry experienced excess loss in share value compared to their peers in other industries immediately following the revelation of the scandal. Further analyses suggest that this value impact is stronger for firms with a higher percentage of women executives. Our results are thus relevant for institutional investors holding a global portfolio. Journal: The European Journal of Finance Pages: 1053-1072 Issue: 11 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2021.1906729 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1906729 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:11:p:1053-1072 Template-Type: ReDIF-Article 1.0 Author-Name: Denisa Lleshaj Author-X-Name-First: Denisa Author-X-Name-Last: Lleshaj Author-Name: Jannik Kocian Author-X-Name-First: Jannik Author-X-Name-Last: Kocian Title: Short selling disclosure and its impact on CDS spreads Abstract: The European Union introduced Regulation 236/2012 in 2012 to address short selling and certain aspects of credit default swaps (CDS). Consequently, a uniform short position disclosure regime was developed, which is used in this paper to examine CDS spreads as a proxy for credit risk around public short sale announcements and evaluate the disclosure policy's relevance from the debtholder's perspective. Existing literature documents short selling regulations’ impacts on the stock market, but no evidence exists from the CDS market. Therefore, we first conduct an event study to examine the effects of different short sale events on corresponding firms’ CDS spreads between 2012 and 2018. Moreover, we use regression analyses to control for several credit risk determinants that may also affect CDS spreads. Our evidence suggests that opening and increasing short positions are perceived as negative information, and in this regard lead to higher CDS spreads. In contrast, CDS spreads tend to be lower if short positions decrease or close. Additionally, we find that negative information ceteris paribus more strongly affects CDS spreads than positive information. Finally, we investigate certain anticipatory reactions when negative news enters the CDS market. Journal: The European Journal of Finance Pages: 1117-1150 Issue: 11 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1858129 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1858129 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:11:p:1117-1150 Template-Type: ReDIF-Article 1.0 Author-Name: Stefan Petry Author-X-Name-First: Stefan Author-X-Name-Last: Petry Title: The effect of issuer leverage on issuer bid and ask quotes for structured retail products Abstract: The financial institution that issues a structured retail product (SRP) becomes the dealer for that security. Issuer–dealer funding constraints can directly impact price quotes for SRPs. The 2007–2009 financial crisis diminished issuer funding liquidity, and both bid and ask quotes declined, with the decrease in bids being significantly greater than that for the asks. A reduction in the bid (ask) discourages (encourages) investor selling (buying) and helps preserve dealer capital. The SRP’s intrinsic value places a bound on how far the ask needs to be reduced to induce investor buying. High-leverage (low-leverage) issuers are the most (least) financially constrained and decrease their bids by a significant 167% (nonsignificant 41%) compared to the pre-crisis average. The decrease in asks is nonsignificant for both groups. Journal: The European Journal of Finance Pages: 1073-1097 Issue: 11 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1860108 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1860108 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:11:p:1073-1097 Template-Type: ReDIF-Article 1.0 Author-Name: G. Bonaccolto Author-X-Name-First: G. Author-X-Name-Last: Bonaccolto Author-Name: M. Caporin Author-X-Name-First: M. Author-X-Name-Last: Caporin Author-Name: N. Zambon Author-X-Name-First: N. Author-X-Name-Last: Zambon Title: Multiple co-jumps in the cross-section of US equities and the identification of system(at)ic movements Abstract: By analyzing a very large dataset of high-frequency returns, we propose two indexes informative of the occurrence of multiple co-jumps in the cross-section of US equities. These indexes have important implications not only in asset allocation and hedging but also in asset pricing. Notably, the two diffusion indexes capture a part of the variation in stocks' returns which is not explained by the capital asset pricing model's traditional factors. Besides, the empirical results provide evidence of interesting relations between contemporaneous jumps, stock size and capitalization. Journal: The European Journal of Finance Pages: 1098-1116 Issue: 11 Volume: 27 Year: 2021 Month: 07 X-DOI: 10.1080/1351847X.2020.1856704 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1856704 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:11:p:1098-1116 Template-Type: ReDIF-Article 1.0 Author-Name: Jingsi Leng Author-X-Name-First: Jingsi Author-X-Name-Last: Leng Author-Name: Aydin Ozkan Author-X-Name-First: Aydin Author-X-Name-Last: Ozkan Author-Name: Neslihan Ozkan Author-X-Name-First: Neslihan Author-X-Name-Last: Ozkan Author-Name: Agnieszka Trzeciakiewicz Author-X-Name-First: Agnieszka Author-X-Name-Last: Trzeciakiewicz Title: CEO overconfidence and the probability of corporate failure: evidence from the United Kingdom Abstract: This paper investigates the impact of CEO overconfidence on the probability of corporate bankruptcy. Using a large dataset of UK firms, we find that firms with overconfident CEOs face a greater risk of failure. The presence of overconfident CEOs leads to a higher risk of bankruptcy in innovative environments, while the impact is insignificant in non-innovative environments. Moreover, overconfident CEOs can increase the bankruptcy risk of firms with less conservative accounting. We find that banks, as major creditors, seem to play an important role in constraining CEO overconfidence, and hence in reducing the likelihood of bankruptcy. Finally, the impact of overconfidence on the probability of bankruptcy is stronger in firms with generalist CEOs than specialist CEOs. Journal: The European Journal of Finance Pages: 1210-1234 Issue: 12 Volume: 27 Year: 2021 Month: 08 X-DOI: 10.1080/1351847X.2021.1876131 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1876131 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:12:p:1210-1234 Template-Type: ReDIF-Article 1.0 Author-Name: Jan Bartholdy Author-X-Name-First: Jan Author-X-Name-Last: Bartholdy Author-Name: Lene Gilje Justesen Author-X-Name-First: Lene Gilje Author-X-Name-Last: Justesen Title: Can strong capital regulation prevent risk-taking from deposit insurance? Abstract: Can strong capital regulation prevent risk-taking from deposit insurance? Denmark offers a unique setting providing solid identification for testing risk incentives from deposit insurance under strong capital regulation. The Danish system is a universal system without strong risk exposure regulation. Commercial banks and savings banks have different ownership structures but are subject to the same set of regulations, but savings banks have no incentive to increase risk after the implementation of a deposit insurance scheme. We show that commercial banks did not increase their risk at the introduction of deposit insurance compared to savings banks. We attribute this to strong capital requirements and a firm closure policy. The results also hold for large commercial banks, indicating that the systemic risk did not increase either. Finally, there is no evidence that commercial banks increase their risk by allowing their customers to increase their leverage (risk) compared with customers in savings banks. Journal: The European Journal of Finance Pages: 1164-1185 Issue: 12 Volume: 27 Year: 2021 Month: 08 X-DOI: 10.1080/1351847X.2020.1860107 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1860107 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:12:p:1164-1185 Template-Type: ReDIF-Article 1.0 Author-Name: Stephanie Titzck Author-X-Name-First: Stephanie Author-X-Name-Last: Titzck Author-Name: Jan Willem van den End Author-X-Name-First: Jan Willem Author-X-Name-Last: van den End Title: The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices Abstract: We analyse the effects of announcements of changes in the Eurosystem’s balance sheet size, duration and composition on inflation expectations, the exchange rate, the 10-year euro area government bond yield and stock returns, using local projections. We explicitly take into account interaction effects between the three balance sheet dimensions. We provide evidence for the duration extraction channel of monetary policy transmission as we find that the bond yield is sensitive to the combined impact of shocks to balance sheet size and duration. The exchange rate is also affected by a joint size-duration shock. Moreover, the bond yield and exchange rate are sensitive to the joint effect of changes in size and composition. The results indicate that interactions between balance sheet dimensions matter. Journal: The European Journal of Finance Pages: 1186-1209 Issue: 12 Volume: 27 Year: 2021 Month: 08 X-DOI: 10.1080/1351847X.2020.1866051 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1866051 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:12:p:1186-1209 Template-Type: ReDIF-Article 1.0 Author-Name: Antonios Siganos Author-X-Name-First: Antonios Author-X-Name-Last: Siganos Title: A novel measure of sleep based on Google: the case for financial markets Abstract: We address in this study the issue of how to proxy sleep and explore sleep’s significance for financial markets. We employ daily Google search activity on sleepiness terms (e.g. sleep deprivation) to develop an index and find that a one-day lagged sleepiness index is related negatively to US stock market returns. When investors lack sleep, stock market returns are relatively low. This pattern could be explained by sleep deprivation causing an increased level of investor anxiety and risk aversion. We find that this relation is most pronounced on days with high uncertainty in the market. Sleep is negatively related to stock market returns even after controlling for sentiment. Overall, our results highlight the application of Google Trend in a new field showing that investors’ sleep patterns influence their investment decisions. Journal: The European Journal of Finance Pages: 1151-1163 Issue: 12 Volume: 27 Year: 2021 Month: 08 X-DOI: 10.1080/1351847X.2020.1857289 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1857289 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:12:p:1151-1163 Template-Type: ReDIF-Article 1.0 Author-Name: Junhuan Zhang Author-X-Name-First: Junhuan Author-X-Name-Last: Zhang Author-Name: Yuqian Xu Author-X-Name-First: Yuqian Author-X-Name-Last: Xu Author-Name: Daniel Houser Author-X-Name-First: Daniel Author-X-Name-Last: Houser Title: Vulnerability of scale-free cryptocurrency networks to double-spending attacks Abstract: Cryptocurrencies including Bitcoin are known to be vulnerable to so-called ‘double-spending’ attacks, where the same digital currency is used to execute multiple different transactions simultaneously. Little is known, however, about the underlying reasons for this vulnerability. Here we develop an agent-based model to study how features of cryptocurrency networks contribute to their vulnerability to double-spending attacks. Perhaps surprisingly, we find neither the number of network nodes nor its path length seem to influence the probability of successful attacks. We find robust evidence that the network's clustering coefficient has substantial influence. In particular, scale-free networks, with their small clustering coefficients, are more than twice as likely to succumb to double-spending attacks than are networks with larger coefficients, such as regular networks. The implication is that cryptocurrency networks, which are scale-free, may be uniquely susceptible to double-spending attacks. Journal: The European Journal of Finance Pages: 1235-1249 Issue: 12 Volume: 27 Year: 2021 Month: 08 X-DOI: 10.1080/1351847X.2021.1886964 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1886964 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:12:p:1235-1249 Template-Type: ReDIF-Article 1.0 Author-Name: Akanksha Jalan Author-X-Name-First: Akanksha Author-X-Name-Last: Jalan Author-Name: Roman Matkovskyy Author-X-Name-First: Roman Author-X-Name-Last: Matkovskyy Author-Name: Andrew Urquhart Author-X-Name-First: Andrew Author-X-Name-Last: Urquhart Title: What effect did the introduction of Bitcoin futures have on the Bitcoin spot market? Abstract: Bitcoin futures were introduced in December 2017 and this was seen by some as a sign of the most popular cryptocurrency finally being accepted by the financial community. In this paper, we examine the impact of the introduction of Bitcoin futures on the Bitcoin spot market in terms of five characteristics – returns, volatility, skewness, kurtosis and liquidity, using a Bayesian diffusion-regression (state-space) structural time-series model. Our results indicate that the introduction of bitcoin futures potentially exerted a downward impact on the USD bitcoin spot market return and skewness and an upward one on volatility, kurtosis and liquidity, which became higher after futures were introduced. Therefore, our paper offers important insights for investors and regulators, while providing some guidance as to the potential impact of futures markets on other cryptocurrencies. Journal: The European Journal of Finance Pages: 1251-1281 Issue: 13 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2020.1869992 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1869992 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:13:p:1251-1281 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Bleaney Author-X-Name-First: Michael Author-X-Name-Last: Bleaney Author-Name: Veronica Veleanu Author-X-Name-First: Veronica Author-X-Name-Last: Veleanu Title: Redenomination risk in eurozone corporate bond spreads Abstract: We investigate the risk spillover from euro area government bond spreads (relative to a safe German government bond of similar maturity) to nonfinancial corporate bonds in France, the Netherlands (‘hard’ euro-area countries), and Italy, Portugal and Spain (‘soft’ euro-area countries). In addition to standard firm- and bond-specific determinants of corporate bonds (capturing liquidity and tax effects, and other euro area macroeconomic risks), we show that there is significant risk transfer from government bonds to the nonfinancial corporate sector. After decomposing the government bond spread into a default risk and a currency redenomination risk component, associated with a possible split in the euro, we find that redenomination risk has been a significant factor in the pricing of corporate bonds, particularly in the ‘soft’ euro-area countries. Journal: The European Journal of Finance Pages: 1303-1325 Issue: 13 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2021.1882524 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1882524 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:13:p:1303-1325 Template-Type: ReDIF-Article 1.0 Author-Name: Shima Amini Author-X-Name-First: Shima Author-X-Name-Last: Amini Author-Name: Robert Hudson Author-X-Name-First: Robert Author-X-Name-Last: Hudson Author-Name: Andrew Urquhart Author-X-Name-First: Andrew Author-X-Name-Last: Urquhart Author-Name: Jian Wang Author-X-Name-First: Jian Author-X-Name-Last: Wang Title: Nonlinearity everywhere: implications for empirical finance, technical analysis and value at risk Abstract: We show that expected returns on US stocks and all major global stock market indices have a particular form of non-linear dependence on previous returns. The expected sign of returns tends to reverse after large price movements and trends tend to continue after small movements. The observed market properties are consistent with various models of investor behaviour and can be captured by a simple polynomial model. We further discuss a number of important implications of our findings. Incorrectly fitting a simple linear model to the data leads to a substantial bias in coefficient estimates. We show through the polynomial model that well-known short-term technical trading rules may be substantially driven by the non-linear behaviour observed. The behaviour also has implications for the appropriate calculation of important risk measures such as value at risk. Journal: The European Journal of Finance Pages: 1326-1349 Issue: 13 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2021.1900888 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1900888 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:13:p:1326-1349 Template-Type: ReDIF-Article 1.0 Author-Name: Rui Li Author-X-Name-First: Rui Author-X-Name-Last: Li Author-Name: Yanhong Qian Author-X-Name-First: Yanhong Author-X-Name-Last: Qian Title: How does entrepreneurship influence the efficiency of household portfolios? Abstract: This paper examines the impact of entrepreneurship on the efficiency of household financial portfolios by constructing Sharpe ratios and Sortino ratios of seven kinds of financial assets, based on data from the 2013, 2015 and 2017 China Household Finance Survey (CHFS), in conjunction with the returns of the financial asset index of China from 2010 to 2018. Employing CRE regressions, Heckman two-stage models and PSM methods, we find that undertaking entrepreneurship helps to increase the efficiency of household portfolios significantly. This study also verifies that entrepreneurial households improve their portfolio efficiency through financial information by testing the moderating effects of social network, business experience and financial literacy. In addition, this study shows that entrepreneurial households generally adopt a less diversified strategy in asset allocation than do non-entrepreneurial households. Journal: The European Journal of Finance Pages: 1282-1302 Issue: 13 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2021.1883698 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1883698 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:13:p:1282-1302 Template-Type: ReDIF-Article 1.0 Author-Name: Keith Jakob Author-X-Name-First: Keith Author-X-Name-Last: Jakob Author-Name: Augusto Castillo Author-X-Name-First: Augusto Author-X-Name-Last: Castillo Author-Name: German Rubio Author-X-Name-First: German Author-X-Name-Last: Rubio Title: Changing currencies and cognitive biases: evidence of the impact of introducing the Euro on dividend heaping in Europe Abstract: Heaping is defined as a cognitive bias to round numbers even if precise results are desired. This article targets on dividends in four key European markets (Germany, France, the UK, and Switzerland) over the 1981–2019 period. We hypothesize and report that the change of currency in Germany and France (they both adopted the Euro in January 1999) significantly influenced the characteristics of heaping observed in the dividends both in the short and in the long run. We also report that consistent with the prior literature, the probability of rounding of dividends in each country is significantly related to both information uncertainty and dividend size. In the UK and Switzerland heaping increases over time for the full 1981–2019 period for all designated rounding intervals. For Germany and France heaping increases for all rounding intervals during the 1981–1998 period, but the adoption of the Euro leads to a drastic reduction of heaping that lasts several years in both markets. In the long run, after the adoption of the Euro, the likelihood of heaping recovers for small rounding intervals, but remains well below the previous levels for larger rounding intervals. Journal: The European Journal of Finance Pages: 1438-1457 Issue: 14 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2021.1894196 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1894196 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:14:p:1438-1457 Template-Type: ReDIF-Article 1.0 Author-Name: Louise Gorman Author-X-Name-First: Louise Author-X-Name-Last: Gorman Author-Name: Theo Lynn Author-X-Name-First: Theo Author-X-Name-Last: Lynn Author-Name: Eleonora Monaco Author-X-Name-First: Eleonora Author-X-Name-Last: Monaco Author-Name: Riccardo Palumbo Author-X-Name-First: Riccardo Author-X-Name-Last: Palumbo Author-Name: Pierangelo Rosati Author-X-Name-First: Pierangelo Author-X-Name-Last: Rosati Title: The effect of media coverage on target firms’ trading activity and liquidity around domestic acquisition announcements: evidence from UK Abstract: This study investigates the effect of news media coverage on trading activity in, and the liquidity of, target firms’ shares around acquisition announcements. We use the number of articles published in four of the UK's main newspapers as a proxy for media coverage. Our dataset includes 350 UK domestic acquisition deals between 1996 and 2014. The results of our analysis suggest that media coverage is positively associated with target firms’ trading activity and stock liquidity. This is consistent with the media playing a key role in mitigating information asymmetry in the financial markets. This study contributes to the literature on stock market reactions to acquisition announcements by investigating the effect of media coverage on trading activity and stock liquidity beyond the price run-up, and by providing additional insights into the UK market which traditionally attracts less attention than the US market. Journal: The European Journal of Finance Pages: 1392-1412 Issue: 14 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2021.1883081 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1883081 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:14:p:1392-1412 Template-Type: ReDIF-Article 1.0 Author-Name: Hurvashee Gya Author-X-Name-First: Hurvashee Author-X-Name-Last: Gya Author-Name: Ahmed Barakat Author-X-Name-First: Ahmed Author-X-Name-Last: Barakat Author-Name: Kevin Amess Author-X-Name-First: Kevin Author-X-Name-Last: Amess Author-Name: Anna Chernobai Author-X-Name-First: Anna Author-X-Name-Last: Chernobai Title: How do banking analysts behave around unanticipated news? Evidence from operational risk event announcements Abstract: We study earnings per share (EPS) forecast revision and accuracy of banking analysts around operational risk event announcements in U.S. banks. We find that first announcements of operational risk events are more informative than their settlement announcements. Optimistic banking analysts revise their forecasts downward more aggressively around operational risk disclosures, thereby improving forecast accuracy. Career concerns of banking analysts cause an upward bias in forecast revision and deterioration in forecast accuracy only if the potential employer is a systemically important bank (SIB). We find consistent evidence linking competition among banking analysts with optimistic and inaccurate forecasts, which is consistent with analysts seeking to use inflated forecasts to curry favour and attract businesses to their brokerage house around the time of operational risk disclosures. Global settlement has no favourable impact on analyst forecast accuracy around operational risk event announcements. We find evidence supporting a materiality threshold of $10 million for the informativeness of operational risk event announcements in SIBs. Overall, our results shed light on optimism bias in banking analyst behaviour upon the arrival of unanticipated news. Journal: The European Journal of Finance Pages: 1351-1391 Issue: 14 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2020.1870518 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1870518 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:14:p:1351-1391 Template-Type: ReDIF-Article 1.0 Author-Name: Ashrafee Tanvir Hossain Author-X-Name-First: Ashrafee Tanvir Author-X-Name-Last: Hossain Author-Name: Takdir Hossain Author-X-Name-First: Takdir Author-X-Name-Last: Hossain Author-Name: Lawrence Kryzanowski Author-X-Name-First: Lawrence Author-X-Name-Last: Kryzanowski Title: Social environment and corporate payouts Abstract: We investigate if macro-level social capital, which captures the notions of trust and honesty, has any effects on corporate payout policy. We find that firms situated in U.S. states (or counties) with higher levels of social capital (SC) have higher dividend payouts (DP). These results survive a battery of robustness tests dealing with inference and various forms of endogeneity. We find that the positive SC-DP association is more prominent when monitoring is weak. We also find that the positive SC-DP association remains when we account for internal social capital, political corruption, federal and state income taxes, and other possible dividend clienteles such as in-state pension funds and pension-age populations. Our study contributes to the literatures that regional locations and social considerations constitute clienteles who affect important corporate strategic decisions such as corporate payouts. Journal: The European Journal of Finance Pages: 1413-1437 Issue: 14 Volume: 27 Year: 2021 Month: 09 X-DOI: 10.1080/1351847X.2021.1889631 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1889631 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:14:p:1413-1437 Template-Type: ReDIF-Article 1.0 Author-Name: Giulia Baschieri Author-X-Name-First: Giulia Author-X-Name-Last: Baschieri Author-Name: Andrea Carosi Author-X-Name-First: Andrea Author-X-Name-Last: Carosi Author-Name: Stefano Mengoli Author-X-Name-First: Stefano Author-X-Name-Last: Mengoli Title: The decision to go public and the IPO underpricing with locally biased investors Abstract: We provide new evidence that local investors are peculiarly biased towards local IPO stocks. Taking the well-known investor preference for local stocks a step further, we contribute by showing that local IPOs boost stock market participation far more intensely than local listed firms. Interestingly, the effect is driven by individuals born and raised in the region, having zero effect for those who have moved to the area. Consistent with underwriters significantly under-estimating the local investors’ demand in local IPOs, the probability of a private firm to go public, the IPO underpricing and the cross-sectional volatility of IPO initial returns, increase in remote firms where the local investors’ demand in local IPOs is particularly high. Overall, our results suggest that local investors are crucial for the IPO decision. Journal: The European Journal of Finance Pages: 1489-1532 Issue: 15 Volume: 27 Year: 2021 Month: 10 X-DOI: 10.1080/1351847X.2021.1890632 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1890632 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:15:p:1489-1532 Template-Type: ReDIF-Article 1.0 Author-Name: Franco Fiordelisi Author-X-Name-First: Franco Author-X-Name-Last: Fiordelisi Author-Name: Nemanja Radić Author-X-Name-First: Nemanja Author-X-Name-Last: Radić Author-Name: Thomas Weyman-Jones Author-X-Name-First: Thomas Author-X-Name-Last: Weyman-Jones Title: Detecting zombie banks Abstract: Capital adequacy has become the main regulatory tool to achieve financial stability in the last twenty years. While most papers analysed the effect of capital adequacy on risk taking, there is a lack of evidence on the relationship between deleveraging and the return on equity capital. In this paper, we examine the evolution of the banking system in Japan over the period 2000–16, where the re-capitalization issue has already played a major role in policy making. Specifically, we estimate the shadow return on equity capital for both listed and unlisted banks by measuring the loans-funding-equity technology through the dual cost function, controlling for risk exposure and bad loans, and accounting for both the standard asset-based model of bank outputs, and income-based model. Such an approach is likely to be important if the central bank permits banks with unsustainable balance sheets to continue in existence, and we refer to this as zombie banking. Overall, our results show that deleveraging did reduce the shadow return on equity for the City banks. We also find that that the presence of ‘zombie’ banks was concentrated and large among the smaller less diversified Regional Banks. Journal: The European Journal of Finance Pages: 1459-1488 Issue: 15 Volume: 27 Year: 2021 Month: 10 X-DOI: 10.1080/1351847X.2021.1893200 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1893200 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:15:p:1459-1488 Template-Type: ReDIF-Article 1.0 Author-Name: Bernardo P. Marques Author-X-Name-First: Bernardo P. Author-X-Name-Last: Marques Author-Name: Carlos F. Alves Author-X-Name-First: Carlos F. Author-X-Name-Last: Alves Title: The profitability and distance to distress of European banks: do business choices matter? Abstract: This paper examines which business choices are more likely to increase the profitability and distance to distress of banks, and whether changing business model pays off. We find that the profitability and distance to distress increase with the use of customer deposits and equity, and decrease with size; also, the top performers tend to have a high relationship banking orientation and/or operate a retail focused business model. Furthermore, we document that income diversification only bears a positive impact on the distance to distress of banks highly focused on relationship banking, and size only bears a negative effect on the profitability of these banks as well; additionally, only banks with a low relationship banking orientation significantly benefit from customer deposits. With respect to the effects of business model changes, we find that shifts from the retail diversified funding model to either the retail focused or the large diversified models improve profitability in the medium term. Finally, we find evidence that large diversified banks benefited from internal capital markets during the twin financial crisis by tapping into low-cost funding from subsidiaries. Our results are robust to changes to our baseline model that account for endogeneity and persistency issues. Journal: The European Journal of Finance Pages: 1553-1580 Issue: 15 Volume: 27 Year: 2021 Month: 10 X-DOI: 10.1080/1351847X.2021.1897638 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1897638 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:15:p:1553-1580 Template-Type: ReDIF-Article 1.0 Author-Name: Carlos de Lamare Bastian-Pinto Author-X-Name-First: Carlos de Lamare Author-X-Name-Last: Bastian-Pinto Author-Name: Luiz Eduardo Teixeira Brandão Author-X-Name-First: Luiz Eduardo Teixeira Author-X-Name-Last: Brandão Author-Name: Luiz de Magalhães Ozorio Author-X-Name-First: Luiz de Magalhães Author-X-Name-Last: Ozorio Author-Name: Arthur Felipe Tavares do Poço Author-X-Name-First: Arthur Felipe Tavares Author-X-Name-Last: do Poço Title: A parameter based approach to single factor stochastic process selection for real options applications Abstract: The single factor stochastic diffusion processes most commonly used for Real Options Valuation are the Geometric Brownian Motion and Mean Reversion Models. Nonetheless, the choice of process to model asset price dynamics is still one of the main challenges for researchers and practitioners in the field. Particularly, in investment projects where there is significant managerial flexibility, the project value and the investment rule may depend in large part on the process used to model the underlying uncertainties. In this article, we develop an approach based on the parameter values of the model, which has some advantages over the methods currently used for stochastic process selection. We use the half-life and normalized variance of the time series to be modeled to determine the optimal choice and discuss related theoretical as well as practical issues concerning the application of this approach to real options valuation. Numerical examples are used to illustrate the method, and a guideline for implementation of this approach is provided. Journal: The European Journal of Finance Pages: 1533-1552 Issue: 15 Volume: 27 Year: 2021 Month: 10 X-DOI: 10.1080/1351847X.2021.1895859 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1895859 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:15:p:1533-1552 Template-Type: ReDIF-Article 1.0 Author-Name: XiaoGang Bi Author-X-Name-First: XiaoGang Author-X-Name-Last: Bi Title: Make a promise: the valuation adjustment mechanism in Chinese private target acquisitions Abstract: The valuation adjustment mechanism (VAM) is a contingent-payment contractual arrangement used in the Chinese mergers and acquisitions (M&As) market. The ‘two-direction payment’ design of Chinese VAMs can reduce deal uncertainty and generate value, especially for poorly performing companies that can use VAM contracts to boost short-term performance. I find in this empirical investigation that acquirers applying VAM terms have significantly higher market returns after addressing endogeneity. I also document that poorly performing bidders sign larger VAM contracts, pay higher bid premiums and achieve higher operating performance, and which types of firms are more likely to adopt a VAM in transactions. Journal: The European Journal of Finance Pages: 1645-1668 Issue: 16 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1903963 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1903963 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:16:p:1645-1668 Template-Type: ReDIF-Article 1.0 Author-Name: Sarah Brown Author-X-Name-First: Sarah Author-X-Name-Last: Brown Author-Name: Pulak Ghosh Author-X-Name-First: Pulak Author-X-Name-Last: Ghosh Author-Name: Daniel Gray Author-X-Name-First: Daniel Author-X-Name-Last: Gray Author-Name: Bhuvanesh Pareek Author-X-Name-First: Bhuvanesh Author-X-Name-Last: Pareek Author-Name: Jennifer Roberts Author-X-Name-First: Jennifer Author-X-Name-Last: Roberts Title: Saving behaviour and health: A high-dimensional Bayesian analysis of British panel data Abstract: We develop a two-part high-dimensional Bayesian modelling approach to analyse the relationship between saving behaviour and health. In contrast to the existing literature, our approach allows different data-generating processes for the decision to save and the amount saved, and therefore unveils a more detailed picture of the relationship between financial behaviour and health than previous work. We explore different measures of saving, including monthly saving behaviour and the stock of financial assets held. Further, we exploit British panel data, which includes an extensive range of biomarkers. Our second contribution lies in comparing the effects of these objective measures of health with commonly used self-assessed health measures. We find that health is a significant determinant of saving behaviour and financial asset holding, and that biomarker measures have differential impacts on saving behaviour compared to self-reported health measures. Journal: The European Journal of Finance Pages: 1581-1603 Issue: 16 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1899953 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1899953 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:16:p:1581-1603 Template-Type: ReDIF-Article 1.0 Author-Name: Muhammad Farid Ahmed Author-X-Name-First: Muhammad Farid Author-X-Name-Last: Ahmed Author-Name: Yang Gao Author-X-Name-First: Yang Author-X-Name-Last: Gao Author-Name: Stephen Satchell Author-X-Name-First: Stephen Author-X-Name-Last: Satchell Title: Modeling demand for ESG Abstract: Existing approaches have considered characteristics of Environmental, Social and Corporate Governance (ESG) focused investments from a return-oriented perspective without paying due consideration to investors’ utility and how ESG features impact utility. We contribute to this literature by providing a model that captures the implications for investment if ESG is valued by the investor as well as wealth. We first present the necessary theory and discuss the rather challenging problem of calibration of the various risk and preference parameters. Using Thomson Reuters ESG data from 2002 to 2018, we provide further empirical evidence that investors who value ESG factors have improved utility which does not come at the cost of return performance. Journal: The European Journal of Finance Pages: 1669-1683 Issue: 16 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1924216 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1924216 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:16:p:1669-1683 Template-Type: ReDIF-Article 1.0 Author-Name: Konstantinos Gkillas Author-X-Name-First: Konstantinos Author-X-Name-Last: Gkillas Author-Name: Rangan Gupta Author-X-Name-First: Rangan Author-X-Name-Last: Gupta Author-Name: Christian Pierdzioch Author-X-Name-First: Christian Author-X-Name-Last: Pierdzioch Title: Forecasting realized volatility of bitcoin returns: tail events and asymmetric loss Abstract: We use intraday data to construct measures of the realized volatility of bitcoin returns. We then construct measures that focus exclusively on relatively large realizations of returns to assess the tail shape of the return distribution, and use the heterogeneous autoregressive realized volatility (HAR-RV) model to study whether these measures help to forecast subsequent realized volatility. We find that mainly forecasters suffering a higher loss in case of an underprediction of realized volatility (than in case of an overprediction of the same absolute size) benefit from using the tail measures as predictors of realized volatility, especially at a short and intermediate forecast horizon. This result is robust controlling for jumps and realized skewness and kurtosis, and it also applies to downside (bad) and upside (good) realized volatility. Journal: The European Journal of Finance Pages: 1626-1644 Issue: 16 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1906728 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1906728 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:16:p:1626-1644 Template-Type: ReDIF-Article 1.0 Author-Name: Pedro Gurrola-Perez Author-X-Name-First: Pedro Author-X-Name-Last: Gurrola-Perez Author-Name: Renata Herrerias Author-X-Name-First: Renata Author-X-Name-Last: Herrerias Title: Volatility patterns of short-term interest rate futures Abstract: A general question in finance is whether the volatility of the price of futures contracts follows any particular trend over the contract’s life. In this study, we contribute to the debate by empirically analyzing the trend of the term structure of the volatility of short-term interest rates (STIR) futures prices. Using data on the Eurodollar, Euribor, and Short-Sterling futures contracts for the period between 2000 and 2018, we model the volatility of each individual contract considering time to expiration and trading activities. Furthermore, we investigate whether these trends change according to overall economic conditions. We find that STIR futures behave differently than futures on other underlying assets and that, most of the time, STIR futures price volatility declines as the contract approaches expiration. Moreover, the relation between volatility and time to maturity depends on market conditions and trading activities, and it is non-linearly related to the observation period. Journal: The European Journal of Finance Pages: 1604-1625 Issue: 16 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1899954 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1899954 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:16:p:1604-1625 Template-Type: ReDIF-Article 1.0 Author-Name: Miao Wang Author-X-Name-First: Miao Author-X-Name-Last: Wang Author-Name: Agyenim Boateng Author-X-Name-First: Agyenim Author-X-Name-Last: Boateng Author-Name: Xiuping Hua Author-X-Name-First: Xiuping Author-X-Name-Last: Hua Title: More money, more honey? An examination of additionality of China’s government R&D subsidies Abstract: This study considers the interaction effects of government subsidies, financial constraints, and ownership structure on the firm’s net research & development (R&D) based on a sample of 3440 Chinese-listed firms during 2000-2019. Our results indicate that R&D subsidies reduce financial constraints irrespective of ownership type; however, the reduction appears more pronounced for private-owned enterprises (POEs) compared with state-owned enterprises (SOEs). Further analysis reveals that the impact of R&D subsidies on R&D investments depends on the interactive effect between financial constraint and ownership type. For financially constrained SOEs, subsidies spur net R&D investment whereas this is not the case for financially constrained POEs. We also examine the potential factors through which ownership types and financial constraints affect innovation input, namely, institutional development and industrial competition. Our evidence indicates that, in a more institutionally developed province, the effect of subsidies on net R&D input is negative for SOEs, but positive for POEs. In a more competitive industry, SOEs tend to face less agency risk and stronger monitoring, while POEs depend more on their financial slack. Our study challenges the ‘more money, more innovation investment’ story, suggesting that alleviating financial constraints does not necessarily stimulate more net R&D investments. Journal: The European Journal of Finance Pages: 1714-1739 Issue: 17 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1918202 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1918202 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:17:p:1714-1739 Template-Type: ReDIF-Article 1.0 Author-Name: Jean Canil Author-X-Name-First: Jean Author-X-Name-Last: Canil Author-Name: Sigitas Karpavičius Author-X-Name-First: Sigitas Author-X-Name-Last: Karpavičius Author-Name: Chia-Feng (Jeffrey) Yu Author-X-Name-First: Chia-Feng (Jeffrey) Author-X-Name-Last: Yu Title: TMT gender diversity: implications for corporate tournaments and innovation Abstract: This study finds that even after controlling for board gender diversity, TMT gender diversity has a distinct and positive effect on corporate innovation. The study also finds that the joint interaction of tournament incentives and TMT gender diversity is detrimental to innovation, implying the two are substitutes. The substitution effect persists beyond the year of female transition and is concentrated on larger firms and firms in low-technology industries. Our results are robust across alternative measures of tournament incentives, female representation, and innovation and after accounting for the endogeneity of both tournament incentives and TMT gender diversity. Thus, for gender-diverse TMTs pursuing an active innovation policy, tournament incentives may not be appropriate. Journal: The European Journal of Finance Pages: 1765-1790 Issue: 17 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1913430 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1913430 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:17:p:1765-1790 Template-Type: ReDIF-Article 1.0 Author-Name: Nathan Lael Joseph Author-X-Name-First: Nathan Lael Author-X-Name-Last: Joseph Author-Name: Chen Su Author-X-Name-First: Chen Author-X-Name-Last: Su Author-Name: Winifred Huang Author-X-Name-First: Winifred Author-X-Name-Last: Huang Author-Name: Baoying Lai Author-X-Name-First: Baoying Author-X-Name-Last: Lai Title: Pricing of foreign exchange rate and interest rate risks using short to long horizon returns Abstract: In this paper, we test whether foreign exchange (FX) rate and interest rate (IR) risks are priced at short to long return horizons. We also test whether the associated risk premia relate to certain stock characteristics. Our new evidence indicates that risk premia increase with the length of the return horizon and that the risk premium signs depend on the sign of the corresponding exposure beta. Thus, for our longest return horizon of 950 days, positive (negative) FX rate premia increase in absolute value to 2.642% (–2.050%), whereas positive (negative) IR premia increase to 1.039% (–1.151%). Zero exposure betas have zero risk premia. We find that, depending on the level of profitability, Size, book-to-market-ratio (B/M) and sales-to-stock price ratio (S/P) explain most of the variation in exposure betas and risk premia. Our results imply that investors view exposure betas and risk premia as important factors affecting portfolio returns. Journal: The European Journal of Finance Pages: 1684-1713 Issue: 17 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1927127 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1927127 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:17:p:1684-1713 Template-Type: ReDIF-Article 1.0 Author-Name: Denis Davydov Author-X-Name-First: Denis Author-X-Name-Last: Davydov Author-Name: Ian Khrashchevskyi Author-X-Name-First: Ian Author-X-Name-Last: Khrashchevskyi Author-Name: Jarkko Peltomäki Author-X-Name-First: Jarkko Author-X-Name-Last: Peltomäki Title: Investor attention and portfolio performance: what information does it pay to pay attention to? Abstract: We explore a unique dataset on individual investors’ online trading accounts to examine the determinants of their attention and its relation to portfolio performance. In particular, we investigate what individual characteristics affect investor attention and what type of information drives investment performance. We find distinct differences in investors’ attention and provide evidence that paying attention has a differential impact on performance depending on the type of information. Portfolio monitoring and attention to financial education are positively related to performance, while attention to analytical information is detrimental to performance. Attention to technical analysis is negatively related to the performance of actively trading investors but improves the performance of less frequent traders. Overall, our results provide additional evidence to the suggestion that attention to financial education is the key to investment success. Journal: The European Journal of Finance Pages: 1740-1764 Issue: 17 Volume: 27 Year: 2021 Month: 11 X-DOI: 10.1080/1351847X.2021.1911823 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1911823 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:17:p:1740-1764 Template-Type: ReDIF-Article 1.0 Author-Name: Santiago Carbó-Valverde Author-X-Name-First: Santiago Author-X-Name-Last: Carbó-Valverde Author-Name: Pedro J. Cuadros-Solas Author-X-Name-First: Pedro J. Author-X-Name-Last: Cuadros-Solas Author-Name: Francisco Rodríguez-Fernández Author-X-Name-First: Francisco Author-X-Name-Last: Rodríguez-Fernández Title: The effects of negative interest rates: a literature review and additional evidence on the performance of the European banking sector Abstract: Reducing interest rates to below zero may be justified on theoretical grounds. However, in practice, it has been shown to create a number of distortions and malfunctions in several dimensions of banking system and the financial markets, which in turn may affect the whole economy. This paper surveys the theoretical grounds of unconventional monetary policy, focusing mostly on the available empirical evidence in order to provide a full picture of the impact of negative monetary policy rates. It also investigates the impact of negative interest rates on the European banking sector using a dataset of 3,155 banks from 36 European countries over the 2011–2018 period. Using a difference-in-differences methodology, we show that banks in negative interest rate environments experienced a 17.4% decrease in their net interest margins compared to banks operating in European countries that did not adopt negative interest rates. The results are found to be robust after combining propensity score matching with a difference-in-differences approach. Moreover, we find that banks that hold more liquid assets, that are highly capitalised, that have larger reserves at central banks and that take more customer deposits are more strongly affected by negative interest rates. Journal: The European Journal of Finance Pages: 1908-1938 Issue: 18 Volume: 27 Year: 2021 Month: 12 X-DOI: 10.1080/1351847X.2021.1927784 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1927784 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:18:p:1908-1938 Template-Type: ReDIF-Article 1.0 Author-Name: Rainer Baule Author-X-Name-First: Rainer Author-X-Name-Last: Baule Author-Name: Christian Tallau Author-X-Name-First: Christian Author-X-Name-Last: Tallau Title: The risk sensitivity of Basel risk weights and loan loss provisions: evidence from European banks Abstract: Recent literature suggests that regulatory risk measures do not adequately capture the actual economic risk of bank portfolios. We shed new light on this issue by analyzing both regulatory and accounting standards, i.e. capital requirements and loan loss provisions. Examining a sample of large European banks for the years 2002–2015, we show that regulatory risk sensitivity, i.e. the response of Basel risk weights to asset volatility as our measure of a bank's asset portfolio risk, is substantially higher than what has been shown so far in the literature. Despite the occasionally bad reputation that risk weights have, we provide new evidence that they are adequately calibrated for banks with low or medium levels of risk. For crisis periods and for high-risk banks, however, risk weights still do not adequately reflect the actual portfolio risk. This results in insufficient capital, even with the stricter Basel III minimum capital requirements. Regarding loan loss provisions, we establish a theoretical link between expected losses and asset volatility. We document a strong empirical association, which fits well to the theoretical model. Overall, we find no indication that the risk sensitivity of loan loss provisions has been insufficient, at least since the financial crisis. Journal: The European Journal of Finance Pages: 1855-1886 Issue: 18 Volume: 27 Year: 2021 Month: 12 X-DOI: 10.1080/1351847X.2021.1918207 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1918207 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:18:p:1855-1886 Template-Type: ReDIF-Article 1.0 Author-Name: Mustafa Onur Caglayan Author-X-Name-First: Mustafa Onur Author-X-Name-Last: Caglayan Author-Name: Umut Celiker Author-X-Name-First: Umut Author-X-Name-Last: Celiker Author-Name: Gokhan Sonaer Author-X-Name-First: Gokhan Author-X-Name-Last: Sonaer Title: Industry herding by hedge funds Abstract: This paper investigates hedge fund herding at the industry level and its impact on industry returns. Although the level of industry herding on average is substantially weaker for hedge funds compared to non-hedge fund institutions, we find that industries that experience heavy herding by hedge funds experience return reversals in the long-run. We provide evidence that non-hedge funds especially follow hedge funds’ sell herding industries in following quarters, and the long-run return reversals observed in these industries are due to non-hedge funds’ failure to timely react to good news coming from these heavy hedge fund sell-herding industries in subsequent quarters. Journal: The European Journal of Finance Pages: 1887-1907 Issue: 18 Volume: 27 Year: 2021 Month: 12 X-DOI: 10.1080/1351847X.2021.1918206 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1918206 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:18:p:1887-1907 Template-Type: ReDIF-Article 1.0 Author-Name: Xu Feng Author-X-Name-First: Xu Author-X-Name-Last: Feng Author-Name: Lin Huang Author-X-Name-First: Lin Author-X-Name-Last: Huang Author-Name: Guanying Wang Author-X-Name-First: Guanying Author-X-Name-Last: Wang Title: Shadow leverage risk and corporate bond pricing: evidence from China Abstract: This study investigates the effect of shadow bank leverage on corporate bond returns. Using a unique dataset of Wealth Management Products (WMPs), we construct a new measurement of shadow leverage in the Chinese banking system. We find that the sensitivity of bond returns to the risk of shadow leverage has a negative effect on corporate bond returns. We propose a new three-factor bond pricing model by adding the factor of shadow leverage risk into the traditional two-factor model of Fama and French (1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33: 3–56). A comprehensive empirical analysis shows that the proposed model fits corporate bond returns well and outperforms the two-factor bond pricing model, both in- and out-of-samples. Specifically, the shadow leverage risk factor makes greater marginal contributions in lower credit rating groups and more shadow leverage-sensitive groups. Overall, we highlight the importance of shadow banks in the role of asset pricing. Journal: The European Journal of Finance Pages: 1834-1854 Issue: 18 Volume: 27 Year: 2021 Month: 12 X-DOI: 10.1080/1351847X.2021.1923548 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1923548 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:18:p:1834-1854 Template-Type: ReDIF-Article 1.0 Author-Name: Demir Bektić Author-X-Name-First: Demir Author-X-Name-Last: Bektić Author-Name: Britta Hachenberg Author-X-Name-First: Britta Author-X-Name-Last: Hachenberg Title: European arbitrage CLOs and risk retention Abstract: In this article, we empirically analyze European Collateralized Loan Obligations (CLOs) in the aftermath of the financial crisis. As Regulation introduced the so-called risk retention rule, originally designed to align interests between issuers and investors, we analyze the implications and effects of the risk retention rule on managed cash CLOs (arbitrage deals). Although the market suffered severely during the period after the rule was introduced, an alignment of interests between issuers and investors does not necessarily seem to have been attained. Here, we examine the implications of risk retention on asset pricing and find that CLO manager experience, credit rating and issuance amount are important factors that significantly influence pricing expectations of CLO investors. However, the form in which the CLO manager retains the risk does not seem to play a role. Journal: The European Journal of Finance Pages: 1791-1803 Issue: 18 Volume: 27 Year: 2021 Month: 12 X-DOI: 10.1080/1351847X.2021.1900887 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1900887 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:18:p:1791-1803 Template-Type: ReDIF-Article 1.0 Author-Name: Massimo Guidolin Author-X-Name-First: Massimo Author-X-Name-Last: Guidolin Author-Name: Valentina Massagli Author-X-Name-First: Valentina Author-X-Name-Last: Massagli Author-Name: Manuela Pedio Author-X-Name-First: Manuela Author-X-Name-Last: Pedio Title: Does the cost of private debt respond to monetary policy? Heteroskedasticity-based identification in a model with regimes Abstract: We investigate the effects of the Federal Reserve's quantitative easing and maturity extension programs on the yields of US dollar-denominated corporate bonds using a multiple-regime heteroskedasticity-based VAR identification approach. Impulse response functions suggest that a traditional, rate-based expansionary policy may lead to an increase in yields while quantitative easing is linked to a general and persistent decrease in yields, particularly for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost of private debt primarily through a reduction in risk premia that cannot be entirely accounted for by a reduction in corporate default risk. Journal: The European Journal of Finance Pages: 1804-1833 Issue: 18 Volume: 27 Year: 2021 Month: 12 X-DOI: 10.1080/1351847X.2021.1917442 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1917442 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:27:y:2021:i:18:p:1804-1833 Template-Type: ReDIF-Article 1.0 Author-Name: Shuai Shao Author-X-Name-First: Shuai Author-X-Name-Last: Shao Author-Name: Hong Bo Author-X-Name-First: Hong Author-X-Name-Last: Bo Title: Behavioural aspects of China's P2P lending Abstract: In this paper, we argue that China's P2P lending is influenced by the behavioural factors of P2P platforms. This is because severe information asymmetry results in high uncertainty surrounding China's P2P lending industry. Specifically, we examine three behavioural aspects of P2P lending: lending sentiments, herding, and speculation. Using a sample of 918 P2P platforms from October 2015-September 2019, we document that positive P2P news release in the media (sentiments) encourages P2P lending; P2P platforms herd on their peers in making lending decisions; and P2P lending contains speculative elements and is driven by real estate bubbles. Moreover, we find that these behavioural effects are less profound if P2P platforms adopt a fund custody mechanism in which commercial banks provide custodian services for investor funds used for P2P lending. This result suggests that behavioural factors are more important in explaining P2P lending when information asymmetry is more severe. We obtain these results by controlling for other usual factors that can explain P2P lending, including characteristics of P2P platforms, macroeconomic variables, and other variables reflecting features of P2P operating environment. Our results suggest that regulators should monitor risk management of P2P platforms and reduce asymmetric information faced by participants in China's P2P lending market. Journal: The European Journal of Finance Pages: 30-45 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2021.1880459 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1880459 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:30-45 Template-Type: ReDIF-Article 1.0 Author-Name: Mustafa Caglayan Author-X-Name-First: Mustafa Author-X-Name-Last: Caglayan Author-Name: Oleksandr Talavera Author-X-Name-First: Oleksandr Author-X-Name-Last: Talavera Author-Name: Lin Xiong Author-X-Name-First: Lin Author-X-Name-Last: Xiong Author-Name: Jing Zhang Author-X-Name-First: Jing Author-X-Name-Last: Zhang Title: What does not kill us makes us stronger: the story of repetitive consumer loan applications Abstract: We investigate borrower and lender behaviours when the borrower has experienced a sequence of failed loan applications. Our analysis is based on half a million observations from an established peer-to-peer (P2P) loan platform in China from 2010 to 2018. We find that borrowers who have better credit scores and who accept to pay higher interest rates are likely to reapply for funds after experiencing an earlier failed attempt. However, women and applicants with more education are discouraged from re-applying compared to their male or less-educated counterparts, respectively. On the funding supply side, lenders strive to fund safe borrowers who have high credit ratings and high income, though not those who offer a high interest rate. Journal: The European Journal of Finance Pages: 46-65 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2020.1793792 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1793792 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:46-65 Template-Type: ReDIF-Article 1.0 Author-Name: Désiré Kanga Author-X-Name-First: Désiré Author-X-Name-Last: Kanga Author-Name: Christine Oughton Author-X-Name-First: Christine Author-X-Name-Last: Oughton Author-Name: Laurence Harris Author-X-Name-First: Laurence Author-X-Name-Last: Harris Author-Name: Victor Murinde Author-X-Name-First: Victor Author-X-Name-Last: Murinde Title: The diffusion of fintech, financial inclusion and income per capita Abstract: Advances in information and communication technology (ICT) have provided a platform for the introduction and diffusion of a range of financial technologies that have transformed the financial sector. This study analyses the diffusion of financial technology (fintech) and its interaction with financial inclusion and living standards (GDP per capita). We consider the determinants and effects of technology diffusion in financial services and identify two possible transmission mechanisms from the financial sector to GDP per capita – a fintech diffusion channel and a financial inclusion channel. We specify the interactions between these two channels and their relationship with income per capita. Our empirical analysis focuses on the diffusion of two enabling fintech innovations: ATMs and associated digital networks; and mobile phones and payments systems. The relationships between fintech diffusion, financial inclusion and GDP per capita are estimated using a panel data set for up to 137 countries over the period 1991–2015 using both cross section and panel techniques, including an error correction model that distinguishes short- and long-run effects. A key finding is that fintech diffusion and financial inclusion have long-run effects on GDP per capita over and above their short-run impact and the effects of investment in fixed and human capital. Journal: The European Journal of Finance Pages: 108-136 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2021.1945646 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1945646 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:108-136 Template-Type: ReDIF-Article 1.0 Author-Name: Lihui Tian Author-X-Name-First: Lihui Author-X-Name-Last: Tian Author-Name: Gerhard Kling Author-X-Name-First: Gerhard Author-X-Name-Last: Kling Title: Financial inclusion and financial technology: finance for everyone? Journal: The European Journal of Finance Pages: 1-2 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2021.1981418 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1981418 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:1-2 Template-Type: ReDIF-Article 1.0 Author-Name: Gerhard Kling Author-X-Name-First: Gerhard Author-X-Name-Last: Kling Author-Name: Vanesa Pesqué-Cela Author-X-Name-First: Vanesa Author-X-Name-Last: Pesqué-Cela Author-Name: Lihui Tian Author-X-Name-First: Lihui Author-X-Name-Last: Tian Author-Name: Deming Luo Author-X-Name-First: Deming Author-X-Name-Last: Luo Title: A theory of financial inclusion and income inequality Abstract: We develop a theory linking financial inclusion, defined as access to formal loans and financial assets, to income inequality. Initial inequality of households is modeled by a random variable determining initial endowments. These initial endowments can be used to invest instantaneously in human capital and financial assets. Human capital translates into income based on a strictly concave production function, suggesting optimal levels of investment. Financial assets earn yields which do not depend on the amount invested by individuals. Theoretical predictions are tested using the China Household Finance Survey (CHFS) for 2011 and 2013. Initial conditions modeled by a random variable are replaced by an actual distribution of income or assets to derive theoretical predictions regarding the proportion of the population that might benefit from financial inclusion. Financial inclusion does mitigate under-investment in education – but formal loans do not contribute. Income inequality worsens if households rely on formal or informal loans, whereas access to bank accounts improves households' prospects in the future income distribution. However, households below the 40th percentile of household income do benefit from informal loans. Journal: The European Journal of Finance Pages: 137-157 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2020.1792960 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1792960 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:137-157 Template-Type: ReDIF-Article 1.0 Author-Name: Sheri Markose Author-X-Name-First: Sheri Author-X-Name-Last: Markose Author-Name: Thankom Arun Author-X-Name-First: Thankom Author-X-Name-Last: Arun Author-Name: Peterson Ozili Author-X-Name-First: Peterson Author-X-Name-Last: Ozili Title: Financial inclusion, at what cost? : Quantification of economic viability of a supply side roll out Abstract: The paper focuses on supply side funding gaps inherent to financial inclusion schemes that threaten their efficacy and sustainability. We model the double bind problem that providers of banking services for the poor face as they struggle to achieve economies of scale to drive down average fixed financial infrastructure costs, while average account balances are low due to insufficient income. This model is applied to the Prime Minister Jan-Dhan Yojna (PMJDY) financial inclusion scheme in India, that was started in 2014. An innovative approach based on cross sectional bank level data from 2014 till 2017 is used to quantify the incentives and costs involved in targeting unbanked households. This gives a monetary estimate of the economic shortfalls or surpluses for participating banks, measured as bank balances relative to outlay costs and subsidies per PMJDY beneficiary. A lack of economic viability of PMJDY accounts is found in the majority of Indian public sector banks, a matter which is problematic in view of their extant financial fragility. We provide evidence for cross subsidization of rural bank accounts by urban accounts. We use fixed effects panel methods to determine what cost public sector banks bear and also quantify the extent to which account ineffectiveness is ameliorated by exogenous factors, primarily the tie up of PMJDY accounts with bio-metric Aadhar cards and electronic direct benefit transfer of G2P payments. Journal: The European Journal of Finance Pages: 3-29 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2020.1821740 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1821740 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:3-29 Template-Type: ReDIF-Article 1.0 Author-Name: Ayse Demir Author-X-Name-First: Ayse Author-X-Name-Last: Demir Author-Name: Vanesa Pesqué-Cela Author-X-Name-First: Vanesa Author-X-Name-Last: Pesqué-Cela Author-Name: Yener Altunbas Author-X-Name-First: Yener Author-X-Name-Last: Altunbas Author-Name: Victor Murinde Author-X-Name-First: Victor Author-X-Name-Last: Murinde Title: Fintech, financial inclusion and income inequality: a quantile regression approach Abstract: Although theory suggests that financial market imperfections – mainly information asymmetries, market segmentation and transaction costs – prevent poor people from escaping poverty by limiting their access to formal financial services, new financial technologies (FinTech) are seen as key enablers of financial inclusion. Indeed, the UN 2030 Agenda for Sustainable Development (UN-2030-ASD) and the G20 High-Level Principles for Digital Financial Inclusion (G20-HLP-DFI) highlight the importance of harnessing the potential of FinTech to reduce financial exclusion and income inequality. This paper investigates the interrelationship between FinTech, financial inclusion and income inequality for a panel of 140 countries using the Global Findex waves of survey data for 2011, 2014 and 2017. We posit that FinTech affects inequality directly and indirectly through financial inclusion. We invoke quantile regression analysis to investigate whether such effects differ across countries with different levels of income inequality. We uncover new evidence that financial inclusion is a key channel through which FinTech reduces income inequality. We also find that while financial inclusion significantly reduces inequality at all quantiles of the inequality distribution, these effects are primarily associated with higher-income countries. Overall, our results support the aspirations of the UN-2030-ASD and G20-HLP-DFI.Highlights Harnessing the potential of FinTech to reduce financial exclusion and income inequality has been proposed by the UN and G20.We posit that FinTech affects income inequality directly and indirectly through financial inclusion.We invoke quantile regression analysis to investigate whether the effects of FinTech differ across countries with different levels of income inequality.We find that financial inclusion is a key channel through which FinTech reduces income inequality, at all quantile levels, primarily among higher-income countries. Journal: The European Journal of Finance Pages: 86-107 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2020.1772335 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1772335 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:86-107 Template-Type: ReDIF-Article 1.0 Author-Name: Jeremy Eng-Tuck Cheah Author-X-Name-First: Jeremy Eng-Tuck Author-X-Name-Last: Cheah Author-Name: Di Luo Author-X-Name-First: Di Author-X-Name-Last: Luo Author-Name: Zhuang Zhang Author-X-Name-First: Zhuang Author-X-Name-Last: Zhang Author-Name: Ming-Chien Sung Author-X-Name-First: Ming-Chien Author-X-Name-Last: Sung Title: Predictability of bitcoin returns Abstract: This paper comprehensively examines the performance of a host of popular variables to predict Bitcoin returns. We show that time-series momentum, economic policy uncertainty, and financial uncertainty outperform other predictors in all in-sample, out-of-sample, and asset allocation tests. Bitcoin returns have no exposure to common stock and bond market factors but rather are affected by Bitcoin-specific and external uncertainty factors. Journal: The European Journal of Finance Pages: 66-85 Issue: 1 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2020.1835685 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1835685 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:66-85 Template-Type: ReDIF-Article 1.0 Author-Name: Jing Zhang Author-X-Name-First: Jing Author-X-Name-Last: Zhang Author-Name: Wei Zhang Author-X-Name-First: Wei Author-X-Name-Last: Zhang Author-Name: Youwei Li Author-X-Name-First: Youwei Author-X-Name-Last: Li Author-Name: Xu Feng Author-X-Name-First: Xu Author-X-Name-Last: Feng Title: The role of hedge funds in the asset pricing: evidence from China Abstract: We document that hedge funds nurture mispricing in the Chinese financial market. We examine the relationship between hedge fund holdings and the degree of mispricing, assuming that hedge funds’ stock holdings are mainly for arbitrage and not for hedging. We also examine this relationship with and without short-selling restrictions. Hedge funds intentionally hold overvalued stocks. Their trades, which generate an abnormal return of 1.78% per month, also impede the dissipation of stock mispricing. Furthermore, we find that trend-chasing may explain why hedge funds prefer to hold overvalued stocks. This research provides a new perspectives on the information content and potential investment value of hedge fund holdings in emerging markets. Journal: The European Journal of Finance Pages: 219-243 Issue: 2 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2021.1929373 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1929373 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:2:p:219-243 Template-Type: ReDIF-Article 1.0 Author-Name: Marco Cucculelli Author-X-Name-First: Marco Author-X-Name-Last: Cucculelli Author-Name: Martino Recanatini Author-X-Name-First: Martino Author-X-Name-Last: Recanatini Title: Distributed Ledger technology systems in securities post-trading services. Evidence from European global systemic banks Abstract: Building on the fast developing – yet not consolidated – literature on blockchain and the financial system, this paper aims to investigate how Distributed Ledger Technologies (DLTs) may affect the banking sector performance by influencing the efficiency of the securities post-trading process. Three different scenarios have been developed and used as a framework to assess the impact of the adoption of blockchain technologies on the cost reduction in a sample of 12 Global Systemic Banks in Europe. By using DLT systems, the expected savings in the post-trading processes are sizable and mainly concentrated in IT expenditures and wages associated with core post-trade functions. Moreover, DLT systems emerge as a catalyst for innovation in post-trade process, as they improve timing window and data quality. Journal: The European Journal of Finance Pages: 195-218 Issue: 2 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2021.1921002 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1921002 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:2:p:195-218 Template-Type: ReDIF-Article 1.0 Author-Name: Thomas David Author-X-Name-First: Thomas Author-X-Name-Last: David Title: Customer risk and the choice between cash and bank credit lines Abstract: I use a matched buyer–supplier sample of U.S. industrial firms to investigate the impact of customer risk on suppliers' choice between cash and credit lines. I show that customer risk decreases the reliance on bank-managed liquidity insurance relative to cash. I also find evidence indicating that firms actively shy away from credit lines in response to customer risk to maximize the future availability of their liquidity reserves. Consistently, my findings suggest that high-customer-risk firms are particularly more likely to be subject to (stricter) borrowing base provisions, which tie the value of a credit line to that of some eligible collateral (notably accounts receivable). I also find that steeper credit line spreads alone cannot explain firms' response to customer risk. These results highlight how customer–supplier relationships affect the precautionary demand for liquidity, and significantly shape corporate financial decisions. Journal: The European Journal of Finance Pages: 159-194 Issue: 2 Volume: 28 Year: 2022 Month: 01 X-DOI: 10.1080/1351847X.2021.1913429 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1913429 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:2:p:159-194 Template-Type: ReDIF-Article 1.0 Author-Name: Mark C. Hutchinson Author-X-Name-First: Mark C. Author-X-Name-Last: Hutchinson Author-Name: Quang Minh Nhi Nguyen Author-X-Name-First: Quang Minh Nhi Author-X-Name-Last: Nguyen Author-Name: Mark Mulcahy Author-X-Name-First: Mark Author-X-Name-Last: Mulcahy Title: Private hedge fund firms' incentives and performance: Evidence from audited filings Abstract: Using an entirely new dataset of audited filings from firms that manage hedge funds, this study examines whether the hedge fund compensation contract aligns managerial incentives and investor interests. Our novel dataset allows us to distinguish between firms focused exclusively on hedge fund management and diversified firms offering products in addition to hedge funds. Our results for compensation data of hedge fund only management firms confirm that compensation increases as assets under management increase, despite increased costs and performance diseconomies of scale. Hedge funds managed by diversified firms have significantly lower performance. A relatively small proportion of the compensation from these firms is generated from hedge funds. The results are consistent with diversified hedge fund firms having weaker alignment between managerial incentives and investment performance. Journal: The European Journal of Finance Pages: 291-306 Issue: 3 Volume: 28 Year: 2022 Month: 02 X-DOI: 10.1080/1351847X.2021.1954966 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1954966 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:3:p:291-306 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Abendschein Author-X-Name-First: Michael Author-X-Name-Last: Abendschein Author-Name: Peter Grundke Author-X-Name-First: Peter Author-X-Name-Last: Grundke Title: On the ranking consistency of systemic risk measures: empirical evidence* Abstract: We empirically analyze the extent to which popular systemic risk measures (SRMs) yield comparable results regarding the systemic importance of a financial institution. More important, we also examine determinants of the degree of consistency in the classification according to the various SRMs. In general, rank correlations tend to be more associated with macroeconomic variables such as the unemployment rate than with bank-individual variables. Our results also reveal that rank correlations are particularly sensitive to the overall market conditions. During more volatile market phases, rank correlations are slightly larger than during less volatile phases. Furthermore, their association with bank-individual and macroeconomic variables changes with the market conditions. The less volatile the market, the more relevant the bank-individual variables become in explaining the rank correlations. Contrary, during less volatile market phases, the relevance of macroeconomic variables decreases. Overall, the analyses reveal a difficulty in detecting specific explanatory factors for the consistency in systemic risk rankings across settings. Journal: The European Journal of Finance Pages: 261-290 Issue: 3 Volume: 28 Year: 2022 Month: 02 X-DOI: 10.1080/1351847X.2021.1946413 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1946413 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:3:p:261-290 Template-Type: ReDIF-Article 1.0 Author-Name: Wouter Vangeel Author-X-Name-First: Wouter Author-X-Name-Last: Vangeel Author-Name: Laurens Defau Author-X-Name-First: Laurens Author-X-Name-Last: Defau Author-Name: Lieven De Moor Author-X-Name-First: Lieven Author-X-Name-Last: De Moor Title: The influence of a mortgage interest deduction on house prices: evidence across tax systems in Europe Abstract: In a large majority of European countries, a tax relief on mortgage interest payments is granted in order to enhance homeownership. Although there is a common belief stating that a mortgage interest deduction (MID) is capitalized into house prices, empirical evidence remains scarce. Therefore, our paper is about the influence of this fiscal relief on house prices. The scope of our analysis includes fourteen European countries, for which an unbalanced panel dataset over the period 1990–2015 is constructed. All our regression results support the hypothesis that a MID has had a significant price-increasing effect in the selected countries over the observed period. However, this result does not hold for a MID in the countries where a dual income tax (DIT) is applied, suggesting a significant difference between tax systems. These results are relevant for governments because there has been much debate about whether and to what extent countries should limit its MID over the last decades. Journal: The European Journal of Finance Pages: 245-260 Issue: 3 Volume: 28 Year: 2022 Month: 02 X-DOI: 10.1080/1351847X.2021.1941173 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1941173 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:3:p:245-260 Template-Type: ReDIF-Article 1.0 Author-Name: Zhiyang Lin Author-X-Name-First: Zhiyang Author-X-Name-Last: Lin Author-Name: Danglun Luo Author-X-Name-First: Danglun Author-X-Name-Last: Luo Author-Name: Feida (Frank) Zhang Author-X-Name-First: Feida (Frank) Author-X-Name-Last: Zhang Title: Regional GDP Distortion and Analyst Forecast Accuracy: Evidence from China Abstract: The reliability of China’s GDP data has been questioned for a long time. Prior studies have discussed the causes of GDP distortion in China, but the evidence on the economic consequences is scant. This paper examines the economic consequences of regional GDP distortion from the perspective of analyst forecasts. We find that regional GDP distortion leads to lower analyst forecast accuracy, and this result is robust to potential endogeneity. Further investigations show that analysts with information advantages have the ability to resist the distorted GDP data and issue accurate forecasts. Political pressure is another factor leading to inaccurate analyst forecasts. Our paper contributes to the literature by highlighting the importance of the reliability of GDP figures as a determinant of analyst forecast accuracy. Journal: The European Journal of Finance Pages: 437-460 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2021.1918203 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1918203 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:437-460 Template-Type: ReDIF-Article 1.0 Author-Name: Qizhi Tao Author-X-Name-First: Qizhi Author-X-Name-Last: Tao Author-Name: Ming Liu Author-X-Name-First: Ming Author-X-Name-Last: Liu Author-Name: Shiman Hu Author-X-Name-First: Shiman Author-X-Name-Last: Hu Author-Name: Yun Zhang Author-X-Name-First: Yun Author-X-Name-Last: Zhang Title: Is a promise a promise? Analyzing performance commitment in acquisitions and target firm performance Abstract: Using the acquisition data in China from 2011 to 2019, we show that acquiring firms are more likely to provide target firms with performance commitment (PC) contracts when they (1) use stocks to pay acquisitions, (2) have low profits, (3) make cross-industry and domestic acquisitions, (4) are young, small, non-stated-owned enterprises and not related parties with target firms, and (5) deal value is high. Although PC increases the takeover premia, acquirers with PC experience high cumulative abnormal stock returns (CARs) during the announcement period. Double PC contracts drive acquirers' CARs even higher. Although target firms with double PC have better profitability than those with single PC during the commitment period, their profit starts to decrease sharply once the commitment period expires, and those with double PC deteriorate even further. Finally, we find that target firms with PC engage in earnings management during the commitment period to meet their promised performance. Overall, we do not support previous studies because PCs engender earnings management and impair the values of acquirers in the post-commitment period. Journal: The European Journal of Finance Pages: 487-513 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2020.1871050 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1871050 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:487-513 Template-Type: ReDIF-Article 1.0 Author-Name: Pei Liu Author-X-Name-First: Pei Author-X-Name-Last: Liu Author-Name: Yuchao Peng Author-X-Name-First: Yuchao Author-X-Name-Last: Peng Author-Name: Yukun Shi Author-X-Name-First: Yukun Author-X-Name-Last: Shi Author-Name: Junhong Yang Author-X-Name-First: Junhong Author-X-Name-Last: Yang Title: Financial structures, political risk and economic growth Abstract: Using a panel of 113 countries over the period from 1990 to 2013, this paper provides new empirical evidence to the intensive debate of whether financial structure is relevant for economic growth. Specifically, we evaluate the role of political risk, development stage and their interactions with the structure of the financial system. We find that on average a more market-based financial system is associated with a higher level of economic growth. This impact varies with different levels of political risk and different stages of economic development. Specifically, the comparative development of equity markets compared with banks appear to promote more economic growth in countries with lower political risk and at a better stage of economic development. Moreover, banks are more important to economic growth in over-market-based financial systems, whilst equity markets are more sensitive to economic growth in over-bank-based financial systems. Our paper provides new insights into the real effects of the mixture of banks and markets on the economy. Journal: The European Journal of Finance Pages: 356-376 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2021.1879888 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1879888 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:356-376 Template-Type: ReDIF-Article 1.0 Author-Name: Wei Cao Author-X-Name-First: Wei Author-X-Name-Last: Cao Author-Name: Chunhua Chen Author-X-Name-First: Chunhua Author-X-Name-Last: Chen Author-Name: Dequan Jiang Author-X-Name-First: Dequan Author-X-Name-Last: Jiang Author-Name: Weiping Li Author-X-Name-First: Weiping Author-X-Name-Last: Li Author-Name: Ying Zhang Author-X-Name-First: Ying Author-X-Name-Last: Zhang Title: Industrial policy and non-financial corporations’ financialization: evidence from China Abstract: Using the Chinese listed firms from 2007 to 2015 as a sample, we examine how industrial policy affects the financialization of non-financial corporations (NFCs). We find that industrial policy reduces the level of the financialization of NFCs. Further evidence shows that industrial policy lowers firms’ motivation to ease financial constraints and mitigates operating risks. This effect becomes more substantial in the regions with a higher level of marketization and stronger government financial capacity. Our findings have important policy implications for the emerging countries to promote real economic growth and curb the ‘shifting from the real economy to the virtual economy'. Journal: The European Journal of Finance Pages: 397-415 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2021.1918204 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1918204 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:397-415 Template-Type: ReDIF-Article 1.0 Author-Name: Linyi Zhang Author-X-Name-First: Linyi Author-X-Name-Last: Zhang Author-Name: Honghui Zhang Author-X-Name-First: Honghui Author-X-Name-Last: Zhang Author-Name: Haiyan Jiang Author-X-Name-First: Haiyan Author-X-Name-Last: Jiang Title: Tournament incentives, internal promotion and corporate social responsibility: evidence from China Abstract: The study investigates the effect of tournament incentives on corporate social responsibility (CSR). Using data from Chinese listed firms during the period from 2010 to 2019, we find that tournament incentives can encourage corporate executives to improve their CSR performance. The results also reveal that this positive association between tournament incentives and CSR is more pronounced in firms that have a tradition of recruiting a successor CEO from within the organization. However, in companies with CEOs recruited internally, shareholder monitoring can restrain the tournament effect on CSR. In addition, we also find that tournament incentives are more pronounced in State Owned Enterprises. The results remain robust to a batch of endogeneity tests to address potential self-selection bias and reverse causality between tournament incentives and CSR. Journal: The European Journal of Finance Pages: 416-436 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2021.1937258 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1937258 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:416-436 Template-Type: ReDIF-Article 1.0 Author-Name: Marco Trombetta Author-X-Name-First: Marco Author-X-Name-Last: Trombetta Title: Financial reporting and macroeconomics Abstract: Financial Reporting (FR) is a fundamental source of information for the correct functioning of markets. Traditionally, FR is associated with the communication activity done by firms to inform stakeholders and the general public about their financial performance. In the first and second part of this essay, I revisit some of the channels through which firm-level FR affects the macroeconomic environment. However, companies are not the only economic actors that engage in an FR activity. Local and national governments produce financial reports as well. In the third part of this essay, I review how we can use the theoretical framework developed for firm-level FR to study government-level FR. I conclude by highlighting the importance of incentives as the fundamental mediator of the relationship between FR and Macroeconomics. I remark how they shape different FR environments during crisis and non-crisis periods and the importance of taking these differences into account while regulating and supervising markets. Journal: The European Journal of Finance Pages: 314-325 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2021.1877166 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1877166 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:314-325 Template-Type: ReDIF-Article 1.0 Author-Name: Yue Cao Author-X-Name-First: Yue Author-X-Name-Last: Cao Author-Name: Yizhe Dong Author-X-Name-First: Yizhe Author-X-Name-Last: Dong Author-Name: Tianxiao Guo Author-X-Name-First: Tianxiao Author-X-Name-Last: Guo Author-Name: Diandian Ma Author-X-Name-First: Diandian Author-X-Name-Last: Ma Title: Short-sale deregulation and corporate tax aggressiveness: evidence from the Chinese market Abstract: We study whether short selling affects corporate tax aggressiveness. Exploiting staggered short-sale deregulation in the Chinese stock market as a source of variation in market pressure and monitoring, our difference-in-differences estimates show that the introduction of a short-selling scheme significantly discourages pilot firms from engaging in aggressive tax avoidance, in contrast to the findings by Luo, Ni, and Tian (2020. “Short Selling and Corporate Tax Avoidance: Insights from a Financial Constraint View.” Pacific–Basin Finance Journal 61: 101323.). We also find that the negative effect of short selling on tax aggressiveness is more pronounced for firms that have high advertising costs, high institutional holdings, and CEO duality, and are located in regions with weak tax law enforcement. We further reveal that short selling has an indirect effect on tax aggressiveness through the additional external pressure exerted by auditors, media, and financial analysts, and lastly, challenge the main analysis by Luo, Ni, and Tian (2020). Our evidence highlights the monitoring and disciplinary roles that short sellers play in determining the level of corporate tax aggressiveness. Journal: The European Journal of Finance Pages: 326-355 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2021.1958890 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1958890 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:326-355 Template-Type: ReDIF-Article 1.0 Author-Name: Yizhe Dong Author-X-Name-First: Yizhe Author-X-Name-Last: Dong Author-Name: Wenxuan Hou Author-X-Name-First: Wenxuan Author-X-Name-Last: Hou Author-Name: Binxuan Lin Author-X-Name-First: Binxuan Author-X-Name-Last: Lin Author-Name: Ting Zhang Author-X-Name-First: Ting Author-X-Name-Last: Zhang Title: Recent advances and future directions in macro-finance: macroeconomic conditions and corporate decisions Abstract: A decade after the 2007–2009 financial crisis, the covid-19 pandemic causes disruptive economic conditions and its uncertain nature makes the formulation of macroeconomic policy response challenging. Meanwhile, extreme weather and natural disasters linked to climate change become more frequent and adversely affect the economy. These challenges highlight the importance of better understanding the effects of macroeconomic conditions on corporate decisions. This article reviews the related macro-finance literature and introduces articles included in this special issue on this theme. In the end, we suggest possible future research directions. Journal: The European Journal of Finance Pages: 307-313 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2021.2022509 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2022509 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:307-313 Template-Type: ReDIF-Article 1.0 Author-Name: Ming Fang Author-X-Name-First: Ming Author-X-Name-Last: Fang Author-Name: Iftekhar Hasan Author-X-Name-First: Iftekhar Author-X-Name-Last: Hasan Author-Name: Zenu Sharma Author-X-Name-First: Zenu Author-X-Name-Last: Sharma Author-Name: An Yan Author-X-Name-First: An Author-X-Name-Last: Yan Title: Firm social networks, trust, and security issuances Abstract: We observe that public firms are more likely to issue seasoned stocks rather than bonds when theirs boards are more socially-connected. These connected issuers experience better announcement-period stock returns and attract more institutional investors. This social-connection effect is stronger for firms with severe information asymmetry, higher risk of being undersubscribed, and more visible to investors. Our conjecture is this social-network effect is driven by trust in issuing firms. Given stocks are more sensitive to trust, these trusted firms are more likely to issue stocks than bonds. Trustworthiness plays an important role in firms’ security issuances in capital markets. Journal: The European Journal of Finance Pages: 514-549 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2020.1803095 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1803095 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:514-549 Template-Type: ReDIF-Article 1.0 Author-Name: Di Gao Author-X-Name-First: Di Author-X-Name-Last: Gao Author-Name: Jihui Guo Author-X-Name-First: Jihui Author-X-Name-Last: Guo Author-Name: Yu Shen Author-X-Name-First: Yu Author-X-Name-Last: Shen Author-Name: Xian Xu Author-X-Name-First: Xian Author-X-Name-Last: Xu Title: CEOs’ supply chain experience and firm innovation: evidence from China Abstract: Using manually collected data of Chinese listed companies, this study investigates the effect of CEOs’ supply chain experience on corporate innovation. We find that such experience is positively associated with corporate innovation inputs, outputs, and innovative efficiency. The main findings withstand checks for endogeneity, self-selection bias, and robustness tests. Additionally, CEOs’ supply chain experience improves corporate innovation performance through providing information more efficiently, reducing the financial constraints faced by firms, and improving the effectiveness of corporate governance. Further analyses indicate that the effect this experience on innovation varies in different environments. Overall, our results suggest that CEOs’ supply chain experience, as an essential component of social ties, contributes to corporate innovation. Journal: The European Journal of Finance Pages: 461-486 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2020.1856164 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1856164 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:461-486 Template-Type: ReDIF-Article 1.0 Author-Name: Sicen Chen Author-X-Name-First: Sicen Author-X-Name-Last: Chen Author-Name: Shuping Lin Author-X-Name-First: Shuping Author-X-Name-Last: Lin Author-Name: Jinli Xiao Author-X-Name-First: Jinli Author-X-Name-Last: Xiao Author-Name: Pengdong Zhang Author-X-Name-First: Pengdong Author-X-Name-Last: Zhang Title: Do managers learn from stock prices in emerging markets? Evidence from China Abstract: In this study, we examine whether managers learn from stock prices when making investment decisions in the context of emerging markets. Adopting the Shanghai-Hong Kong Stock Connect scheme launched by the Chinese government as a quasi-natural experiment, we determine that openness to global investors improves the investment efficiency of firms included in the scheme. We provide supporting evidence of managers’ learning behavior proving that the effect is strengthened (weakened) for stocks whose prices convey more (less) incremental information after the scheme launched. Furthermore, we observe a more pronounced effect in firms eager to obtain the information of technology frontier and product market from foreign investors. Alternative explanations, like improving corporate governance, mitigating financial constraints, increasing executive incentives, and attracting analyst coverage are empirically excluded. Overall, this study contributes to the literature by documenting whether the information role of stock prices succeeds in improving firms’ investment efficiency in emerging markets. Journal: The European Journal of Finance Pages: 377-396 Issue: 4-5 Volume: 28 Year: 2022 Month: 03 X-DOI: 10.1080/1351847X.2020.1850500 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1850500 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:4-5:p:377-396 Template-Type: ReDIF-Article 1.0 Author-Name: Oleg Badunenko Author-X-Name-First: Oleg Author-X-Name-Last: Badunenko Author-Name: Aristeidis Dadoukis Author-X-Name-First: Aristeidis Author-X-Name-Last: Dadoukis Author-Name: Giulia Fusi Author-X-Name-First: Giulia Author-X-Name-Last: Fusi Author-Name: Richard Simper Author-X-Name-First: Richard Author-X-Name-Last: Simper Title: The impact of efficiency on asset quality in banking Abstract: We investigate the impact of banks’ ability to minimise costs on asset quality, by assessing the temporal relationship between these variables in a sample of Italian banks over the period 2006–2015. We offer new insights into the channels through which bank efficiency affects non-performing loans by disentangling the short-term component of cost efficiency from its long-term component. We show that non-performing loans afflicting Italian banks can be explained by both efficiency components. A decrease in short-term cost efficiency precedes a worsening in banks’ asset quality, implying that regulators should consider adopting short-term efficiency as an early warning indicator of a deterioration in asset quality. We also present evidence of a trade-off between long-term efficiency and bank non-performing loans, which suggests that the removal of exogenous hindrances that prevent banks from allocating optimal levels of resources to the management of their loan portfolio should be a main policymakers’ objective. Journal: The European Journal of Finance Pages: 596-620 Issue: 6 Volume: 28 Year: 2022 Month: 04 X-DOI: 10.1080/1351847X.2021.1946117 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1946117 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:6:p:596-620 Template-Type: ReDIF-Article 1.0 Author-Name: Honghai Yu Author-X-Name-First: Honghai Author-X-Name-Last: Yu Author-Name: Xianfeng Hao Author-X-Name-First: Xianfeng Author-X-Name-Last: Hao Author-Name: Yudong Wang Author-X-Name-First: Yudong Author-X-Name-Last: Wang Title: Good volatility, bad volatility, and time series return predictability Abstract: We propose a least squares estimator weighted by a combination of lagged realized semivariances related to positive and negative returns (WLS-CRS) and use univariate models alone and in combination to reveal significant return predictability. For an investor with a mean-variance preference who allocates a portfolio based on an equal-weighted combination of WLS-CRS model forecasts, the annual certainty equivalent return is 242.8 basis points higher than that received by an investor whose portfolio is allocated based on historical average forecasts. In forecasting stock returns, WLS-CRS estimates outperform the popular ordinary least squares estimates in both statistical and economic evaluation frameworks. WLS-CRS also outperforms estimators based on least squares weighted by lagged realized volatility. We further demonstrate the dominant role of negative return semivariance in improved forecasting performance. Our main findings hold through several robustness checks, including alternative validation samples, different risk aversion coefficients, and various forecast combinations. Journal: The European Journal of Finance Pages: 571-595 Issue: 6 Volume: 28 Year: 2022 Month: 04 X-DOI: 10.1080/1351847X.2021.1946119 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1946119 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:6:p:571-595 Template-Type: ReDIF-Article 1.0 Author-Name: Vineet Upreti Author-X-Name-First: Vineet Author-X-Name-Last: Upreti Author-Name: Mike Adams Author-X-Name-First: Mike Author-X-Name-Last: Adams Author-Name: Yihui Jia Author-X-Name-First: Yihui Author-X-Name-Last: Jia Title: Risk management and the cost of equity: evidence from the United Kingdom’s non-life insurance market Abstract: We investigate the effect of risk management (reinsurance) on the corporate cost of equity using panel data drawn from the United Kingdom’s (UK) non-life insurance industry. Our results show that use of reinsurance lowers the cost of equity but that the relation is non-linear. We find that the rate of reduction declines as the level of premiums ceded relative to total gross premiums written increases. We also find that the reinsurance-cost of equity relation is moderated by the risk of financial distress/bankruptcy. This moderating relation is robust to the use of three alternative measures of financial distress and bankruptcy risk. Journal: The European Journal of Finance Pages: 551-570 Issue: 6 Volume: 28 Year: 2022 Month: 04 X-DOI: 10.1080/1351847X.2021.1936588 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1936588 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:6:p:551-570 Template-Type: ReDIF-Article 1.0 Author-Name: Yuzhi Cai Author-X-Name-First: Yuzhi Author-X-Name-Last: Cai Title: Hawkes processes with hidden marks Abstract: We develop a novel Hawkes process (HP) model with hidden marks for financial event data, where the hidden marks are used to take account the effect of some extra random errors (ERE) caused by data collection mechanisms and some data cleaning procedures. We further propose a Bayesian method for parameter estimation. We use simulation studies and two data applications to evaluate the performance of the estimation method and the impact of ERE on the intensity of an underlying financial process and explain how to use the proposed model in practice. Our results show that the proposed estimation method works well, and they also confirm that when ERE cause information about the underlying process to be lost, the intensity function may be underestimated. We further find that the proposed model performs better in the presence of ERE compared with the standard HP model. Journal: The European Journal of Finance Pages: 679-704 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2020.1820356 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1820356 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:679-704 Template-Type: ReDIF-Article 1.0 Author-Name: Fabrizio Ferriani Author-X-Name-First: Fabrizio Author-X-Name-Last: Ferriani Author-Name: Patrick Zoi Author-X-Name-First: Patrick Author-X-Name-Last: Zoi Title: The dynamics of price jumps in the stock market: an empirical study on Europe and U.S. Abstract: We study the bivariate jump process involving the S&P 500 and the Euro Stoxx 50, with jumps extracted from high-frequency data. In our analysis, based on Hawkes processes, we find no evidence of contagion across different markets. Nevertheless, we observe significant jump clustering effects though they are limited to intraday time scales. Moreover, we notice that the relative contribution of jumps to the total price variance is larger during tranquil market conditions rather than in periods of stress, providing empirical evidence of this result during the subprime mortgage crisis and the European sovereign debt crisis. Importantly, our results are robust under different jump detection methods. Journal: The European Journal of Finance Pages: 718-742 Issue: 7 Volume: 28 Year: 2022 Month: 5 X-DOI: 10.1080/1351847X.2020.1740288 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1740288 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:718-742 Template-Type: ReDIF-Article 1.0 Author-Name: Alan G. Hawkes Author-X-Name-First: Alan G. Author-X-Name-Last: Hawkes Title: Hawkes jump-diffusions and finance: a brief history and review Abstract: A brief history of diffusions in Finance is presented, followed by an even briefer discussion of jump-diffusions that involve Poisson or Lévy jumps. The main purpose of the paper is then to discuss applications of self-exciting and mutually-exciting Hawkes point processes. After an outline of the basic properties of this class of processes, there is a review of some recent articles that show how incorporating them as contagious jumps into Financial diffusions may improve model fit, forecasting, pricing, hedging and portfolio management. Journal: The European Journal of Finance Pages: 627-641 Issue: 7 Volume: 28 Year: 2022 Month: 5 X-DOI: 10.1080/1351847X.2020.1755712 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1755712 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:627-641 Template-Type: ReDIF-Article 1.0 Author-Name: Xing Han Author-X-Name-First: Xing Author-X-Name-Last: Han Author-Name: Youwei Li Author-X-Name-First: Youwei Author-X-Name-Last: Li Author-Name: Olena Onishchenko Author-X-Name-First: Olena Author-X-Name-Last: Onishchenko Title: Shunned stocks and market states Abstract: Hong and Kacperczyk (2009, The price of sin: The effects of social norms on markets. Journal of Financial Economics 93(1), 15–36) document that ‘sin stocks’ (alcohol, tobacco, and gambling) earn relatively high returns on a risk-adjusted basis. We revisit their original study with an updated sample. Contrary to the stylized facts that prominent anomalies attenuate out-of-sample or in the post-publication period (McLean and Pontiff 2016, Does academic research destroy stock return predictability? The Journal of Finance 71, 5–32), we document that the superior performance of sin stocks has persisted over the most recent decade (2009–2018). This is consistent with the increased popularity of socially responsible investing over recent decades, pushing more norm-constrained investors away from sin stocks. Further analyses suggest that sin stocks outperform in low-liquidity states and in high-uncertainty states and are recession-proof. Overall, our work supports the shunned stock hypothesis and indicates the price of sin stocks is alive and well. Journal: The European Journal of Finance Pages: 705-717 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2021.2015699 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2015699 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:705-717 Template-Type: ReDIF-Article 1.0 Author-Name: Steve Y. Yang Author-X-Name-First: Steve Y. Author-X-Name-Last: Yang Author-Name: Yunfeng Liu Author-X-Name-First: Yunfeng Author-X-Name-Last: Liu Author-Name: Yangyang Yu Author-X-Name-First: Yangyang Author-X-Name-Last: Yu Author-Name: Sheung Yin Kevin Mo Author-X-Name-First: Sheung Yin Kevin Author-X-Name-Last: Mo Title: Energy ETF return jump contagion: a multivariate Hawkes process approach Abstract: Compared with investing in individual stocks, ETF investment is capable of diversifying the non-systematic risk or exposure to broad market or industry sectors. The aim of this paper is to develop a jump contagion modeling framework to understand the contagion effect of market jump events of energy sector ETFs using multivariate Hawkes process modeling approach. Through analyzing intraday high-frequency market data, we find that negative index jumps lead index price discovery processes, and their influences disappear faster than the positive index jumps in both the S&P500 and the crude oil futures. And on average, the self contagion in negative jumps is stronger than the self contagion in the positive jumps across all ETF groups. However, the ETFs focused on the master limited partnership (MLP) segment show less negative self contagion and relatively stronger positive self contagion than the other energy ETFs. Overall, the influence of negative jumps on ETFs from both the equity index and the energy future index is stronger than that of the positive jumps. And the influence of the equity index (S&P500) jump on ETFs lasts longer than that of the crude oil futures index (CLC1). Journal: The European Journal of Finance Pages: 761-783 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2021.1903962 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1903962 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:761-783 Template-Type: ReDIF-Article 1.0 Author-Name: Michael Mark Author-X-Name-First: Michael Author-X-Name-Last: Mark Author-Name: Jan Sila Author-X-Name-First: Jan Author-X-Name-Last: Sila Author-Name: Thomas A. Weber Author-X-Name-First: Thomas A. Author-X-Name-Last: Weber Title: Quantifying endogeneity of cryptocurrency markets Abstract: We construct a ‘reflexivity’ index to measure the activity generated endogenously within a market for cryptocurrencies. For this purpose, we fit a univariate self-exciting Hawkes process with two classes of parametric kernels to high-frequency trading data. A parsimonious model of both endogenous and exogenous dynamics enables a direct comparison with exchanges for traditional asset classes, in terms of identified branching ratios. We also formulate a ‘Hawkes disorder problem,’ as generalization of the established Poisson disorder problem, and provide a simulation-based approach to determining an optimal observation horizon. Our analysis suggests that Bitcoin mid-price dynamics feature long-memory properties, well explained by the power-law kernel, at a level of criticality similar to fiat-currency markets. Journal: The European Journal of Finance Pages: 784-799 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2020.1791925 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1791925 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:784-799 Template-Type: ReDIF-Article 1.0 Author-Name: Alice Buccioli Author-X-Name-First: Alice Author-X-Name-Last: Buccioli Author-Name: Thomas Kokholm Author-X-Name-First: Thomas Author-X-Name-Last: Kokholm Title: Shock waves and golden shores: the asymmetric interaction between gold prices and the stock market Abstract: Gold is often considered a safe haven asset providing negative return correlation with the stock market in times of distress, while in more calm periods the correlation is close to zero. We study the dynamic inter-linkage of gold prices and the stock market. Specifically, we model the log-prices of gold and a stock index as jump-diffusive processes, with the jumps arriving with mutually exciting intensities. Hence, the occurrence of negative shocks to the stock index spill over into higher probabilities of positive shocks to the gold price and vice versa. For the empirical analysis, we consider daily prices on gold and the SPX index. Utilizing that the model's moment conditions are computed efficiently in closed form, we use the generalized method of moments to estimate the model parameters. We document the existence of cross-excitation between the stock index and gold prices, with the channel from the stock index to gold prices being the most pronounced. Moreover, we find that gold behaves as a safe haven asset for the stock index for around 20 days following a market crash. Finally, we study the power of the proposed model to predict future price jumps and benchmark the performance against more classical models. Journal: The European Journal of Finance Pages: 743-760 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2021.1897026 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1897026 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:743-760 Template-Type: ReDIF-Article 1.0 Author-Name: Antoine Fosset Author-X-Name-First: Antoine Author-X-Name-Last: Fosset Author-Name: Jean-Philippe Bouchaud Author-X-Name-First: Jean-Philippe Author-X-Name-Last: Bouchaud Author-Name: Michael Benzaquen Author-X-Name-First: Michael Author-X-Name-Last: Benzaquen Title: Non-parametric estimation of quadratic Hawkes processes for order book events Abstract: We propose an actionable calibration procedure for general Quadratic Hawkes models of order book events (market orders, limit orders, cancellations). One of the main features of such models is to encode not only the influence of past events on future events but also, crucially, the influence of past price changes on such events. We show that the empirically calibrated quadratic kernel is well described by a diagonal contribution (that captures past realised volatility), plus a rank-one ‘Zumbach’ contribution (that captures the effect of past trends). We find that the Zumbach kernel is a power-law of time, as are all other feedback kernels. As in many previous studies, the rate of truly exogenous events is found to be a small fraction of the total event rate. These two features suggest that the system is close to a critical point – in the sense that slightly stronger feedback kernels would lead to endogenous liquidity crises. Journal: The European Journal of Finance Pages: 663-678 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2021.1917441 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1917441 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:663-678 Template-Type: ReDIF-Article 1.0 Author-Name: Jing Chen Author-X-Name-First: Jing Author-X-Name-Last: Chen Author-Name: Nick Taylor Author-X-Name-First: Nick Author-X-Name-Last: Taylor Author-Name: Steve Yang Author-X-Name-First: Steve Author-X-Name-Last: Yang Author-Name: Qian Han Author-X-Name-First: Qian Author-X-Name-Last: Han Title: Hawkes processes in finance: market structure and impact Journal: The European Journal of Finance Pages: 621-626 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2022.2060755 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2060755 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:621-626 Template-Type: ReDIF-Article 1.0 Author-Name: Matthias Kirchner Author-X-Name-First: Matthias Author-X-Name-Last: Kirchner Author-Name: Silvan Vetter Author-X-Name-First: Silvan Author-X-Name-Last: Vetter Title: Hawkes model specification for limit order books Abstract: This paper discusses Hawkes modeling of order arrivals in limit order books. We model the flow of market orders, limit orders, and cancelations by a self- and crossexciting multitype marked Hawkes process with state-dependent baseline intensities. The marks carry the order sizes and the state of the book is summarized by the ‘limit-order-book imbalance’. We specify the model very carefully – with few a priori assumptions: we select the non-zero excitements (the ‘Hawkes skeleton’), the shape of the decay kernels, and the shape of the impact functions in a nonparametric manner. Furthermore, we show that our data exhibit perfect bid–ask symmetry. We observe that the imbalance of the order book explains the probability for a bid (ask) market order – given the occurrence of a market order – in a perfectly linear manner. Thus, we include a term involving the imbalance in the baseline intensity of the process. We calibrate the specified parametric model by maximum likelihood estimation and discuss the results. Finally, we apply the fitted model in order to estimate the conditional distribution of the next order type. This opens the door to order-type prediction. Journal: The European Journal of Finance Pages: 642-662 Issue: 7 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2020.1784974 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1784974 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:7:p:642-662 Template-Type: ReDIF-Article 1.0 Author-Name: Malika Chaudhuri Author-X-Name-First: Malika Author-X-Name-Last: Chaudhuri Author-Name: Ranadeb Chaudhuri Author-X-Name-First: Ranadeb Author-X-Name-Last: Chaudhuri Author-Name: Jay Janney Author-X-Name-First: Jay Author-X-Name-Last: Janney Author-Name: Mohinder Parkash Author-X-Name-First: Mohinder Author-X-Name-Last: Parkash Title: Things often get worse before they get better: using contest theory to explain the effect of informational risk around inclusion in S&P 500 on cost of capital Abstract: The link between cost of capital and information risk is one of the most fundamental and controversial issues in financial accounting. We need an exogenous shock to unequivocally tease out the link between information risk and cost of capital (CoC). In this study, we consider a firm’s listing with the S&P 500 index as the exogenous shock. Listing with the index is expected to bring the firm into the limelight, leading to increased scrutiny of the firm and its management performance by market participants and stock analysts. This may expose the firm to increased information risk, which may adversely affect its cost of capital in the short run. Empirical evidence in this study suggests firms that are added to the S&P 500 index exhibit higher cost of capital over the first year after inclusion compared to a carefully constructed matched sample of non-S&P 500 stocks. Results also indicate that the volume of information released and precision of information once a firm is listed with the index significantly impact its cost of capital. Journal: The European Journal of Finance Pages: 848-869 Issue: 8 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2021.1933119 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1933119 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:8:p:848-869 Template-Type: ReDIF-Article 1.0 Author-Name: Diogo Duarte Author-X-Name-First: Diogo Author-X-Name-Last: Duarte Author-Name: Hamilton Galindo Author-X-Name-First: Hamilton Author-X-Name-Last: Galindo Author-Name: Alexis Montecinos Author-X-Name-First: Alexis Author-X-Name-Last: Montecinos Title: Leverage and capital utilization Abstract: Our paper documents that capital utilization and short-term debt are procyclical. We show that a strong positive relationship exists both at the aggregate and firm levels, and it persists even when we control the regressions for firm size, profits, growth, and business cycle effects. In addition, our DSGE model shows that in the presence of capital utilization, positive real and financial shocks cause the firm to change its financing of the equity payout policy from earnings to debt, resulting in an increase in short-term debt. Therefore, ignoring the firm's optimal decision on capital utilization may lead to misleading conclusions on how leverage is undertaken. Journal: The European Journal of Finance Pages: 801-824 Issue: 8 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2021.1924215 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1924215 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:8:p:801-824 Template-Type: ReDIF-Article 1.0 Author-Name: Panagiotis Karavitis Author-X-Name-First: Panagiotis Author-X-Name-Last: Karavitis Author-Name: Michael S. Michael Author-X-Name-First: Michael S. Author-X-Name-Last: Michael Title: International financial integration in the presence of an international duopoly Abstract: We revisit the debate on the benefits of international financial integration. We build a partial equilibrium imperfectly competitive model with two countries, where each country has one firm. Firms are Cournot competitors. Within this framework, we examine how the liberalization of international capital flows affects the welfare of each country and their joint welfare. Our results show that international capital flows' liberalization cannot guarantee the improvement in each country's welfare and their joint welfare. Overall, we find that international financial integration has very heterogeneous effects, depending on the market size, the initial level of capital stock and the degree of product competition. Journal: The European Journal of Finance Pages: 825-847 Issue: 8 Volume: 28 Year: 2022 Month: 05 X-DOI: 10.1080/1351847X.2021.1931389 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1931389 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:8:p:825-847 Template-Type: ReDIF-Article 1.0 Author-Name: Afees A. Salisu Author-X-Name-First: Afees A. Author-X-Name-Last: Salisu Author-Name: Lukman Lasisi Author-X-Name-First: Lukman Author-X-Name-Last: Lasisi Author-Name: Jean Paul Tchankam Author-X-Name-First: Jean Paul Author-X-Name-Last: Tchankam Title: Historical geopolitical risk and the behaviour of stock returns in advanced economies Abstract: In this study, we investigate the impact of global geopolitical risk (GPR) of different forms on the economies of advanced countries (G7 and Switzerland). We construct a predictive model, following the approach of Lewellen (2004. “Predicting returns with financial ratios.” Journal of Financial Economics 74 (2): 209–235) and Westerlund and Narayan (2012. “Does the choice of estimator matter when forecasting returns?” Journal of Banking & Finance 36 (9): 2632–2640; 2015. “Testing for Predictability in Conditionally Heteroskedastic Stock Returns.” Journal of Financial Econometrics 13 (2): 342–375), to analyse over a century of GPR indices and stock returns. For robustness, we control for oil price given its strong connection with stock returns of advanced economies and further extend our analysis to out-of-sample predictability. Our findings reveal that GPR is a significant predictor of stock returns in advanced economies, although their stock markets are vulnerable to GPR and particularly suffer greater adverse effects from threats of GPR (such as threats of war and terrorism) than their actual occurrence. Meanwhile, our forecast evaluation results show that the predictive model that accommodates the GPR indices outperforms the benchmark model that ignores the same both in the in-sample and out-of-sample forecast estimates. Journal: The European Journal of Finance Pages: 889-906 Issue: 9 Volume: 28 Year: 2022 Month: 06 X-DOI: 10.1080/1351847X.2021.1968467 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1968467 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:9:p:889-906 Template-Type: ReDIF-Article 1.0 Author-Name: Ángel León Author-X-Name-First: Ángel Author-X-Name-Last: León Author-Name: Trino-Manuel Ñíguez Author-X-Name-First: Trino-Manuel Author-X-Name-Last: Ñíguez Title: Polynomial adjusted Student-t densities for modeling asset returns Abstract: We present a polynomial expansion of the standardized Student-t distribution. Our density, obtained through the polynomial adjusted method in Bagnato, Potí, and Zoia (2015. “The Role of Orthogonal Polynomials in Adjusting Hyperbolic Secant and Logistic Distributions to Analyse Financial Asset Returns.” Statistical Papers 56 (4): 1205–12340), is an extension of the Gram–Charlier density in Jondeau and Rockinger (2001. “Gram-Charlier Densities.” Journal of Economic Dynamics and Control 25 (10): 1457–1483). We derive the closed-form expressions of the moments, the distribution function and the skewness–kurtosis frontier for a well-defined density. An empirical application is also implemented for modeling heavy-tailed and skewed distributions for daily asset returns. Both in-sample and backtesting analysis show that this new density can be a good candidate for risk management. Journal: The European Journal of Finance Pages: 907-929 Issue: 9 Volume: 28 Year: 2022 Month: 06 X-DOI: 10.1080/1351847X.2021.1985561 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1985561 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:9:p:907-929 Template-Type: ReDIF-Article 1.0 Author-Name: Doojin Ryu Author-X-Name-First: Doojin Author-X-Name-Last: Ryu Author-Name: Robert I. Webb Author-X-Name-First: Robert I. Author-X-Name-Last: Webb Author-Name: Jinyoung Yu Author-X-Name-First: Jinyoung Author-X-Name-Last: Yu Title: Liquidity-adjusted value-at-risk: a comprehensive extension with microstructural liquidity components Abstract: This study constructs an extended value-at-risk model that incorporates all microstructural liquidity components using a high-quality tick-by-tick index options market dataset. Out-of-sample backtesting and mean-difference analyses suggest that the traditional value-at-risk measure significantly underestimates investors’ potential losses relative to our new liquidity-adjusted measure. Logistic regressions reveal that ex-ante market illiquidity increases violations of liquidity-adjusted value-at-risk and that these violations are often driven by foreign institutional investors. Journal: The European Journal of Finance Pages: 871-888 Issue: 9 Volume: 28 Year: 2022 Month: 06 X-DOI: 10.1080/1351847X.2021.1946414 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1946414 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:9:p:871-888 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1949368_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Nima Zarrabi Author-X-Name-First: Nima Author-X-Name-Last: Zarrabi Author-Name: Stuart Snaith Author-X-Name-First: Stuart Author-X-Name-Last: Snaith Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Title: Exchange rate forecasting using economic models and technical trading rules Abstract: The use of technical analysis by practitioners in the foreign exchange market contrasts with the ongoing debate among academics on the poor predictive ability of macroeconomic variables. This paper compares these two methods by constructing pools of economic models and technical trading rules and evaluates their in-sample and out-of-sample performance both locally and globally. Results suggest the presence of local forecastability that is overlooked when relying on global measures of predictability. The local predictability is captured using a rolling model selection approach to generate aggregate forecasts across separate pools of economic models and technical trading rules as well as both combined. The out-of-sample results for our aggregate forecasts using pools of economic models fail to beat the random walk as do pools of technical trading models. However combining the two pools of models results in forecasts that beat the random walk for four out of the six sample currencies. This result suggests that exchange rate forecasts can be improved by pooling both sets of models. Journal: The European Journal of Finance Pages: 997-1018 Issue: 10 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.1949368 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1949368 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:10:p:997-1018 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1939087_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Alin Marius Andrieş Author-X-Name-First: Alin Marius Author-X-Name-Last: Andrieş Author-Name: Florentina Melnic Author-X-Name-First: Florentina Author-X-Name-Last: Melnic Author-Name: Nicu Sprincean Author-X-Name-First: Nicu Author-X-Name-Last: Sprincean Title: The effects of macroprudential policies on credit growth Abstract: In this paper, we assess the effectiveness of macroprudential policies in controlling short- and long-term credit growth. Using a sample of 414 banks located in 61 countries, we document that macroprudential policies manifest a stabilizing effect in the short run, reducing credit growth, with borrower-targeted macroprudential policies being the most effective in taming credit developments. However, in the long-term tight macroprudential policies enhance credit growth. In this case, country-level analysis shows that financial institution-targeted macroprudential policy is more effective than the instruments that target borrowers, whereas at the bank-level the opposite is true. In addition, using a difference-in-difference approach, we emphasize that there is heterogeneity in the relationship among macroprudential policy and credit growth across different types of countries, banking systems, policy regimes and banks. Our findings stress the importance of macroprudential instruments in limiting excessive lending, most notably borrower-based tools. Journal: The European Journal of Finance Pages: 964-996 Issue: 10 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.1939087 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1939087 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:10:p:964-996 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1957698_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Abdullah Yalaman Author-X-Name-First: Abdullah Author-X-Name-Last: Yalaman Author-Name: Viktor Manahov Author-X-Name-First: Viktor Author-X-Name-Last: Manahov Title: Analysing emerging market returns with high-frequency data during the global financial crisis of 2007–2009 Abstract: Nowadays, the majority of stock market trading is performed electronically, based on pre-programmed computer algorithms. We obtain five-minute high-frequency data from the Turkish Stock Exchange to investigate the data-generating process of emerging market returns during the global financial crisis of 2007–2009. We test tail behaviour and how data-generating processes changed during the intraday trading period in both crisis and non-crisis periods. We also examine whether price asymmetry has a significant effect on the diffusion and jump characteristics of emerging market returns. The results identify a clear increase in jumps with infinite activity in crisis periods and a decreased identification of jumps with finite activity in non-crisis periods. In crisis periods, the proportion of large and small jumps increased and the proportion of Brownian motion decreased. We show that data-generating processes are not stable during the intraday trading period, which fluctuates slightly, particularly right after the market opening times in the morning and in the afternoon. Finally, we conclude that there are many more stressful days in crisis periods than in non-crisis periods in emerging markets returns. Journal: The European Journal of Finance Pages: 1019-1051 Issue: 10 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.1957698 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1957698 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:10:p:1019-1051 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1939753_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Guillaume Arnould Author-X-Name-First: Guillaume Author-X-Name-Last: Arnould Author-Name: Giuseppe Avignone Author-X-Name-First: Giuseppe Author-X-Name-Last: Avignone Author-Name: Cosimo Pancaro Author-X-Name-First: Cosimo Author-X-Name-Last: Pancaro Author-Name: Dawid Żochowski Author-X-Name-First: Dawid Author-X-Name-Last: Żochowski Title: Bank funding costs and solvency Abstract: This paper investigates the relationship between bank funding costs and solvency for a large sample of euro area banks using two proprietary ECB datasets for both wholesale funding costs and deposit rates. In particular, the paper studies the relationship between bank solvency, on the one hand, and senior bond yields, term deposit rates and overnight deposit rates, on the other. The analysis finds a significant negative relationship between bank solvency and the different types of funding costs. It also shows that this relationship is non-linear, namely convex, for senior bond yields and term deposit rates. It also identifies a positive realistic solvency threshold beyond which the effect of an increase in solvency on senior bond yields becomes positive. The paper also finds that senior bond yields are more sensitive to a change in solvency than deposit rates. Among the deposit rates, the interest rates of the overnight deposits are the least sensitive. Banks’ asset quality, profitability and liquidity seem to play only a minor role in driving funding costs while the ECB monetary policy stance, sovereign risk and financial markets uncertainty appear to be material drivers. Journal: The European Journal of Finance Pages: 931-963 Issue: 10 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.1939753 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1939753 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:10:p:931-963 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1960404_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Reza Bradrania Author-X-Name-First: Reza Author-X-Name-Last: Bradrania Author-Name: Davood Pirayesh Neghab Author-X-Name-First: Davood Author-X-Name-Last: Pirayesh Neghab Title: State-dependent asset allocation using neural networks Abstract: Changes in market conditions present challenges for investors as they cause performance to deviate from the ranges predicted by long-term averages of means and covariances. The aim of conditional asset allocation strategies is to overcome this issue by adjusting portfolio allocations to hedge changes in the investment opportunity set. This paper proposes a new approach to conditional asset allocation that is based on machine learning; it analyzes historical market states and asset returns and identifies the optimal portfolio choice in a new period when new observations become available. In this approach, we directly relate state variables to portfolio weights, rather than firstly modeling the return distribution and subsequently estimating the portfolio choice. The method captures nonlinearity among the state (predicting) variables and portfolio weights without assuming any particular distribution of returns and other data, without fitting a model with a fixed number of predicting variables to data and without estimating any parameters. The empirical results for a portfolio of stock and bond indices show the proposed approach generates a more efficient outcome compared to traditional methods and is robust in using different objective functions across different sample periods. Journal: The European Journal of Finance Pages: 1130-1156 Issue: 11 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.1960404 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1960404 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:11:p:1130-1156 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1958244_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Jie Cao Author-X-Name-First: Jie Author-X-Name-Last: Cao Author-Name: Fenghua Wen Author-X-Name-First: Fenghua Author-X-Name-Last: Wen Author-Name: H. Eugene Stanley Author-X-Name-First: H. Author-X-Name-Last: Eugene Stanley Title: Measuring the systemic risk in indirect financial networks Abstract: In this study, we present a novel measurement approach for systemic risk by considering an indirect network structure. In a departure from previous studies, this measurement method captures spillovers arising from deleveraging and price impact in financial systems and calculates the amplification of losses during the contagion process. We show the relationship between a bank's vulnerability and its network connections. Applying the model to Chinese banks, we evaluate the fire-sale loss of each bank and quantify the impact of each asset in different simulated stress scenarios. Using both theoretical and empirical evidence, we show the ability of network centrality to explain systemic risk contribution: a bank with more network connections is systemically more important. We also present an optimal strategy to mitigate and govern systemic risk. Our result implies that the systemic importance of a bank is based not only on its size but also on the kinds of assets it holds; it provides useful systemic risk monitoring tools complementary to those currently used by supervisors. Journal: The European Journal of Finance Pages: 1053-1098 Issue: 11 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.1958244 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1958244 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:11:p:1053-1098 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2002381_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Bonnie G. Buchanan Author-X-Name-First: Bonnie G. Author-X-Name-Last: Buchanan Author-Name: Eva Liljeblom Author-X-Name-First: Eva Author-X-Name-Last: Liljeblom Author-Name: Minna Martikainen Author-X-Name-First: Minna Author-X-Name-Last: Martikainen Author-Name: Jussi Nikkinnen Author-X-Name-First: Jussi Author-X-Name-Last: Nikkinnen Title: Multiple owners and productivity: evidence from family firms Abstract: We investigate the productivity of family owned small- and medium-sized enterprises (SMEs). Specifically, we examine whether productivity is influenced by the number of family owners and by family member involvement in daily operations. We find that the productivity of family firms is non-monotonically associated with the number of family owners and with the number of family members who work in the firm. Although prior empirical research has often been associated with positive effects, we identify problematic cases, especially when a few owners are involved. We document a negative effect on productivity if the firm has few but more than one family owner, and if the firm has two or three owners who are involved in daily business operations. In these cases, an external (non-family) Chair (CEO) might mitigate these effects stemming from the family ownership (family working in the firm). The results of our study have practical relevance and policy implications when it comes to questions concerning optimal governance. Journal: The European Journal of Finance Pages: 1157-1171 Issue: 11 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.2002381 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2002381 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:11:p:1157-1171 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1959366_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Kun Duan Author-X-Name-First: Kun Author-X-Name-Last: Duan Author-Name: Mamata Parhi Author-X-Name-First: Mamata Author-X-Name-Last: Parhi Author-Name: Simon Wolfe Author-X-Name-First: Simon Author-X-Name-Last: Wolfe Title: Credit composition and housing price dynamics: a disaggregation approach Abstract: While credit plays an instrumental role in housing price dynamics, existing work has produced conflicting evidence of its real impact. This paper reconciles various inconclusive findings via a disaggregation strategy to decompose aggregate credit into credit-to-the-real economy (cr) and credit-to-the-asset markets (cf ). We argue that these two credit components exert theoretically expected and distinct impacts on housing prices, identified separately through a housing demand and a housing supply credit-circulation channel. Using an international panel dataset and treating for periodic cycles, our panel VAR estimations show that cr and housing prices depict a mutually reinforcing positive relationship. However, cf exerts a negative but negligible impact on housing prices in the short-run; it has a strong and positive effect in the long-run. Further, controlling for effects of economic policy uncertainty strengthens the interactions between housing prices and the two credit components. Our results are robust and suggest that close monitoring of credit allocation to housing demand and supply sides, as well as the extent of pump-priming resource allocation to the real economy, should be of interest to policymakers. Journal: The European Journal of Finance Pages: 1099-1129 Issue: 11 Volume: 28 Year: 2022 Month: 07 X-DOI: 10.1080/1351847X.2021.1959366 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1959366 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:11:p:1099-1129 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1998176_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Paulo Pereira da Silva Author-X-Name-First: Paulo Pereira Author-X-Name-Last: da Silva Author-Name: Victor Mendes Author-X-Name-First: Victor Author-X-Name-Last: Mendes Author-Name: Margarida Abreu Author-X-Name-First: Margarida Author-X-Name-Last: Abreu Title: The disposition effect among mutual fund participants: a re-examination Abstract: Based on the information gathered on mutual fund trades executed between 1998 and 2017 by 31,513 individual investor clients of a major Portuguese bank, we study the relationship between the disposition effect, financial literacy and trading experience. We find that mutual fund investors exhibit a strong disposition effect. The tendency to hold losers is partially offset with literacy: a university degree reduces the propensity to hold on to loser funds, in addition to greater financial knowledge and stronger math skills. Literacy also plays a role in shaping the way experience affects this bias. Evidence of the disposition effect remains after considering redemption fees, bad emotions, irrational beliefs, market sentiment and the existence of someone to blame. Given that the existence of the disposition effect entails substantial costs for investors, higher levels of literacy benefit investors. The implementation of measures that accommodate investor reaction to poor performances may also help to reduce the disposition effect. Journal: The European Journal of Finance Pages: 1237-1256 Issue: 12 Volume: 28 Year: 2022 Month: 08 X-DOI: 10.1080/1351847X.2021.1998176 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1998176 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:12:p:1237-1256 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1964556_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Laura Chiaramonte Author-X-Name-First: Laura Author-X-Name-Last: Chiaramonte Author-Name: Alberto Dreassi Author-X-Name-First: Alberto Author-X-Name-Last: Dreassi Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Author-Name: Stefano Piserà Author-X-Name-First: Stefano Author-X-Name-Last: Piserà Title: Do ESG strategies enhance bank stability during financial turmoil? Evidence from Europe Abstract: This paper investigates the joint and separate effects of Environmental (E), Social (S), and Governance (G) scores on bank stability. Using a sample of European banks operating in 21 countries over 2005–2017, we find that the total ESG score, as well as its sub-pillars, reduces bank fragility during periods of financial distress. This stabilizing effect holds strongly for banks with higher ESG ratings. These results are confirmed by a differences-in-differences (DID) analysis built around the introduction of the EU 2014 Non-Financial Reporting Directive (NFRD). Our evidence also reveals that, in times of financial turmoil, the longer the duration of ESG disclosures, the greater the benefits on stability. Finally, we show that the ESG–bank stability linkages vary significantly across banks’ characteristics and operating environments. Our findings are robust to selection bias and endogeneity concerns. Overall, they support the regulatory effort in requiring an enhanced disclosure of non–financial information. Journal: The European Journal of Finance Pages: 1173-1211 Issue: 12 Volume: 28 Year: 2022 Month: 08 X-DOI: 10.1080/1351847X.2021.1964556 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1964556 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:12:p:1173-1211 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1971100_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220804T044749 git hash: 24b08f8188 Author-Name: Alex Sclip Author-X-Name-First: Alex Author-X-Name-Last: Sclip Title: Do SMEs benefit from the corporate sector purchase program? evidence from the eurozone Abstract: In this paper, we study the impact of the European Central Bank Corporate Sector Purchase Program on small and medium sized firms' financing using restricted data from the Survey of Access to Finance of Enterprises. We find that following the announcement, credit access improved through the reduction of both formal and informal credit constraints. Loans terms also improved as manifested by a reduction on loan application costs. The unconventional monetary policy intervention is also transmitted through trade credit in production networks as unconstrained borrowers extend more trade credit following the announcement of the program. Journal: The European Journal of Finance Pages: 1212-1236 Issue: 12 Volume: 28 Year: 2022 Month: 08 X-DOI: 10.1080/1351847X.2021.1971100 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1971100 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:12:p:1212-1236 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1994439_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Prajakta Desai Author-X-Name-First: Prajakta Author-X-Name-Last: Desai Author-Name: Massimo Guidolin Author-X-Name-First: Massimo Author-X-Name-Last: Guidolin Title: Performance persistence and optimal asset allocation strategies Abstract: This study explores whether optimal asset allocation strategies, defined by permutations and combinations of different predictor variables, produce consistently superior performance for investors. We extend the literature by exploring whether such strategies benefit investors over the entire investment period or whether investors are forced to switch among alternative strategies over time. As benchmarks, we employ the 1/N (equally weighted) and the myopic (no predictability) strategies. Persistence tests suggest that no single optimal strategy outperforms the remaining optimal and benchmark strategies over the entire sample. However, in two out of three subsample periods, some optimal strategies persistently outperform the benchmarks. Journal: The European Journal of Finance Pages: 1571-1598 Issue: 16 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.1994439 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1994439 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:16:p:1571-1598 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1990977_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Benno Kammann Author-X-Name-First: Benno Author-X-Name-Last: Kammann Author-Name: Jörg Prokop Author-X-Name-First: Jörg Author-X-Name-Last: Prokop Title: A view to a deal: the effect of upcoming investment banking transactions on financial analysts’ target price estimates Abstract: This study investigates whether sell-side analysts issue inflated target price estimates to compete for investment banking mandates in the European Union (EU), and whether country-specific weaknesses in regulatory enforcement diminish the mitigating effects of stricter financial-market regulation. We find that, irrespective of previous business ties with the target firm, target prices become more optimistic (and, as a consequence, less accurate) in the run-up to an investment banking transaction for target firms located in countries with weaker enforcement regimes. In contrast, for firms in countries with stronger enforcement regimes, we observe the opposite to be the case. Furthermore, we find that analysts’ optimistic biases have been mitigated, but not fully eliminated, since the implementation of the European Markets in Financial Instruments Directive (MiFID) in 2007 in low-enforcement countries. Overall, our results demonstrate that reducing country-level differences in enforcement constitute a significant factor in effectively regulating analysts’ conflicts of interest, and in improving investor protection within the EU. Journal: The European Journal of Finance Pages: 1599-1620 Issue: 16 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.1990977 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1990977 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:16:p:1599-1620 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1991421_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Zinoviy Landsman Author-X-Name-First: Zinoviy Author-X-Name-Last: Landsman Author-Name: Udi Makov Author-X-Name-First: Udi Author-X-Name-Last: Makov Author-Name: Jing Yao Author-X-Name-First: Jing Author-X-Name-Last: Yao Author-Name: Ming Zhou Author-X-Name-First: Ming Author-X-Name-Last: Zhou Title: Downside risk optimization with random targets and portfolio amplitude Abstract: In this paper, we discuss downside risk optimization in the context of portfolio selection. We derive explicit solutions to the optimal portfolios that minimize the downside risk with respect to constant targets and random targets. In doing so, we propose using portfolio amplitude, a new measure in the literature, to characterize the portfolio selection under the downside risk optimization. Particularly, we demonstrate a mechanism by which the random target inputs its impact into the system and alters the optimal solution. Our results underpin why investors prefer holding some specific assets in following random targets and provide explanations for some special investment strategies, such as constructing a stock portfolio following a bond index. We present numerical examples of stock portfolio management to support our theoretical results. Journal: The European Journal of Finance Pages: 1642-1663 Issue: 16 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.1991421 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1991421 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:16:p:1642-1663 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1998175_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Siu Kai Choy Author-X-Name-First: Siu Kai Author-X-Name-Last: Choy Author-Name: Gerald J. Lobo Author-X-Name-First: Gerald J. Author-X-Name-Last: Lobo Author-Name: Yongxian Tan Author-X-Name-First: Yongxian Author-X-Name-Last: Tan Title: Testing the accruals anomaly based on the speed of price adjustment Abstract: In this study, we investigate the nature of the accruals anomaly by analyzing the speed of price adjustment to accruals information. Consistent with the mispricing hypothesis, we find that a relatively larger proportion of accruals premium is distributed near the filing dates among low limits-to-arbitrage stocks and during periods of increased arbitrage activity. We also discuss our findings in the context of q-theory. Journal: The European Journal of Finance Pages: 1664-1684 Issue: 16 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.1998175 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1998175 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:16:p:1664-1684 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1988670_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Mingfa Ding Author-X-Name-First: Mingfa Author-X-Name-Last: Ding Author-Name: Sandy Suardi Author-X-Name-First: Sandy Author-X-Name-Last: Suardi Author-Name: Caihong Xu Author-X-Name-First: Caihong Author-X-Name-Last: Xu Author-Name: Dong Zhang Author-X-Name-First: Dong Author-X-Name-Last: Zhang Title: Large-caps liquidity provision, market liquidity and high-frequency market makers’ trading behaviour Abstract: This paper exploits the introduction of the liquidity provision scheme (LPS) in NASDAQ Stockholm (NOMX) to assess how the implementation of LPS affects market liquidity and the trading behaviors of high-frequency market makers. Unlike the traditional designated market makers (DMM) that target the liquidity supply of small and less traded stocks, LPS is implemented for large-caps and liquid stocks. LPS requires participants to submit buy and sell orders at the European best bid and offer quotes with a size larger than 50,000 Swedish Krona on each trade side. LPS delivers liquidity improvements by reducing order processing costs in the large-cap and cross-listed stocks in the NOMX and Chi-X markets, with no evidence of market liquidity migration from Chi-X to NOMX. As market makers registered with LPS are likely high-frequency traders, LPS stabilizes market liquidity as market makers’ decisions to supply or demand liquidity become less sensitive to market conditions like the spread and order imbalance. Journal: The European Journal of Finance Pages: 1621-1641 Issue: 16 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.1988670 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1988670 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:16:p:1621-1641 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1971731_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Man Dang Author-X-Name-First: Man Author-X-Name-Last: Dang Author-Name: Viet Anh Hoang Author-X-Name-First: Viet Anh Author-X-Name-Last: Hoang Author-Name: Edward Jones Author-X-Name-First: Edward Author-X-Name-Last: Jones Author-Name: Darren Henry Author-X-Name-First: Darren Author-X-Name-Last: Henry Author-Name: Phuong Uyen Le Author-X-Name-First: Phuong Uyen Author-X-Name-Last: Le Author-Name: Premkanth Puwanenthiren Author-X-Name-First: Premkanth Author-X-Name-Last: Puwanenthiren Title: Country uncertainty, power distance, and payment methods in acquisitions Abstract: This study examines the impact of country-specific uncertainty on the choice of payment method in international acquisitions. Our results show a negative association between the level of target country-specific uncertainty and cash transactions. Specifically, when the host country experiences a high level of country uncertainty, acquirers are more likely to choose non-cash transactions in which acquiring firms can issue their own equity to the target firm as part or all of the purchase consideration of the deal. The result is robust to alternative tests and analysis of subsamples. We also find that differences in uncertainty between host and home countries are informative of bidders’ payment choices. Further, we find that the negative relation between target country-specific uncertainty and cash payment weakens when there are larger differences in power distance between host and home countries. Our findings provide recommendations for policy-making bodies, and have implications for firm managers making corporate restructuring decisions. Journal: The European Journal of Finance Pages: 1541-1570 Issue: 16 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.1971731 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1971731 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:16:p:1541-1570 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2007150_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Allan Hodgson Author-X-Name-First: Allan Author-X-Name-Last: Hodgson Author-Name: John Okunev Author-X-Name-First: John Author-X-Name-Last: Okunev Title: Long term equity risk premiums in the UK and US: A cautionary tale of weak mean reversion Abstract: It is well established in the literature the ex post risk premium is higher than the ex ante risk premium and can vary substantially, but little research has been conducted in modelling the dynamic process between the two. This paper contributes by providing a theoretical framework to model the long-term dynamic relationship between the two risk premia in the UK and US. Using an Ornstein-Uhlenbeck (OU) ex ante model, that dominates several competitive models, we reveal slow reversion toward a stable long term ex post mean of 4% in both the UK and US markets. Results extend prior research by using an extended data set (1923–2019), providing a more precise and flexible estimation model, confirming that inflation and interest rates provide additional explanatory power over the long term but significantly less so across several regime shocks, especially during high inflation and periods of negative risk premia. By highlighting potential mispricing through a flexible approach we provide financially useful information to investors and regulators, particularly when central banks are manipulating equity prices. Journal: The European Journal of Finance Pages: 1728-1744 Issue: 17 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.2007150 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2007150 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:17:p:1728-1744 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2007496_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Zhongfei Chen Author-X-Name-First: Zhongfei Author-X-Name-Last: Chen Author-Name: Ming Jin Author-X-Name-First: Ming Author-X-Name-Last: Jin Author-Name: Athanasios Andrikopoulos Author-X-Name-First: Athanasios Author-X-Name-Last: Andrikopoulos Author-Name: Youwei Li Author-X-Name-First: Youwei Author-X-Name-Last: Li Title: Cultural diversity and borrowers’ behavior: evidence from peer-to-peer lending Abstract: We study cultural diversity and borrowers’ behavior using data from peer-to-peer lending platform Renrendai. We proxy cultural diversity with the Linguistic Diversity Index, measured by the population-weighted number of dialects spoken in a region, and we show that it has a negative (positive) effect on the loan amount (default rate) of the borrowers. We address endogeneity using two novel instruments, the river length and land slope of Chinese cities, a Heckman two-stage model, and an IV-Heckit model. We also study areas where financial institutions’ loan balances are higher (lower) than average. In areas with low (high) loan balances, the amount borrowed (the default rate) is affected more (less). We argue that lenders’ behavior is a reason that borrowers in diverse cultures apply for smaller loans. Our results pass a number of robustness tests. Finally, we offer suggestions for improving risk management and inclusive financial development. Journal: The European Journal of Finance Pages: 1745-1769 Issue: 17 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.2007496 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2007496 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:17:p:1745-1769 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2007972_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Suman Banerjee Author-X-Name-First: Suman Author-X-Name-Last: Banerjee Author-Name: Saul Estrin Author-X-Name-First: Saul Author-X-Name-Last: Estrin Author-Name: Sarmistha Pal Author-X-Name-First: Sarmistha Author-X-Name-Last: Pal Title: Corporate disclosure, compliance and consequences: evidence from Russia Abstract: Does the introduction of corporate transparency and disclosure rules in emerging economies affect compliance, and therefore earnings quality and firm performance? We explore these questions for an important emerging economy, Russia, using a natural experiment, the 2002 introduction of Russian corporate governance code. We exploit the exogenous variation in voluntary disclosure and find a significant increase in corporate disclosure among the domestic Russian firms over the period 2003–2007 when firms gradually adopted some but not all disclosure rules. The immediate effect of the introduction was a drop in reported earnings. Market valuation, however, only improved for domestic firms after 2007, when all domestic firms had complied. However, cross-listed firms, which were already satisfying international standards, remained largely unaffected. Though average compliance by domestic firms was only 53%, average firm value of treated domestic firms, relative to cross-listed ones, went up by about 10%. Results are robust, confirm external validity and offer important policy implications for other emerging/ transition economies. Journal: The European Journal of Finance Pages: 1770-1802 Issue: 17 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.2007972 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2007972 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:17:p:1770-1802 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2010782_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Yuan Li Author-X-Name-First: Yuan Author-X-Name-Last: Li Author-Name: Jinqiang Yang Author-X-Name-First: Jinqiang Author-X-Name-Last: Yang Author-Name: Siqi Zhao Author-X-Name-First: Siqi Author-X-Name-Last: Zhao Title: Commitment, agency costs and dynamic capital structure Abstract: This paper studies leverage dynamics when shareholders commit to optimizing total enterprise value and face debt adjustment friction. Debt adjustment costs render the leverage commitment a double-edged sword. High-levered firms benefit from the commitment due to active debt repurchase. However, such debt buyback incurs a heavy burden and constrains financial flexibility. With high debt adjustment costs, it could be inefficient for the enterprise to maintain a firm-optimal debt policy. Interestingly, the incentive alignment effect from commitment makes shareholders act as if creditors in normal times. For instance, shareholders exhibit precautionary motives and overinvest. Finally, we show that dynamic risk management exacerbates the debt-equity conflicts and improves the commitment value. Highlights The firm-optimal debt policy eliminates the leverage ratchet effect by accelerating debt repayment should the firm's fundamental deteriorates.The commitment to the firm-optimal debt policy hurts enterprise value when facing high debt adjustment costs and short-term debt.Incentive alignment effect from the firm-optimal commitment causes shareholders to overinvest and exhibit risk-aversion in normal times. Journal: The European Journal of Finance Pages: 1708-1727 Issue: 17 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.2010782 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2010782 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:17:p:1708-1727 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2002705_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Thu Phuong Truong Author-X-Name-First: Thu Phuong Author-X-Name-Last: Truong Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Author-Name: John van der Burg Author-X-Name-First: John Author-X-Name-Last: van der Burg Title: The quantity theory of stock prices Abstract: We determine the implications of the Modern Quantity Theory of Money for the nominal pricing of equity stocks. Our analysis is compatible with the hypothesis that the ratio of the quantity of money in circulation to a comprehensive index of stock prices evolves in terms of an elastic (that is, mean reverting) random walk. Using annual U.S. data covering the period from 1871 until 2018 shows that the ‘half-life’ of the period it takes for the money to stock price ratio to converge towards its long-run mean, is around fifteen years. Our empirical analysis also shows that unexpected inflation has a disruptive impact on the output and investment decisions implemented by firms and leads to an increase in the money to stock price ratio (equivalently, the stock price index falls relative to the quantity of money in circulation). We also develop a framework for determining how economic agents can rebalance their investment portfolios in response to disequilibria in the money to stock price ratio and thereby maximise the expected discounted utility obtained from their future consumption. Journal: The European Journal of Finance Pages: 1685-1707 Issue: 17 Volume: 28 Year: 2022 Month: 11 X-DOI: 10.1080/1351847X.2021.2002705 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2002705 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:17:p:1685-1707 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1976664_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Andrea Gurgone Author-X-Name-First: Andrea Author-X-Name-Last: Gurgone Author-Name: Giulia Iori Author-X-Name-First: Giulia Author-X-Name-Last: Iori Title: Macroprudential capital buffers in heterogeneous banking networks: insights from an ABM with liquidity crises Abstract: We study how the effectiveness of macroprudential capital buffers conditional to the systemic-risk assessment of banks responds to the degree of heterogeneity of the financial system. A multi-agent model is employed to build an artificial economy with households, firms, and banks where occasional liquidity crises emerge. The systemic importance of banks is captured by a score-based mechanism reflecting banks' characteristics in terms of size or interconnectedness. We compare three degrees of heterogeneity in the configuration of financial networks related to different banking concentrations in the loan market. The main findings suggest that: (i) reducing the heterogeneity of the banking network stabilizes the economy by itself; (ii) the identification criteria of systemic-important institutions are affected by the heterogeneity of networks; it is preferable applying systemic capital surcharges to the largest banks under high heterogeneity and targeting those most interconnected under low heterogeneity; (iii) the effectiveness of systemic capital buffers is preserved under high heterogeneity when a common asset holding contagion channel is added. However, simple measures based on risk-weighted assets capital ratios appear to be more effective in low heterogeneous systems. Thus, we argue that prudential regulation should account for the characteristics of the banking networks and tune macroprudential tools accordingly. Journal: The European Journal of Finance Pages: 1399-1445 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1976664 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1976664 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1399-1445 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1963301_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Christian Bongiorno Author-X-Name-First: Christian Author-X-Name-Last: Bongiorno Author-Name: Damien Challet Author-X-Name-First: Damien Author-X-Name-Last: Challet Title: Reactive global minimum variance portfolios with k-BAHC covariance cleaning Abstract: We introduce a covariance cleaning method which works well in the very high-dimensional regime, i.e. when there are many more assets than data points per asset. This opens the way to unconditional reactive portfolio optimization when there are not enough points to calibrate dynamical conditional covariance models, which happens, for example, when new assets appear in a market. The method is a k-fold boosted version of the Bootstrapped Average Hierarchical Clustering cleaning procedure for correlation and covariance matrices. We apply this method to global minimum variance portfolios and find that k should increase with the calibration window length. We compare the performance of k-BAHC with other state-of-the-art covariance cleaning methods, including dynamical conditional covariance (DCC) with non-linear shrinkage. Generally, we find that our method yields better Sharpe ratios after transaction costs than competing unconditional covariance filtering methods, despite requiring a larger turnover. Finally, k-BAHC yields better Global Minimum Variance portfolios with long–short positions than DCC in a non-stationary investment universe. Journal: The European Journal of Finance Pages: 1344-1360 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1963301 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1963301 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1344-1360 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1963300_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Domenico Delli Gatti Author-X-Name-First: Domenico Author-X-Name-Last: Delli Gatti Author-Name: Elisa Grugni Author-X-Name-First: Elisa Author-X-Name-Last: Grugni Title: Breaking bad: supply chain disruptions in a streamlined agent-based model Abstract: We explore the macro-financial consequences of the disruption of a supply chain in an agent-based framework characterized by two networks, a credit network connecting banks and firms and a production network connecting upstream and downstream firms. We consider two scenarios. In the first one, because of the lockdown, all the upstream firms are forced to cut production. This generates a sizable downturn during the lockdown due to the indirect effects of the shock (network-based financial accelerator). In the second scenario, only those upstream firms located in the ‘red zone’ are forced to contract production. In this case, the recession is milder and the recovery begins earlier. Upstream firms hit by the shock, in fact, will be abandoned by their customers who will switch to suppliers who are located outside the red zone. In this way, firms endogenously reconstruct (at least in part) the supply chain after the disruption. This is the main determinant of the mitigated impact of the shock in the ‘red zone’ type of lockdown. Journal: The European Journal of Finance Pages: 1446-1473 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1963300 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1963300 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1446-1473 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1947338_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Xing Gao Author-X-Name-First: Xing Author-X-Name-Last: Gao Author-Name: Daniel Ladley Author-X-Name-First: Daniel Author-X-Name-Last: Ladley Title: Noise trading and market stability Abstract: Noise traders are often thought to be detrimental to market stability, increasing volatility and the risk of bubbles and crashes. The effect of noise traders on the learning and development of informed traders, however, has received little attention. We consider a computational model of a derivatives market containing informed traders and noise traders with the former group having to learn to price the traded asset. We demonstrate that noise traders have a beneficial effect on market stability: an increase in the amount of noise traders makes the market more resilient to shocks. Noise traders by pushing the price away from fundamentals create opportunities for learning, increasing the proportion of informed traders possessing high levels of trading skills in turn protecting the market. Journal: The European Journal of Finance Pages: 1283-1301 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1947338 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1947338 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1283-1301 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1828963_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Friederike Mengel Author-X-Name-First: Friederike Author-X-Name-Last: Mengel Author-Name: Ronald Peeters Author-X-Name-First: Ronald Author-X-Name-Last: Peeters Title: Do markets encourage risk-seeking behaviour? Abstract: Excessive risk-taking in markets can have devastating consequences as the latest financial crises have highlighted. In this paper, we ask whether markets as an institution encourages such excessive risk-taking. To establish causality, we isolate the effects of market interaction in a laboratory experiment keeping other possibly confounding factors constant. We find that the opposite is true. Markets decrease participants' willingness to take risks. This finding can be explained by social comparison utility in the presence of negatively correlated risks. Journal: The European Journal of Finance Pages: 1474-1480 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2020.1828963 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1828963 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1474-1480 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1835686_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Sudarshan Kumar Author-X-Name-First: Sudarshan Author-X-Name-Last: Kumar Author-Name: Avijit Bansal Author-X-Name-First: Avijit Author-X-Name-Last: Bansal Author-Name: Anindya S. Chakrabarti Author-X-Name-First: Anindya S. Author-X-Name-Last: Chakrabarti Title: Ripples on financial networks Abstract: In the financial markets, asset returns exhibit collective dynamics masking individual impacts on the rest of the market. Hence, it is still an open problem to identify how shocks originating from one particular asset create spillover effects across other assets. The problem is more acute when there is a large number of simultaneously traded assets, making the identification of which asset affects which other assets even more difficult. In this paper, we construct a network of the conditional volatility series estimated from asset returns and estimate a many-dimensional VAR model with unique identification criteria based on the network topology. Because of the interlinkages across stocks, volatility shock to a particular asset propagates through the network creating a ripple effect. Our method allows us to find the exact path the ripple effect follows on the whole network of assets. Journal: The European Journal of Finance Pages: 1302-1323 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2020.1835686 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1835686 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1302-1323 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1911822_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Alba Ruiz-Buforn Author-X-Name-First: Alba Author-X-Name-Last: Ruiz-Buforn Author-Name: Simone Alfarano Author-X-Name-First: Simone Author-X-Name-Last: Alfarano Author-Name: Eva Camacho-Cuena Author-X-Name-First: Eva Author-X-Name-Last: Camacho-Cuena Author-Name: Andrea Morone Author-X-Name-First: Andrea Author-X-Name-Last: Morone Title: Single vs. multiple disclosures in an experimental asset market with information acquisition Abstract: We conduct laboratory experiments to study whether increasing the number of independent public signals in an economy with endogenous private information is an effective measure to promote the acquisition of information and to enhance price efficiency. We observe that the release of public information crowds out the traders' demand for private information under a single disclosure while favoring private information acquisition under multiple disclosures. The latter measure improves price accuracy in forecasting the asset fundamental value. However, multiple disclosures do not eliminate the adverse effect of market overreaction to public information, becoming a potential source of fragility for the financial system. Journal: The European Journal of Finance Pages: 1513-1539 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1911822 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1911822 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1513-1539 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1832553_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Noemi Schmitt Author-X-Name-First: Noemi Author-X-Name-Last: Schmitt Author-Name: Ivonne Schwartz Author-X-Name-First: Ivonne Author-X-Name-Last: Schwartz Author-Name: Frank Westerhoff Author-X-Name-First: Frank Author-X-Name-Last: Westerhoff Title: Heterogeneous speculators and stock market dynamics: a simple agent-based computational model Abstract: We propose a simple agent-based computational model in which speculators’ trading behavior may cause bubbles and crashes, excess volatility, serially uncorrelated returns, fat-tailed return distributions and volatility clustering, thereby replicating five important stylized facts of stock markets. Since each speculator bets on his own (technical and fundamental) trading signals, stock prices are excessively volatile and oscillate erratically around their fundamental value. However, speculators’ heterogeneity occasionally vanishes, e.g. due to panic-induced herding behavior, yielding extreme returns. Lasting regimes with high volatility originate from the fact that speculators extract stronger trading signals out of past stock price movements when stock prices fluctuate strongly. Simulations furthermore suggest that circuit breakers may be an effective tool to combat financial market turbulences. Journal: The European Journal of Finance Pages: 1263-1282 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2020.1832553 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1832553 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1263-1282 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1908391_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Giuseppe Brandi Author-X-Name-First: Giuseppe Author-X-Name-Last: Brandi Author-Name: T. Di Matteo Author-X-Name-First: T. Author-X-Name-Last: Di Matteo Title: On the statistics of scaling exponents and the multiscaling value at risk Abstract: Research on scaling analysis in finance is vast and still flourishing. We introduce a novel statistical procedure based on the generalized Hurst exponent, the Relative Normalized and Standardized Generalized Hurst Exponent (RNSGHE), to robustly estimate and test the multiscaling property. Furthermore, we introduce a new tool to estimate the optimal aggregation time used in our methodology which we name Autocororrelation Segmented Regression. We numerically validate this procedure on simulated time series by using the Multifractal Random Walk and we then apply it to real financial data. We present results for times series with and without anomalies and we compute the bias that such anomalies introduce in the measurement of the scaling exponents. We also show how the use of proper scaling and multiscaling can ameliorate the estimation of risk measures such as Value at Risk (VaR). Finally, we propose a methodology based on Monte Carlo simulation, which we name Multiscaling Value at Risk (MSVaR), that takes into account the statistical properties of multiscaling time series. We mainly show that by using this statistical procedure in combination with the robustly estimated multiscaling exponents, the one year forecasted MSVaR mimics the VaR on the annual data for the majority of the stocks. Journal: The European Journal of Finance Pages: 1361-1382 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1908391 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1908391 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1361-1382 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2057808_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Giampaolo Gabbi Author-X-Name-First: Giampaolo Author-X-Name-Last: Gabbi Author-Name: Giulia Iori Author-X-Name-First: Giulia Author-X-Name-Last: Iori Title: New measures for a new normal in finance and risk management Journal: The European Journal of Finance Pages: 1257-1262 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2022.2057808 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2057808 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1257-1262 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1882523_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: M. Raddant Author-X-Name-First: M. Author-X-Name-Last: Raddant Author-Name: F. Wagner Author-X-Name-First: F. Author-X-Name-Last: Wagner Title: Multivariate GARCH with dynamic beta Abstract: We investigate a solution for the problems related to the application of multivariate GARCH models to markets with a large number of stocks by restricting the form of the conditional covariance matrix and by introducing a system of recursion formals. The model is based on a decomposition of the conditional covariance matrix into two components and requires only six parameters to be estimated. The first component can be interpreted as the market factor, all remaining components are assumed to be equal. This allow the analytical calculation of the inverse covariance matrix. The factors are dynamic and therefore enable to describe dynamic beta coefficients. We compare the estimated covariances for the S&P500 market with those of other GARCH models and find that they are competitive, despite the low number of parameters. As applications we use the daily values of beta coefficients to confirm a transition of the market in 2006. Furthermore we discuss the relationship of our model with the leverage effect. Journal: The European Journal of Finance Pages: 1324-1343 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1882523 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1882523 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1324-1343 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1857290_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Pietro Vozzella Author-X-Name-First: Pietro Author-X-Name-Last: Vozzella Author-Name: Giampaolo Gabbi Author-X-Name-First: Giampaolo Author-X-Name-Last: Gabbi Title: Banking regulation, procyclicality, and asset correlations in the real economic environment Abstract: Banking regulations have often been viewed as possible sources of procyclicality. We aim to provide a critical assessment of the risk-weighted asset estimates through the relationship between asset correlation and the probability of default as stated by international regulators. Our findings show that the relationship between asset correlation and size is not linear and also changes with the economic cycle. A risk-weighted asset computed according to regulatory assumptions would not generate the required capital relief during the downturn phase, when banks should release credit resources to support firms’ resilience. Therefore, we propose to transform the regulatory approach to empower the procyclical issues that still remain in upturns and slowdowns in economic cycles. Journal: The European Journal of Finance Pages: 1383-1398 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2020.1857290 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1857290 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1383-1398 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1967180_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Gianluca Fusai Author-X-Name-First: Gianluca Author-X-Name-Last: Fusai Author-Name: Giovanni Longo Author-X-Name-First: Giovanni Author-X-Name-Last: Longo Author-Name: Giovanna Zanotti Author-X-Name-First: Giovanna Author-X-Name-Last: Zanotti Title: Interest rate structured products: can they improve the risk–return profile? Abstract: In this paper, we investigate the contribution of interest rate structured bonds to portfolios of risk-averse retail investors. We conduct our analysis by simulating the term structure according to a multifactor no-arbitrage interest rate model and comparing the performance of a portfolio consisting of basic products (zero-coupon bonds, coupon bonds and floating rate notes) with a portfolio containing more sophisticated exotic products (like constant maturity swaps, collars, spread and volatility notes). Our analysis, performed under different market environments, as well as volatility and correlation levels, takes into account the combined effects of risk premiums required by investors and fees that they have to pay. Our results show that capital protected interest rate structured products allow investors to improve risk–return trade-off if no fees are considered. With fees, our simulations show that structured products add value to the basic portfolio in a very limited number of cases. We believe our paper contributes to understanding the role of structured products in investors portfolios also in light of the current regulatory debate on the use of complex financial products by retail investors. Journal: The European Journal of Finance Pages: 1481-1512 Issue: 13-15 Volume: 28 Year: 2022 Month: 10 X-DOI: 10.1080/1351847X.2021.1967180 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1967180 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:13-15:p:1481-1512 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2020146_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Christos Argyropoulos Author-X-Name-First: Christos Author-X-Name-Last: Argyropoulos Author-Name: Ekaterini Panopoulou Author-X-Name-First: Ekaterini Author-X-Name-Last: Panopoulou Author-Name: Nikolaos Voukelatos Author-X-Name-First: Nikolaos Author-X-Name-Last: Voukelatos Author-Name: Teng Zheng Author-X-Name-First: Teng Author-X-Name-Last: Zheng Title: Hedge fund return predictability in the presence of model risk* Abstract: Hedge funds implement elaborate investment strategies that include a variety of positions and assets. As a result, there is significant time variation in the set of risk factors and their respective loadings which in turn introduces severe model risk in any attempt to model and forecast hedge fund returns. In this study, we investigate the statistical and economic value of incorporating heteroscedasticity, non-normality, time-varying parameters, model selection risk and parameter estimation risk jointly in hedge fund return forecasting and fund of funds construction. Parameter estimation risk is dealt with a time-varying parameter structure, while model selection uncertainty is mitigated by model averaging or model selection. We adopt a dynamic model averaging approach along with the conventional Bayesian averaging technique. Our empirical results suggest that accounting for model risk can significantly improve the forecasting accuracy of hedge fund returns and consequently the performance of funds of hedge funds. Journal: The European Journal of Finance Pages: 1892-1916 Issue: 18 Volume: 28 Year: 2022 Month: 12 X-DOI: 10.1080/1351847X.2021.2020146 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2020146 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:18:p:1892-1916 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2007149_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Arthur Krebbers Author-X-Name-First: Arthur Author-X-Name-Last: Krebbers Author-Name: Andrew Marshall Author-X-Name-First: Andrew Author-X-Name-Last: Marshall Author-Name: Patrick McColgan Author-X-Name-First: Patrick Author-X-Name-Last: McColgan Author-Name: Biwesh Neupane Author-X-Name-First: Biwesh Author-X-Name-Last: Neupane Title: Home bias and the need to build a bond market track record Abstract: This paper examines home bias in the primary distribution process of the European corporate bond market. Our approach allows us to study the initial holdings of corporate bonds at a uniquely liquid point in their life cycle. We find that home bias is prevalent across our sample, but is highest amongst bonds issued by firms from both the highest-debt market size economies and lower-debt market sizes economies, who both benefit from relatively large domestic bond markets compared to their funding needs. We argue that international diversification can occur in this market through a life cycle effect where issuers outgrow investor home bias and build a reputation amongst international investors through regular bond market issuance. Our results provide some initial support for this life cycle effect, with repeat issues, issues off an EMTN programme, and highly subscribed issues being associated with lower home bias. Journal: The European Journal of Finance Pages: 1803-1818 Issue: 18 Volume: 28 Year: 2022 Month: 12 X-DOI: 10.1080/1351847X.2021.2007149 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2007149 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:18:p:1803-1818 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2020145_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Panagiotis G. Artikis Author-X-Name-First: Panagiotis G. Author-X-Name-Last: Artikis Author-Name: Lydia Diamantopoulou Author-X-Name-First: Lydia Author-X-Name-Last: Diamantopoulou Author-Name: Georgios A. Papanastasopoulos Author-X-Name-First: Georgios A. Author-X-Name-Last: Papanastasopoulos Title: New insights on the asset growth anomaly: evidence from Europe* Abstract: This study provides insights into the well-documented asset growth anomaly using an integrated European stock market sample derived from 21 countries. We assess whether the anomaly in Europe is attributable to risk or mispricing. In doing so, we examine whether the asset growth effect on stock returns is dependent on the valuation signals contained in equity financing activities. Moreover, we determine whether it is derived from firms with existing market expectation errors. Finally, we explicitly test whether asset growth is a priced risk factor using the common two-stage cross-sectional regression (2SCSR) methodology. Overall, our evidence suggests that the underlying origins of the asset growth anomaly in Europe at the aggregate level are relatively consistent with a risk-based explanation. Journal: The European Journal of Finance Pages: 1867-1891 Issue: 18 Volume: 28 Year: 2022 Month: 12 X-DOI: 10.1080/1351847X.2021.2020145 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2020145 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:18:p:1867-1891 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2029523_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Laivi Laidroo Author-X-Name-First: Laivi Author-X-Name-Last: Laidroo Title: Capturing the ‘true’ information content of supervisory announcements in Europe Abstract: We assess the information content of supervisory announcements related to stress tests and other supervisory exercises in the EU for 2010–2018. Our results show that compared to abnormal returns the use of absolute abnormal returns provides superior possibilities for detecting significant information content in almost all supervisory announcements in the EU from 2010 to 2018. In line with expectations, absolute abnormal returns surrounding announcements of the stress tests’ final results remain greater than those for the pre-results. We also find that the ‘surprise' contained in the results of the stress test is an important determinant of the magnitude of the price reaction. Contrary to expectations, we find no clear signs of a significant decline in the information content of supervisory announcements over time. This indicates that, despite decreased uncertainty levels, equity investors have continued to value the efforts put into the stress tests and transparency exercises by supervisory authorities and systemically important banks. Journal: The European Journal of Finance Pages: 1917-1939 Issue: 18 Volume: 28 Year: 2022 Month: 12 X-DOI: 10.1080/1351847X.2022.2029523 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2029523 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:18:p:1917-1939 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2037681_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20220907T060133 git hash: 85d61bd949 Author-Name: Radu-Dragomir Manac Author-X-Name-First: Radu-Dragomir Author-X-Name-Last: Manac Author-Name: Jens Martin Author-X-Name-First: Jens Author-X-Name-Last: Martin Author-Name: Geoffrey Wood Author-X-Name-First: Geoffrey Author-X-Name-Last: Wood Title: Varieties of funds and performance: the case of private equity Abstract: Within the growing body of literature on private equity, there is intense controversy as to whether, and by how much, the industry really adds value. However, much of the diversity in results can be ascribed to a tendency to focus on a subset of private equity fund types of venture capital and buyout funds or combine very different fund types. This study identifies and explores variations in performance according to eleven different types of fund, providing a much more fine-grained picture than preceding studies. We evidence considerable heterogeneity in performance results between fund types, with funds typically associated with riskier areas of activity having divergent outcomes and generally underperforming compared to buyout funds. We also find that all eleven fund types outperform the stock market when evaluating PMEs. We explore why underperforming fund types continue to attract significant investment. We apply agency theory to help understand general partner behaviour in private equity partnerships and building on the literature on the economics of expectation and of systemic evolution to explain limited partner behaviour, draw out the implications for theory and practice.Highlights An analysis of the relationship between a much wider range of PE fund types than preceding studies, and performance.Explanatory application of agency, expectations, and evolutionary theories.We evidence considerable heterogeneity in the performance of different types of fund. Funds typically associated with riskier areas of activity generally underperform buyout funds.We explore possible explanations behind mediocre or superior returns for specific fund types and why levels of return for some exhibit much more diversity than others. Journal: The European Journal of Finance Pages: 1819-1866 Issue: 18 Volume: 28 Year: 2022 Month: 12 X-DOI: 10.1080/1351847X.2022.2037681 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2037681 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:28:y:2022:i:18:p:1819-1866 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2146522_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Haiyan Jiang Author-X-Name-First: Haiyan Author-X-Name-Last: Jiang Author-Name: Kun Su Author-X-Name-First: Kun Author-X-Name-Last: Su Title: Why do firms purchase directors and officers liability insurance? – a perspective from short selling threats Abstract: This study examines the role of increased short selling threats in firms’ directors and officers liability insurance (D&O insurance) purchase decision against the backdrop of the Chinese deregulation of short sale. Using a difference-in-differences (DiD) research design, we demonstrate a positive effect of short selling threats on firms’ likelihood of purchasing D&O insurance policies after controlling for the known determinants of D&O insurance. We then perform tests to validate the DiD analysis result, including a test of the parallel trend assumption and placebo tests. To shed light on the mechanism through which the effect of short selling takes place, we perform a path analysis. The results reveal that firms’ litigation risk explains the effect of short selling pressure on D&O insurance purchase decision. Further cross-sectional analyses show that the positive effect of short selling threats on D&O insurance is ameliorated when firms have strong internal control or have great analyst coverage. Journal: The European Journal of Finance Pages: 111-133 Issue: 1 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2146522 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2146522 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:1:p:111-133 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2097885_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Yi Li Author-X-Name-First: Yi Author-X-Name-Last: Li Author-Name: Wei Zhang Author-X-Name-First: Wei Author-X-Name-Last: Zhang Author-Name: Andrew Urquhart Author-X-Name-First: Andrew Author-X-Name-Last: Urquhart Author-Name: Pengfei Wang Author-X-Name-First: Pengfei Author-X-Name-Last: Wang Title: The unintended consequence of social media criticisms: an earnings management perspective Abstract: This paper investigates the impact of social media criticisms on financial reporting quality. Analyzing data from the leading Internet stock message board in China, we demonstrate that postings on stock message boards could promote earnings management, i.e. reducing financial transparency. This finding is further enhanced by employing the instrumental variable approach and the difference-in-differences approach and is explained by the cognitive evaluation theory. Additional analysis suggests that the positive relation between social media criticisms and earnings management cannot be attributed to a deterioration in operating performance or internal governance and is more pronounced in postings from senior users. Journal: The European Journal of Finance Pages: 33-57 Issue: 1 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2097885 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2097885 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:1:p:33-57 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1957699_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Junhuan Zhang Author-X-Name-First: Junhuan Author-X-Name-Last: Zhang Author-Name: Jiaqi Wen Author-X-Name-First: Jiaqi Author-X-Name-Last: Wen Author-Name: Jing Chen Author-X-Name-First: Jing Author-X-Name-Last: Chen Title: Modeling market fluctuations under investor sentiment with a Hawkes-Contact process Abstract: We present a new Hawkes-Contact model that combines a Hawkes process and a finite-range contact process to model the stock price movements, especially under the impact of news and other information flows that could lead to contagious effects. To fully capture the underlying price process, we take the Hawkes process to track the full pathway of historical prices on their future movements and the contact process to capture the impact from news/investment sentiment. We compare this full model to a univariate Hawkes process that works as a benchmark model through analyzing their statistical properties using both simulated returns and the real 5-min returns of the crude oil index (Wind CZCE-TA). The statistical properties include probability density function, complementary cumulative distribution function, and Lempel-Ziv Complex. Our results show that the real returns' distribution is often far from normal, but the simulated returns through the Hawkes or Hawke-Contact model can achieve close fit to the real returns and exhibit similar statistical properties. More importantly, the Hawkes-Contact model performs better than the simple Hawkes model in capturing characteristics in the return movements, which indicates that the price evolution is also driven by the news sentiment created after them. Journal: The European Journal of Finance Pages: 17-32 Issue: 1 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2021.1957699 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1957699 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:1:p:17-32 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2104127_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Panagiota Makrychoriti Author-X-Name-First: Panagiota Author-X-Name-Last: Makrychoriti Author-Name: Spyros Spyrou Author-X-Name-First: Spyros Author-X-Name-Last: Spyrou Title: To be or not to be in the EU: the international economic effects of Brexit uncertainty Abstract: This paper evaluates the impact of Brexit-related uncertainty on the economies of the UK, EU, and the US. We propose a measure of Brexit uncertainty that has not been employed before in the literature. We first construct a binary variable by selecting Brexit-related events. We subsequently employ the Qual VAR model of Dueker [2005. “Dynamic Forecasts of Qualitative Variables: A Qual VAR Model of US Recessions.” Journal of Business & Economic Statistics 23: 96–104] to transform this variable to a continuous latent variable that captures uncertainty on important economic and financial variables. Next, this latent variable enters a structural Factor-Augmented Vector AutoRegression model combined with 452 macro and financial variables for the sample countries. Overall, our results indicate that the prolonged period of uncertainty, had a positive effect on the economies of major EU countries and negative effects for the UK economy. Additionally, the UK is the most important net sender of uncertainty spillovers in the EU, while Germany and France are among the most important net receivers of uncertainty shocks. Journal: The European Journal of Finance Pages: 58-85 Issue: 1 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2104127 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2104127 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:1:p:58-85 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2098046_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Philip Molyneux Author-X-Name-First: Philip Author-X-Name-Last: Molyneux Author-Name: Qingwei Wang Author-X-Name-First: Qingwei Author-X-Name-Last: Wang Author-Name: Ru Xie Author-X-Name-First: Ru Author-X-Name-Last: Xie Author-Name: Binru Zhao Author-X-Name-First: Binru Author-X-Name-Last: Zhao Title: Bank funding constraints and stock liquidity Abstract: This paper examines the relationship between bank marginal funding constraints and stock liquidity. Using bank credit default swap (CDS) spreads we show that increased funding constraints weaken bank stock liquidity (as measured by liquidity tightness, depth, and resilience). This effect strengthens during crises periods. Deteriorating bank stock liquidity is in turn priced into excess stock returns. In addition, we find that during liquidity crises, monetary expansion can break the relationship between funding costs and stock liquidity. Heightened monetary policy uncertainty, however, strengthens this relation. Journal: The European Journal of Finance Pages: 1-16 Issue: 1 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2098046 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2098046 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:1:p:1-16 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1955463_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Juan Carluccio Author-X-Name-First: Juan Author-X-Name-Last: Carluccio Author-Name: Clément Mazet-Sonilhac Author-X-Name-First: Clément Author-X-Name-Last: Mazet-Sonilhac Author-Name: Jean-Stéphane Mésonnier Author-X-Name-First: Jean-Stéphane Author-X-Name-Last: Mésonnier Title: Private firms, corporate investment and the WACC: evidence from France Abstract: How is corporate investment affected by the weighted average cost of capital (WACC)? Since existing studies focus on listed firms, little is known of the case of private firms, in spite of their relevance in both developed and developing economies. In this paper, we attempt to fill this gap. We develop an empirical study on the impact of the WACC on private firms' investment rates. We exploit accounting information on a panel of around 1700 French private corporate groups in the non-farm, non-financial sectors, covering the period 2005–2015. We overcome the challenge posed by the lack of observable information about the cost of equity for private firms by developing a methodology that relies on estimates for comparable public firms. We find that a one-standard deviation increase in the WACC (2 percentage points) leads to a 0.7 percentage point decrease in the investment rate the following year. Increases in both components of the WACC, namely the cost of debt and the cost of equity, are associated with lower investment rates. A back-of-the-envelope calculation suggests that the heightened WACC following the euro area crises reduced the aggregate corporate investment rate of French private firms by a cumulative 1.6 percentage points over 2009–2015. Journal: The European Journal of Finance Pages: 86-110 Issue: 1 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2021.1955463 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1955463 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:1:p:86-110 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2030778_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: José Jorge Author-X-Name-First: José Author-X-Name-Last: Jorge Title: Strategic complementarities, geographical agglomeration, and firm investment Abstract: We estimate the effect of strategic complementarities (measured by the geographical agglomeration of firms) on firm investment. Individual firm investment responds significantly to industry investment in agglomerated industries, whereas the response is null in dispersed industries. Industry-region sales do not explain the differential effect between these two types of industries. These results have been overlooked in the literature, provide a justification for regional and industry policies, and challenge the stable unit treatment value assumption (SUTVA) required in potential outcome analysis. Journal: The European Journal of Finance Pages: 135-154 Issue: 2 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2030778 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2030778 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:2:p:135-154 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2029751_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Mostafa Monzur Hasan Author-X-Name-First: Mostafa Monzur Author-X-Name-Last: Hasan Author-Name: Grantley Taylor Author-X-Name-First: Grantley Author-X-Name-Last: Taylor Title: Brand capital and credit ratings Abstract: We examine the relationship between brand capital and firms’ credit ratings. Using a sample of 5,787 publicly listed U.S. firm-year observations over the 1994–2017 period, we provide evidence that firms with higher levels of brand capital are associated with more favorable credit ratings. In cross-sectional analyses, we find that this relationship is more salient for firms with higher levels of information asymmetry and more financial and distress risk, and for firms with weak governance. In additional analysis, we find a negative relationship between brand capital and the implied cost of equity capital. Our results are robust to alternative measures of brand capital, an alternative regression model and endogeneity tests. Overall, our findings suggest that brand capital captures important financial and non-financial information, and that credit rating agencies, sensibly, consider brand capital in their assessment of firms’ credit worthiness. Journal: The European Journal of Finance Pages: 228-254 Issue: 2 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2029751 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2029751 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:2:p:228-254 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2022508_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Rong Ding Author-X-Name-First: Rong Author-X-Name-Last: Ding Author-Name: Yukun Shi Author-X-Name-First: Yukun Author-X-Name-Last: Shi Author-Name: Hang Zhou Author-X-Name-First: Hang Author-X-Name-Last: Zhou Title: Social media coverage and post-earnings announcement drift: evidence from seeking alpha Abstract: In this study, we investigate how social media coverage mitigates the under-reaction to an earnings surprise captured by post-earnings announcement drift. Based on the analysis of data collected over a nine-year period from Seeking Alpha, the largest crowdsourced social media platform providing third-party-generated financial commentary and analysis in the United States, we find that the market response to an earnings surprise attenuates for firms with high coverage on Seeking Alpha prior to the earnings announcement. Furthermore, such an effect is more salient for firms with lower institutional ownership and lower press coverage. The findings are consistent with the view that higher social media coverage facilitates a timely absorption of earnings-based information by stock prices, leading to a weaker under-reaction of the market. Journal: The European Journal of Finance Pages: 207-227 Issue: 2 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2021.2022508 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2022508 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:2:p:207-227 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2032242_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Imtiaz Sifat Author-X-Name-First: Imtiaz Author-X-Name-Last: Sifat Author-Name: Azhar Mohamad Author-X-Name-First: Azhar Author-X-Name-Last: Mohamad Author-Name: Heng Chao Zhang Author-X-Name-First: Heng Chao Author-X-Name-Last: Zhang Author-Name: Philip Molyneux Author-X-Name-First: Philip Author-X-Name-Last: Molyneux Title: Reevaluating the risk minimization utility of Islamic stocks and bonds (Sukuk) in international financial markets Abstract: We examine the risk minimization utility of Islamic stock and Sukuk (bond) indices by studying their linkages against traditional global counterparts. We first employ an asymmetric power ARCH-based ADCC model on an extended dataset employed by Kenourgios et al. (2016). Our sample ranges from July 2007 to June 2021 covering the Global Financial Crisis (GFC), the European Sovereign Debt Crisis (ESDC), and the COVID-19 pandemic. Econometric tests suggest strong evidence of coupling in the bulk of Islamic equity indices. A handful of emerging market indices constitute exceptions. Qualitatively similar results emerge from time–frequency analysis via wavelet tools, revealing pervasive coupling in both returns and volatility series. The linkages are scale-dependent in only a few pairs. In contrast, Sukuk indices are uncoupled from their global fixed income counterparts and relevant risky debt portfolios. In sum, the risk-return characteristics of Islamic equities (especially in developed economies) remain coupled to major global benchmarks and therefore are unlikely to appeal as safe haven candidates. The converse applies to Sukuk, which promises potential portfolio diversification benefits and safe haven status in ‘normal’ and crisis periods. Journal: The European Journal of Finance Pages: 185-206 Issue: 2 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2032242 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2032242 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:2:p:185-206 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2026440_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Sophie Carran Author-X-Name-First: Sophie Author-X-Name-Last: Carran Author-Name: Allan Hodgson Author-X-Name-First: Allan Author-X-Name-Last: Hodgson Author-Name: Shahrokh M. Saudagaran Author-X-Name-First: Shahrokh M. Author-X-Name-Last: Saudagaran Author-Name: Zhengling Xiong Author-X-Name-First: Zhengling Author-X-Name-Last: Xiong Title: Do CSR ethics dominate weak shareholder protection? The case of corporate insider trading in Europe Abstract: Corporate social responsibility (CSR) theoretically builds a positive brand for social and environmental commitment with ethical constraints imposed on corporate insider trading. We use a sample of ten European countries, clustered by French, German and Nordic sub-code law and U.K. common law to show high variability in the ethical influence of CSR components in constraining insider profitability. Moreover, in Continental Europe, the negative association between CSR commitment and insider profits, becomes significantly weaker when there is insufficient legislative protection afforded to minority shareholders. Results are robust to changes in CSR quality, trading around annual accounting reports, and when CSR commitment and insider control factors are adjusted. We reveal a complex intersection between innate predatory corporate trading, nurtured ethical governance and customised country legislative codes that provides a contrast to prior studies enacted under protective shareholder legislation in the U.S. Journal: The European Journal of Finance Pages: 155-184 Issue: 2 Volume: 29 Year: 2023 Month: 01 X-DOI: 10.1080/1351847X.2022.2026440 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2026440 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:2:p:155-184 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2032241_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Tobias Brünner Author-X-Name-First: Tobias Author-X-Name-Last: Brünner Author-Name: René Levínský Author-X-Name-First: René Author-X-Name-Last: Levínský Title: Price discovery and gains from trade in asset markets with insider trading Abstract: The present study contributes to the ongoing debate on possible costs and benefits of insider trading. We present a novel call auction model with insider information. Our model predicts that more insider information improves informational efficiency of prices, but this comes at the expense of reduced gains from trade. Testing these hypotheses in the lab, we find that insider information increases informational efficiency of call auction prices but does not decrease the realized gains from trade. We further find that the call auction does not perform worse than the continuous double auction. In fact, when the probability of insider information is high, the call auction has the most informative prices and highest realized gains from trade. Our experiment provides new evidence, from markets with very asymmetrically dispersed information, that lends support to the decision by many stock exchanges to use call auctions when information asymmetries are severe and the need for accurate prices is large, e.g. at the open or close of the trading day. Journal: The European Journal of Finance Pages: 255-277 Issue: 3 Volume: 29 Year: 2023 Month: 02 X-DOI: 10.1080/1351847X.2022.2032241 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2032241 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:3:p:255-277 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2041455_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Olga-Chara Pavlopoulou-Lelaki Author-X-Name-First: Olga-Chara Author-X-Name-Last: Pavlopoulou-Lelaki Title: The macroeconomic content of analyst news during economic crises and bailouts Abstract: This study examines the macroeconomic content of financial analysts’ news conditional on the state of the economy. The study analyses data from major markets in the Eurozone from 2005 to 2018, a period that includes an economic exuberance phase, followed by a global crisis that led to the application of economic adjustment programmes for several countries. The empirical findings show that analysts incorporate a positive association between expected GDP growth and corporate earnings growth, primarily driven by the investment component of GDP growth. The informativeness of macro expectations for analysts’ news increases as macroeconomic revisions are released, except for the crisis-bailout period, when analysts respond to macro revisions earlier in the horizon but systematically overreact to them. Analysts’ news is value relevant during the crisis-bailout period, with increased relevance for timely forecasts. Journal: The European Journal of Finance Pages: 307-328 Issue: 3 Volume: 29 Year: 2023 Month: 02 X-DOI: 10.1080/1351847X.2022.2041455 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2041455 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:3:p:307-328 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2052140_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Stefano Filomeni Author-X-Name-First: Stefano Author-X-Name-Last: Filomeni Author-Name: Konstantinos Baltas Author-X-Name-First: Konstantinos Author-X-Name-Last: Baltas Title: Senior-subordinated structure: buffer or signal in securitisation? Abstract: By exploiting a unique and proprietary dataset comprising granular deal- and tranche-level data on a global portfolio of securitisation deals, we empirically test the buffer vs the signalling hypothesis of credit enhancements in securitisation. We do so by focusing on one internal credit enhancement associated with the design of financial securities in securitisation, i.e. subordination. This study provides novel evidence on the role played by subordination in securitisation, suggesting that a real dichotomy between the buffer and signalling effects does not hold. Our findings indeed highlight that subordination serves both as a buffer against observable risk and as a signal of unobservable credit quality to third-party investors in the market; moreover, our results are robust to a wide battery of robustness tests. Our findings, of international relevance, contribute to the literature on information asymmetries between originators and investors and offer new policy insights in light of the recent agreement reached by European lawmakers with national governments to revive the European securitisation market. Journal: The European Journal of Finance Pages: 329-362 Issue: 3 Volume: 29 Year: 2023 Month: 02 X-DOI: 10.1080/1351847X.2022.2052140 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2052140 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:3:p:329-362 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2040042_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Kun Su Author-X-Name-First: Kun Author-X-Name-Last: Su Author-Name: Haiyan Jiang Author-X-Name-First: Haiyan Author-X-Name-Last: Jiang Title: Does social trust restrict dual agency costs? Evidence from China Abstract: This study examines whether social trust mitigates both principal-agent and principal-principal agency costs. Using data from China, we find that those firms headquartered in regions with high levels of social trust have a lower level of perk consumption, a high asset turnover ratio, and a low level of financial tunneling. Thus, the findings provide strong evidence that social trust serves as an invisible hand mitigating agency costs. Additionally, the results demonstrate that social trust’s effect is attenuated when external monitoring is already in place, suggestive of a more pronounced monitoring effect of social trust when firms lack formal governance mechanisms. Additional analyses on State-Owned Enterprise (SOE) and non-SOE subsamples reveal that social trust has a more pronounced effect in reducing managerial perk consumption in SOEs than in non-SOEs, whereas the constraining effect of social trust on tunneling is stronger in non-SOEs than it in SOEs. Journal: The European Journal of Finance Pages: 278-306 Issue: 3 Volume: 29 Year: 2023 Month: 02 X-DOI: 10.1080/1351847X.2022.2040042 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2040042 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:3:p:278-306 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2053732_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Hiep N. Luu Author-X-Name-First: Hiep N. Author-X-Name-Last: Luu Author-Name: Linh H. Nguyen Author-X-Name-First: Linh H. Author-X-Name-Last: Nguyen Author-Name: John O. S. Wilson Author-X-Name-First: John O. S. Author-X-Name-Last: Wilson Title: Organizational culture, competition and bank loan loss provisioning Abstract: This paper investigates how banks with different organizational cultures (defined as either control-dominant, collaborate-dominant, compete-dominant, create-dominant) manage their loan loss provisions (LLPs) in response to intensified industry competition. For identification, we utilize the change in state-level competition that followed the passage of the US Interstate Banking and Branching Efficiency Act (IBBEA) of 1994 as a quasi-natural experiment. We find that banks with a collaborate-dominant organizational culture are less likely to exercise discretion over LLPs. In contrast, banks with compete- and create-dominant organizational cultures are more likely to utilize discretionary LLPs when competition increases. Moreover, banks use discretionary LLPs to smooth income and signal private information to outsiders. Banks with collaborate-dominant organizational cultures exhibit less income smoothing. Counterparts with a create-dominant organizational culture use discretionary LLPs to signal information to outside stakeholders. Finally, banks with a create-dominant organizational culture are more likely to be subject to formal regulatory enforcement actions. Journal: The European Journal of Finance Pages: 393-418 Issue: 4 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2053732 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2053732 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:4:p:393-418 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2053180_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Luis Otero González Author-X-Name-First: Luis Otero Author-X-Name-Last: González Author-Name: Pablo Durán Santomil Author-X-Name-First: Pablo Durán Author-X-Name-Last: Santomil Author-Name: Robert E. Hoyt Author-X-Name-First: Robert E. Author-X-Name-Last: Hoyt Title: The impact of ERM on insurer performance under the Solvency II regulatory framework Abstract: This paper analyzes whether the degree of Enterprise Risk Management (ERM) implementation affects the performance obtained by insurance companies in the context of Solvency II. We have constructed a composite ERM index of 76 variables based on the responses from the chief risk officers (CROs) of 44 insurance entities in one of the EU’s largest insurance markets, namely, Spain. The results show that the higher the degree and quality of ERM implementation there is, the better the return on equity (ROE) and risk-adjusted return on assets (ROAadj) there is. We find that risk governance makes performance standards higher and more stable. Finally, our results suggest that models that run on Solvency II penalize small companies, meaning that improvements in management can offset the costs involved in its implementation. Journal: The European Journal of Finance Pages: 419-443 Issue: 4 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2053180 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2053180 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:4:p:419-443 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2071629_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Cesario Mateus Author-X-Name-First: Cesario Author-X-Name-Last: Mateus Author-Name: Sohan Sarwar Author-X-Name-First: Sohan Author-X-Name-Last: Sarwar Author-Name: Natasa Todorovic Author-X-Name-First: Natasa Author-X-Name-Last: Todorovic Title: Does equity mutual fund factor-risk-shifting pay off? Evidence from the US Abstract: In this paper, we assess the relationship between risk-shifting of mutual funds, measured as benchmark-adjusted factor-based investment style change following a structural break, and their risk-adjusted performance. We isolate only the breaks in style risk beyond those embedded in the funds’ benchmark index to eliminate any natural style risk changes resulting from varying company fundamentals over time. We group style risk changes into extreme (style rotation), moderate (style drifting), and weak (style-strengthening/weakening) and assess which investment style category is most profitable to shift in to and out of. Our findings show that funds that exhibit breaks generate overall better risk-adjusted performance than those that do not. Funds that are most successful in risk-shifting have both statistically and economically distinct risk-adjusted performance, make shifts towards small/large/value/growth style combinations rather than mid-cap and blend style, exhibit breaks less frequently and has more moderate risk-shifts than funds that are unsuccessful. Journal: The European Journal of Finance Pages: 444-465 Issue: 4 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2071629 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2071629 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:4:p:444-465 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2049448_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Xiaoyuan Hu Author-X-Name-First: Xiaoyuan Author-X-Name-Last: Hu Author-Name: Danmo Lin Author-X-Name-First: Danmo Author-X-Name-Last: Lin Author-Name: Onur Kemal Tosun Author-X-Name-First: Onur Kemal Author-X-Name-Last: Tosun Title: The effect of board independence on firm performance – new evidence from product market conditions Abstract: We study the effect of corporate board independence on firm performance under different product market conditions. Using customer–supplier links to identify exogenous downstream demand shocks, we find that firm performance is positively associated with board independence when the firm-specific product demand drops. The results are stronger for smaller firms and firms with high growth and more volatile stock returns. The findings prevail if the firm faces a medium level of product market competition or a medium level of downstream demand shock. We provide suggestive evidence for the board's monitoring function driving the effectiveness of board independence in bad times of idiosyncratic risks, rather than its advisory function. Journal: The European Journal of Finance Pages: 363-392 Issue: 4 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2049448 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2049448 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:4:p:363-392 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2097883_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Afees A. Salisu Author-X-Name-First: Afees A. Author-X-Name-Last: Salisu Author-Name: Rangan Gupta Author-X-Name-First: Rangan Author-X-Name-Last: Gupta Author-Name: Ahamuefula E. Ogbonna Author-X-Name-First: Ahamuefula E. Author-X-Name-Last: Ogbonna Title: Tail risks and forecastability of stock returns of advanced economies: evidence from centuries of data* Abstract: This study examines the out-of-sample predictability of market risks measured as tail risks for stock returns of eight advanced countries using a long-range monthly data of over a century. We follow the Conditional Autoregressive Value at Risk (CAViaR) of Engle and Manganelli (2004) to measure the tail risks and consequently, we produce results for both 1% and 5% VaRs across four variants (Adaptive, Symmetric absolute value, Asymmetric slope and Indirect GARCH) of the CAViaR. Thereafter, we use the “best” fit tail risks in the return predictability of the selected advanced stock markets. For the forecasting exercise, we construct three predictive models (one-predictor, two-predictor and three-predictor models) and examine their forecast performance in contrast with a driftless random walk model. Three findings are discernible from the empirical analysis. First, we find that the choice of VaR matters when determining the “best” fit CAViaR model for each return series as the outcome seems to differ between 1% and 5% VaRs. Second, the predictive model that incorporates both stock tail risk and oil tail risk produces better forecast outcomes than the one with own tail risk indicating the significance of both domestic and global risks in the return predictability of advanced countries. Journal: The European Journal of Finance Pages: 466-481 Issue: 4 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2097883 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2097883 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:4:p:466-481 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2075281_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Xing Huang Author-X-Name-First: Xing Author-X-Name-Last: Huang Author-Name: Xiaodong Wang Author-X-Name-First: Xiaodong Author-X-Name-Last: Wang Author-Name: Liang Han Author-X-Name-First: Liang Author-X-Name-Last: Han Author-Name: Benjamin Laker Author-X-Name-First: Benjamin Author-X-Name-Last: Laker Title: Does sound lending infrastructure foster better financial reporting quality of SMEs? Abstract: Using an unbalanced panel dataset that contains financial information of 46,340 small and medium-sized enterprises (SMEs) across 11 European countries over 2007–2015, this study examines the impacts of soundness of institutional factors on SME financial reporting quality as (inversely) reflected by the degree of earnings management. We consider a comprehensive framework of country-level lending infrastructure proxies which includes information, legal, social and regulatory environments and show that SME financial reporting quality is better in economies where there is greater availability, depth and quality of credit information sharing between lenders and credit reporting service providers, as empirically shown by a lower level of earnings management. We also show that a well-established legal system, i.e. better judicial and bankruptcy protection systems, is effective in restraining SME earnings management incentives and, earnings management is less prevalent in economies that are subject to a higher stock of social capital which increases SME borrowing capacity. Furthermore, we find that the stringent tax and regulatory systems can foster better financial reporting quality, as earnings management may be less effective. Overall, our robust findings suggest that the soundness of country-level lending infrastructure plays a vital role in improving SME financial reporting quality. Journal: The European Journal of Finance Pages: 542-566 Issue: 5 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2075281 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2075281 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:5:p:542-566 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2062250_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Jia Cao Author-X-Name-First: Jia Author-X-Name-Last: Cao Author-Name: Laurence Copeland Author-X-Name-First: Laurence Author-X-Name-Last: Copeland Title: Momentum and market volatility: a Bayesian regime-switching model Abstract: Our study finds that momentum is a persistent phenomenon that exhibits great variability in its strength in the UK stock market. Inspired by psychological evidence that cognitive biases can shift overtime, we conjecture that there may be two stock market states, namely, the calm and the turbulent market state, and that the switch between these two market states is governed by market volatility. Using Bayesian estimation methods, our results confirm the role of market volatility as the critical switching variable, which is also found to have additional predictive power for momentum returns in the turbulent market state. Somewhat contradictory to the findings in cross-sectional studies, we find that past returns have a negative impact on momentum profits. We also find that both winners and losers tend to perform better in the turbulent market state than in the calm market state and that losers’ outperformance is responsible for large momentum losses in the turbulent market state. Investment strategies that take advantage of the predictability of momentum dynamics outperform momentum strategies. Our findings are not readily reconciled with risk-based explanations but can be loosely explained in a behavioural framework. Journal: The European Journal of Finance Pages: 483-507 Issue: 5 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2062250 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2062250 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:5:p:483-507 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2075781_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Jyh-Bang Jou Author-X-Name-First: Jyh-Bang Author-X-Name-Last: Jou Title: The design of first-price debt auction when the winning bidder can install capacity that can be expanded or contracted later Abstract: This paper investigates how a seller designs the down payment rate and a bidder’s strategy in equilibrium in a first-price debt auction in which the winning bidder can exercise an investment project that can be expanded or contracted later. I find that the seller should ask a higher rate and a bidder will bid more when the bidder suffers larger losses in bankruptcy. This finding also applies to the case in which the winning bidder resells the installed capital stock at a lower price provided that he maintains the same or expands capacity on the verge of bankruptcy. As compared to the case in which a seller optimally designs the down payment rate, the seller who sets a lower one will receive lower revenue and the winning bidder, who installs a smaller capacity, will bid less and thus gain more, but his probability of bankruptcy will remain unchanged. Journal: The European Journal of Finance Pages: 527-541 Issue: 5 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2075781 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2075781 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:5:p:527-541 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2068964_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Sungju Hong Author-X-Name-First: Sungju Author-X-Name-Last: Hong Author-Name: Soosung Hwang Author-X-Name-First: Soosung Author-X-Name-Last: Hwang Title: In search of pairs using firm fundamentals: is pairs trading profitable? Abstract: We investigate whether spurious pairs created by multiple hypothesis testing can be minimized when firm characteristics are used to identify pairs. The results show that the portfolios of pairs that have higher similarities in firm characteristics outperform those that are fundamentally less similar by minimizing the non-convergence risk. The cost of trading spurious pairs is significant despite the empirical results that the profitability of pairs trading has continued to decline since 2003 and is not significant anymore. Accounting information plays a crucial role in identifying pairs rather than market trading data, and the importance of firm fundamentals in pairs trading increases during market crises. Journal: The European Journal of Finance Pages: 508-526 Issue: 5 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2068964 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2068964 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:5:p:508-526 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2078666_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Ebrahim Bazrafshan Author-X-Name-First: Ebrahim Author-X-Name-Last: Bazrafshan Author-Name: Amine Tarazi Author-X-Name-First: Amine Author-X-Name-Last: Tarazi Title: Cash shortfall, SEO offer size, and SEO announcement returns Abstract: We examine the announcement returns of 3483 seasoned equity offerings (SEOs) during the 1996–2018 period. Although there is a significant decline in SEO announcement returns, we show that cash shortfall in the year before SEO has a positive impact on SEO announcement returns. By matching SEO offers sizes and cash shortfalls, we also find that negative announcement-period returns become positive when SEO offer size is determined in concert with cash shortfall. Patterns of long-run abnormal firm performance after SEO announcements are consistent with those we document for the announcement-period returns. Our results suggest that cash shortfall in the year before SEO as indication of funds needs mitigates agency spending of SEO proceeds, and thus, the market welcomes the SEO announcement with positive stock price reactions. Journal: The European Journal of Finance Pages: 567-582 Issue: 5 Volume: 29 Year: 2023 Month: 03 X-DOI: 10.1080/1351847X.2022.2078666 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2078666 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:5:p:567-582 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2082311_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Seyed Hossein Khatami Author-X-Name-First: Seyed Hossein Author-X-Name-Last: Khatami Author-Name: Maria-Teresa Marchica Author-X-Name-First: Maria-Teresa Author-X-Name-Last: Marchica Author-Name: Roberto Mura Author-X-Name-First: Roberto Author-X-Name-Last: Mura Title: The effect of ‘underwriter–issuer’ personal connections on IPO underpricing Abstract: Using a large sample of US IPOs between 1999 and 2020, we show that personal connections between directors and top executives of issuers and those of underwriting banks result in significantly lower levels of IPO underpricing. We estimate the average effect to be about 13 percentage points. The results hold with several alternative robustness tests including non-random choice of underwriter, endogenous presence of venture capitalists, additional controls for managerial traits, matching exercises and doubly robust estimations. Our results indicate that the effect of connections is significantly stronger for companies that are more likely to suffer from asymmetric information problems. This corroborates the idea that the lower level of underpricing for connected companies reflects better flow of information with the underwriter. Journal: The European Journal of Finance Pages: 638-668 Issue: 6 Volume: 29 Year: 2023 Month: 04 X-DOI: 10.1080/1351847X.2022.2082311 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2082311 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:6:p:638-668 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2075280_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Guanming He Author-X-Name-First: Guanming Author-X-Name-Last: He Author-Name: Helen Mengbing Ren Author-X-Name-First: Helen Mengbing Author-X-Name-Last: Ren Title: Are financially constrained firms susceptible to a stock price crash? Abstract: This study investigates whether and how financial constraints on firms affect the risk of their stock price crashing. We find strong evidence that financial constraints increase future stock price crash risk. This finding is robust to using two quasi-natural experiments to control for potential endogeneity. We also provide evidence to suggest that bad news hoarding and default risk explain the crash risk of financially constrained firms. Cross-sectional analysis reveals that the positive relation between financial constraints and future crash risk is more prominent for firms with weak corporate governance. Our study is of interest to investors as well as other stakeholders concerned about firms’ creditworthiness and viability. Journal: The European Journal of Finance Pages: 612-637 Issue: 6 Volume: 29 Year: 2023 Month: 04 X-DOI: 10.1080/1351847X.2022.2075280 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2075280 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:6:p:612-637 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2084343_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Daniele Bianchi Author-X-Name-First: Daniele Author-X-Name-Last: Bianchi Author-Name: Massimo Guidolin Author-X-Name-First: Massimo Author-X-Name-Last: Guidolin Author-Name: Manuela Pedio Author-X-Name-First: Manuela Author-X-Name-Last: Pedio Title: The dynamics of returns predictability in cryptocurrency markets Abstract: In this paper, we take a forecasting perspective and compare the information content of a set of market risk factors, cryptocurrency-specific predictors, and sentiment variables for the returns of cryptocurrencies vs traditional asset classes. To this aim, we rely on a flexible dynamic econometric model that not only features time-varying coefficients, but also allows for the entire forecasting model to change over time to capture the time variation in the exposures of major digital currencies to the predictive variables. Besides, we investigate whether the inclusion of cryptocurrencies in an already diversified portfolio leads to additional economic gains. The main empirical results suggest that cryptocurrencies are not systematically predicted by stock market factors, precious metal commodities or supply factors. On the contrary, they display a time-varying but significant exposure to investors' attention. In addition, also because of a lack of predictability compared to traditional asset classes, cryptocurrencies lead to realized expected utility gains for a power utility investor. Journal: The European Journal of Finance Pages: 583-611 Issue: 6 Volume: 29 Year: 2023 Month: 04 X-DOI: 10.1080/1351847X.2022.2084343 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2084343 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:6:p:583-611 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2090267_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Christian Eckert Author-X-Name-First: Christian Author-X-Name-Last: Eckert Author-Name: Nadine Gatzert Author-X-Name-First: Nadine Author-X-Name-Last: Gatzert Author-Name: Madeline Schubert Author-X-Name-First: Madeline Author-X-Name-Last: Schubert Title: Analyzing spillover effects from data breaches to the US (cyber) insurance industry Abstract: As the US cyber insurance market is the largest worldwide, this paper presents an analysis of the effects of data breaches in the US financial services industry in relation to the stocks of US insurance companies. We conduct an event study, focusing on publicly announced data breaches that occurred between 2005 and 2018, and observe significant negative spillover effects for US insurers. However, in the subsample of non-announcing cyber insurers between 2015 and 2018, we not only find significant negative spillover effects especially for longer event windows, but also significant positive effects in case of ‘mega data breaches' with more than 1 million breached records, which may be due to an increasing demand for cyber insurance. To understand these findings in more detail, we further analyze event as well as firm characteristics and find that spillover effects are information-based rather than pure. Journal: The European Journal of Finance Pages: 669-692 Issue: 6 Volume: 29 Year: 2023 Month: 04 X-DOI: 10.1080/1351847X.2022.2090267 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2090267 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:6:p:669-692 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2058882_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Sascha Hahn Author-X-Name-First: Sascha Author-X-Name-Last: Hahn Author-Name: Paul P. Momtaz Author-X-Name-First: Paul P. Author-X-Name-Last: Momtaz Author-Name: Axel Wieandt Author-X-Name-First: Axel Author-X-Name-Last: Wieandt Title: The economics of banking regulation in Europe: does the post-GFC bail-in regime effectively eliminate implicit government guarantees? Abstract: This paper assesses the market effects of regulatory events associated with the implementation of a bail-in regime for failing European banks. The bail-in regime was designed to make banks efficiently resolvable in order to abolish Implicit Government Guarantees (IGGs). We use a seemingly-unrelated-regressions framework to estimate the effects on Credit Default Swap (CDS) spreads and equity returns of key events associated with the two cornerstones of the European bail-in regime, the Bank Recovery & Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRM-R), and other relevant events. Contrary to the regulations’ objectives, we find that regulatory events associated with the implementation of BRRD and SRM-R led to tighter CDS spreads and higher equity returns over the 2009–2017 period. The pattern varies with bank heterogeneity and is particularly pronounced for global systemically important banks (G-SIBs), i.e. banks whose systemic risk profile is deemed to be of such importance that the bank's failure would trigger a wider financial crisis and threaten the global economy, suggesting that the regime does not effectively solve the systemic problem of bailout expectations in the European banking sector. Journal: The European Journal of Finance Pages: 700-725 Issue: 7 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2058882 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2058882 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:7:p:700-725 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2081091_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Vu Quang Trinh Author-X-Name-First: Vu Quang Author-X-Name-Last: Trinh Author-Name: Ngan Duong Cao Author-X-Name-First: Ngan Duong Author-X-Name-Last: Cao Author-Name: Marwa Elnahass Author-X-Name-First: Marwa Author-X-Name-Last: Elnahass Title: Financial stability: a ‘vaccine’ for tail risk of the global banking sector in the shadow of the pandemic Abstract: This study examines the association between bank tail risk and the ongoing COVID-19 pandemic. We use a sample of 868 listed banks across 98 countries from 2002 to 2020, yielding a cross-country panel sample of 15,791 bank-year observations. We find that different components of bank tail risk (i.e. systematic and idiosyncratic) have increased during the health crisis but less so for stronger banks (i.e. more profitable, higher market valuation, lower stock volatility). The result implies that the pandemic results in a higher possibility of suffering extremely large losses in the stock prices of the global banking sector. However, banks with higher profitability and financial stability levels can better prepare themselves to tackle the crisis more effectively and hence are less likely to suffer extreme equity devaluations. Therefore, we contend that financial stability acts as a ‘vaccine’ for the bank tail risk in the shadow of the pandemic. We finally confine the results to some specific geographic settings; typically, they are more intensified in countries with more financial freedom, middle income-generating, and large banks. Journal: The European Journal of Finance Pages: 726-753 Issue: 7 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2081091 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2081091 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:7:p:726-753 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2055969_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Quynh Anh Do Author-X-Name-First: Quynh Anh Author-X-Name-Last: Do Author-Name: Van Phan Author-X-Name-First: Van Author-X-Name-Last: Phan Author-Name: Duc Tam Nguyen Author-X-Name-First: Duc Tam Author-X-Name-Last: Nguyen Title: How do local banks respond to natural disasters? Abstract: The increasing frequency and intensity of catastrophic natural disasters have the potential to stress and imperil banks to the point of compromised viability or even bankruptcy. Using data of approximately 907 domestic/local banks and Spatial Hazard Events and Losses Database for the United States during the period 2010–2019, we explore how natural disasters impact bank stability. Our main findings support the aforementioned hypothesis that natural disasters decrease bank stability because total deposit and equity (capital) become more volatile and the bank is prone to increased lending margins, as well as a provision of loan loss. Thus, banks lose their competitiveness, ROA deteriorates, and Z-score becomes lower. Strong corporate governance and healthy financial strategy, nevertheless, assist bank recovery in the aftermath of these weather extreme events. Last but not least, we find a non-linear relationship between natural disasters and bank stability and posit the role of indemnity paid out from the Federal insurance programme (after natural hazards) in the high-damage group. Journal: The European Journal of Finance Pages: 754-779 Issue: 7 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2055969 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2055969 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:7:p:754-779 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2033806_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Xinyu Huang Author-X-Name-First: Xinyu Author-X-Name-Last: Huang Author-Name: Weihao Han Author-X-Name-First: Weihao Author-X-Name-Last: Han Author-Name: David Newton Author-X-Name-First: David Author-X-Name-Last: Newton Author-Name: Emmanouil Platanakis Author-X-Name-First: Emmanouil Author-X-Name-Last: Platanakis Author-Name: Dimitrios Stafylas Author-X-Name-First: Dimitrios Author-X-Name-Last: Stafylas Author-Name: Charles Sutcliffe Author-X-Name-First: Charles Author-X-Name-Last: Sutcliffe Title: The diversification benefits of cryptocurrency asset categories and estimation risk: pre and post Covid-19 Abstract: We examine the diversification benefits of cryptocurrency asset categories. To mitigate the effects of estimation risk, we employ the Bayes-Stein model with no short-selling and variance-based constraints. We estimate the inputs using lasso regression and elastic net regression, employing the shrunk Wishart stochastic volatility model and Gaussian random projection. We consider nine cryptocurrency asset categories, and find that all but two provide significant out-of-sample diversification benefits. The lower is investor risk aversion, the more beneficial are cryptocurrencies as portfolio diversifiers. During uncertain economic environments, such as the post-Covid-19 period, cryptocurrencies provide the same diversification benefits as in more stable environments. Our results are robust to different portfolio benchmarks, regression technique, transaction cost, portfolio constraints, higher moments and Black–Litterman models. Journal: The European Journal of Finance Pages: 800-825 Issue: 7 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2033806 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2033806 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:7:p:800-825 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2200145_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Winifred Huang Author-X-Name-First: Winifred Author-X-Name-Last: Huang Author-Name: Philip Molyneux Author-X-Name-First: Philip Author-X-Name-Last: Molyneux Author-Name: Steven Ongena Author-X-Name-First: Steven Author-X-Name-Last: Ongena Author-Name: Ru Xie Author-X-Name-First: Ru Author-X-Name-Last: Xie Title: The new challenges of global banking and finance Abstract: The economic downturn caused by the Covid-19 pandemic has brought unprecedented uncertainty to the global banking system. Banks are facing critical market challenges driven by uncertain monetary policies, deterioration in credit quality, and regulation and compliance pressures. These challenges highlight the importance of better understanding the new role of financial intermediations in facilitating efficient capital allocations and economic development. This article reviews the related literature on monetary policy uncertainty, bank performance, digital finance, and introduces articles on these themes. Finally, we propose potential areas for future research. Journal: The European Journal of Finance Pages: 693-699 Issue: 7 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2023.2200145 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2200145 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:7:p:693-699 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2124120_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Luis Antonio Molinas Author-X-Name-First: Luis Antonio Author-X-Name-Last: Molinas Author-Name: Jane M. Binner Author-X-Name-First: Jane M. Author-X-Name-Last: Binner Author-Name: Meng Tong Author-X-Name-First: Meng Author-X-Name-Last: Tong Title: Do Divisia monetary aggregates help forecast exchange rates in a negative interest rate environment? Abstract: This paper contributes to the literature as the first work of its kind to examine the role and importance of Divisia monetary aggregates and concomitant User Cost Price indices as superior monetary policy forecasting tools in a negative interest rate environment. We compare the performance of Divisia monetary aggregates with traditional simple-sum aggregates in several theoretical models and in a Bayesian VAR to forecast the exchange rates between the euro, the dollar and yuan at various horizons using quarterly data. We evaluate their performance against that of a random walk using two criteria: Root Mean Square Error ratios and the Clark-West statistic. We find that, under a free-floating exchange regime, superior Divisia monetary aggregates outperform their simple sum counterparts and the benchmark random walk in a negative interest rate environment, consistently. Journal: The European Journal of Finance Pages: 780-799 Issue: 7 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2124120 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2124120 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:7:p:780-799 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2075780_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Jennifer Thewissen Author-X-Name-First: Jennifer Author-X-Name-Last: Thewissen Author-Name: James Thewissen Author-X-Name-First: James Author-X-Name-Last: Thewissen Author-Name: Wouter Torsin Author-X-Name-First: Wouter Author-X-Name-Last: Torsin Author-Name: Özgür Arslan-Ayaydin Author-X-Name-First: Özgür Author-X-Name-Last: Arslan-Ayaydin Title: Linguistic errors and investment decisions: the case of ICO white papers Abstract: Drawing on language expectancy theory, we predict that linguistic errors in ICO white papers negatively impact investors’ willingness to financially contribute to ICO projects. We manually annotate a sample of 546 ICO white papers according to 13 different error subcategories related to spelling and grammar. The error-annotated data are subsequently submitted to regression analyses which confirm that linguistic errors discourage potential investments in ICOs. Specifically, our analyses reveal the presence of ‘high penalty’ vs. ‘low penalty’ errors which result in higher vs. lower financial investment losses for the ICOs. The negative impact of language errors is stronger when ICO white papers are (1) written in native English-speaking countries and (2) from countries without cryptocurrency regulation. Results from an experiment confirm that this relationship is not driven by the entrepreneur- or investor-specific characteristics. Overall, we highlight that the reader identifies linguistic errors as a major ‘red flag’ that ultimately affects financial decision-making. Journal: The European Journal of Finance Pages: 826-868 Issue: 7 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2075780 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2075780 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:7:p:826-868 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2057807_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Yunhao Dai Author-X-Name-First: Yunhao Author-X-Name-Last: Dai Author-Name: Othar Kordsachia Author-X-Name-First: Othar Author-X-Name-Last: Kordsachia Author-Name: Weiqiang Tan Author-X-Name-First: Weiqiang Author-X-Name-Last: Tan Title: How does firm prestige affect the cost of bank loans? Abstract: Firm prestige reduces the cost of bank loans. Specifically, when borrowers are included in Fortune’s list of ‘America’s Most Admired Companies' (MAC), their loan costs decline by approximately 12.3 bps on average. The effect appears causal. The negative relation between prestige and loan costs is more pronounced for borrowers in more competitive industries and with higher information uncertainty. Banks with weaker bargaining power offer favorable loan terms to the MAC ranked borrowers when they face a high degree of competition from other banks. The MAC ranking appears to be used by these banks as a summary statistic for loan quality in the face of competition. Journal: The European Journal of Finance Pages: 888-918 Issue: 8 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2057807 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2057807 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:8:p:888-918 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2087533_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Qingfeng Wang Author-X-Name-First: Qingfeng Author-X-Name-Last: Wang Author-Name: Xingyi Zhang Author-X-Name-First: Xingyi Author-X-Name-Last: Zhang Title: Board Political Superiority and firm performance variability Abstract: This study provides empirical evidence that firms with a higher proportion of board directors who are politically more powerful than their CEOs can significantly reduce stock performance variability, but not on accounting performance variability. Our findings show that among independent (female, non-coopted) directors, only those who are politically more powerful than CEOs are effective in their monitoring role. In our additional tests, we show that our findings are not driven by an endogeneity bias. We find some mechanisms through which politically superior boards can mitigate stock performance variability. Journal: The European Journal of Finance Pages: 919-948 Issue: 8 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2087533 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2087533 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:8:p:919-948 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2035791_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Miguel Tavares-Gärtner Author-X-Name-First: Miguel Author-X-Name-Last: Tavares-Gärtner Author-Name: Paulo J. Pereira Author-X-Name-First: Paulo J. Author-X-Name-Last: Pereira Author-Name: Elísio Brandão Author-X-Name-First: Elísio Author-X-Name-Last: Brandão Title: Designing a public-private co-investment mechanism to foster venture capital Abstract: In this paper we develop a co-investment mechanism for promoting early investment in Start-up Firms. Focusing on the (uncertain) payoffs earned by a Public Venture Capitalist (PVC) and an Independent Venture Capitalist (IVC), we model each of the alternative mechanisms as an investment timing real option and illustrate that co-investing might be the most effective mechanism to foster investment in Entrepreneurial Firms. Grounded on this theoretical framework, we list a set of both public policy and managerial implications. Journal: The European Journal of Finance Pages: 869-887 Issue: 8 Volume: 29 Year: 2023 Month: 05 X-DOI: 10.1080/1351847X.2022.2035791 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2035791 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:8:p:869-887 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2091946_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Chuangxia Huang Author-X-Name-First: Chuangxia Author-X-Name-Last: Huang Author-Name: Yunke Deng Author-X-Name-First: Yunke Author-X-Name-Last: Deng Author-Name: Xin Yang Author-X-Name-First: Xin Author-X-Name-Last: Yang Author-Name: Xiaoguang Yang Author-X-Name-First: Xiaoguang Author-X-Name-Last: Yang Author-Name: Jinde Cao Author-X-Name-First: Jinde Author-X-Name-Last: Cao Title: Can financial crisis be detected? Laplacian energy measure Abstract: How to rapidly and accurately detect the financial crisis is one of the fundamental and challenging problems in the field of financial risk management. This paper aims to develop a novel network characteristic indicator to deal with this issue. Specifically, we select the daily closing price of stocks spanning from 2006 to 2020 in China’s A-share market to establish a series of complex networks, and extract Laplacian energy measure as a new network indicator. By employing the method of seasonal-trend decomposition procedure based on loess, the proposed indicator successfully detects the global financial crisis, the Eurozone debt crisis, the Chinese stock market crash, the Sino-US trade friction and the COVID-19 pandemic. Furthermore, compared with the traditional topological indicators (e.g. global efficiency, average clustering coefficient, characteristic path length and network density), the proposed indicator demonstrates the outstanding characteristics of higher identification accuracy, wider application range and faster response speed. Lastly, the robustness of the Laplacian energy measure in the financial crisis detection is further confirmed in the US, UK, German, French and Spanish stock markets. Journal: The European Journal of Finance Pages: 949-976 Issue: 9 Volume: 29 Year: 2023 Month: 06 X-DOI: 10.1080/1351847X.2022.2091946 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2091946 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:9:p:949-976 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2089048_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Jin Zou Author-X-Name-First: Jin Author-X-Name-Last: Zou Author-Name: Shuxin Li Author-X-Name-First: Shuxin Author-X-Name-Last: Li Author-Name: Zihan Xu Author-X-Name-First: Zihan Author-X-Name-Last: Xu Author-Name: Guoying Deng Author-X-Name-First: Guoying Author-X-Name-Last: Deng Title: Political uncertainty and bond defaults: evidence from the Chinese market Abstract: In this paper, we provide new evidence on how political uncertainty influences bond default, using China’s local officials’ turnover as a source of plausibly exogenous variation in uncertainty. We find that officials’ turnover increases bond defaults when political links are stronger, indicating that political turnover can destabilize government support for politically connected bonds. Additionally, off-budget resources have expanded China’s local government’s ability to bail out local bonds. Further results show that political connections create zombie bonds that ought to be out but instead to be in the market, reducing the allocative efficiency of financial resources. Our study suggests that, at least in some countries, political uncertainty influences financial risk through the mechanism of political connection. Journal: The European Journal of Finance Pages: 977-998 Issue: 9 Volume: 29 Year: 2023 Month: 06 X-DOI: 10.1080/1351847X.2022.2089048 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2089048 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:9:p:977-998 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1910529_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Angeliki Drousia Author-X-Name-First: Angeliki Author-X-Name-Last: Drousia Author-Name: Athanasios Episcopos Author-X-Name-First: Athanasios Author-X-Name-Last: Episcopos Author-Name: George N. Leledakis Author-X-Name-First: George N. Author-X-Name-Last: Leledakis Author-Name: Emmanouil G. Pyrgiotakis Author-X-Name-First: Emmanouil G. Author-X-Name-Last: Pyrgiotakis Title: EU Regulation and open market share repurchases: new evidence Abstract: This paper re-examines the impact of the EU Market Abuse Directive (MAD) on the market reaction around share repurchase announcements. We use a unique hand-collected dataset of firms listed on the Athens Stock Exchange, and we find evidence that contrasts with previous conclusions for large European economies. The implementation of the MAD is followed by a significant increase in announcement abnormal returns, which is more pronounced in initial repurchase programs. Our results remain robust to a series of robustness tests. We attribute our findings to cross-country differences in institutional framework and pre-MAD existing national laws. Collectively, our results support the notion that EU directives do not have a uniform effect across Member States. Thus, the impact of such reforms should also be examined in individual capital market studies. Journal: The European Journal of Finance Pages: 1022-1042 Issue: 9 Volume: 29 Year: 2023 Month: 06 X-DOI: 10.1080/1351847X.2021.1910529 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1910529 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:9:p:1022-1042 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2097886_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: An Chen Author-X-Name-First: An Author-X-Name-Last: Chen Author-Name: Stefan Schelling Author-X-Name-First: Stefan Author-X-Name-Last: Schelling Author-Name: Nils Sørensen Author-X-Name-First: Nils Author-X-Name-Last: Sørensen Title: On the impact of low interest rates on common withdrawal rules in old age Abstract: Ensuring a desired standard of living in retirement has been strongly challenged by increasing life expectancy, and simultaneously by the current and possibly long-lasting low interest environment. In contrast to literature in this field which claims annuitization of wealth being a vital part of retirement planning, many people manage their retirement savings and withdrawal policy during the retirement period independently. To this end, several easily applicable self-managed withdrawal rules are commonly recommended by financial advisors. We cast doubt on the viability of these self-managed withdrawal rules, particularly in an environment with increasing life expectancies and low interest rates. Further, we show that a mixed rule which combines the fixed percentage and the remaining lifetime rule can significantly improve retirees' welfare in an expected utility framework compared to other simple self-managed withdrawal rules. The results provide important insights for revising common recommendations by financial advisors, designing retirement products, and regulation. Journal: The European Journal of Finance Pages: 999-1021 Issue: 9 Volume: 29 Year: 2023 Month: 06 X-DOI: 10.1080/1351847X.2022.2097886 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2097886 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:9:p:999-1021 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1960403_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Daniel Traian Pele Author-X-Name-First: Daniel Traian Author-X-Name-Last: Pele Author-Name: Niels Wesselhöfft Author-X-Name-First: Niels Author-X-Name-Last: Wesselhöfft Author-Name: Wolfgang Karl Härdle Author-X-Name-First: Wolfgang Karl Author-X-Name-Last: Härdle Author-Name: Michalis Kolossiatis Author-X-Name-First: Michalis Author-X-Name-Last: Kolossiatis Author-Name: Yannis G. Yatracos Author-X-Name-First: Yannis G. Author-X-Name-Last: Yatracos Title: Are cryptos becoming alternative assets? Abstract: This research provides insights for the separation of cryptocurrencies from other assets. Using dimensionality reduction techniques, we show that most of the variation among cryptocurrencies, stocks, exchange rates, commodities, bonds, and real estate indexes can be explained by the tail, memory and moment factors of their log-returns. By applying various classification methods, cryptocurrencies are categorized as a separate asset class, mainly due to the tail factor. The main result is the complete separation of cryptocurrencies from the other asset types, using the Maximum Variance Components Split method. Additionally, we show that cryptocurrencies tend to exhibit similar characteristics over time and become more distinguished from other asset classes (synchronic evolution). Journal: The European Journal of Finance Pages: 1064-1105 Issue: 10 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2021.1960403 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1960403 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:10:p:1064-1105 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2100715_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Kei Nakagawa Author-X-Name-First: Kei Author-X-Name-Last: Nakagawa Author-Name: Ryuta Sakemoto Author-X-Name-First: Ryuta Author-X-Name-Last: Sakemoto Title: Dynamic allocations for currency investment strategies Abstract: This study conducts out-of-sample tests for returns on individual currency investment strategies and the weights on the universe of these strategies. We focus on five investment strategies: carry, momentum, value, dollar carry, and conditional FX correlation risk. The performances of our predictive models are evaluated using both statistical and economic measures. Within a dynamic asset allocation framework, an investor adjusts investment strategy weights based on the results of the prediction models. We find that our predictive model outperforms our benchmark, which uses historical average information in terms of statistical and economic measures. When the Sharpe ratio of the benchmark model is 0.52, our predictive model generates an economic gain of approximately 1.16% per annum over the benchmark. These findings are robust to the changes in investors’ risk aversion and target volatility for portfolio optimization. Journal: The European Journal of Finance Pages: 1207-1228 Issue: 10 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2100715 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2100715 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:10:p:1207-1228 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2097884_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Yuwei Liu Author-X-Name-First: Yuwei Author-X-Name-Last: Liu Author-Name: Jiangyi Li Author-X-Name-First: Jiangyi Author-X-Name-Last: Li Author-Name: Guoying Deng Author-X-Name-First: Guoying Author-X-Name-Last: Deng Title: Reference-dependent preferences and stock market participation Abstract: Prospect theory was proposed mainly to explain irrational investment behaviour. However, empirical evidence has come mostly from controlled experiments, and evidence from real data is rare. This paper uses panel data from a nationally representative survey in China to test whether prospect theory can explain stock market participation. The empirical results show that individuals take expected income as a reference point when investing in stocks. After real income and other factors are controlled for, the relative loss between expected and real income increases by 10,000 RMB, the probability of holding stocks increases by 0.77% and stock investment increases by 11.78%. The mechanism behind this is that relative losses motivate individuals to take excessive risks to hedge losses, while relative gains increase risk aversion and the holding of safe assets. These results can explain the puzzle of limited stock market participation. Participation costs are the main factor that restricts the low-income group from participating in the stock market, while the high-income group often faces relative gains, which leads to increased risk aversion and unwillingness to hold stocks. Journal: The European Journal of Finance Pages: 1043-1063 Issue: 10 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2097884 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2097884 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:10:p:1043-1063 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2100269_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Panagiotis Panagiotou Author-X-Name-First: Panagiotis Author-X-Name-Last: Panagiotou Author-Name: Xu Jiang Author-X-Name-First: Xu Author-X-Name-Last: Jiang Author-Name: Angel Gavilan Author-X-Name-First: Angel Author-X-Name-Last: Gavilan Title: The determinants of liquidity commonality in the Euro-area sovereign bond market Abstract: We examine time-series variation in liquidity commonality across sovereign benchmark bonds from 10 Euro-area countries, over a 7-year period using tick-by-tick data from the inter-dealer market and study how it is driven by supply determinants (funding constraints of financial intermediaries) and demand determinants (investor sentiment, uncertainty, and cross-market linkages with the equity market) of liquidity. Commonality in liquidity does change over time, tends to intensify in stress periods as well as around ECB policy meetings, and we find stronger evidence in favor of the supply side determinants. Journal: The European Journal of Finance Pages: 1144-1186 Issue: 10 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2100269 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2100269 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:10:p:1144-1186 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2098793_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Florian Schmid Author-X-Name-First: Florian Author-X-Name-Last: Schmid Author-Name: Herbert Mayer Author-X-Name-First: Herbert Author-X-Name-Last: Mayer Author-Name: Markus Wanner Author-X-Name-First: Markus Author-X-Name-Last: Wanner Author-Name: Andreas W. Rathgeber Author-X-Name-First: Andreas W. Author-X-Name-Last: Rathgeber Title: Rebalancing effects of commodity indices on open interest, volume and prices Abstract: The investment volume for commodity indices has increased rapidly over the past years. This financialization is intensively discussed in politics and science with mixed results because of several problems. We use a novel idea to measure the effect of the growing investment volume of index investors by looking at index rebalancing, in which only financial traders are forced to trade. Analyzing 289 rebalancing between 2006 and 2021 for the BCOM and the S&P GSCI, we observe significant results—with abnormal returns up to 14.1%—only for open interest and volume data. We cannot prove an effect on prices and, therefore, no effect of financialization on the real economy. Journal: The European Journal of Finance Pages: 1187-1206 Issue: 10 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2098793 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2098793 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:10:p:1187-1206 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2081090_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Massimiliano Barbi Author-X-Name-First: Massimiliano Author-X-Name-Last: Barbi Author-Name: Ottorino Morresi Author-X-Name-First: Ottorino Author-X-Name-Last: Morresi Title: Corporate hedging, family firms, and CEO identity Abstract: We study the propensity to hedge of closely-held family-managed firms. Family involvement in CEO positions positively affects the likelihood of hedging. The effect is stronger when the CEO belongs to the founding family, especially for long-tenured and founder CEOs. This evidence is consistent with the higher conservatism of family agents, aimed at protecting socioemotional wealth and avoiding loss of reputation and control. Information asymmetry and, more mildly, underdiversification increase the propensity to hedge. Corporate governance attributes proxying agency issues are not significant. Journal: The European Journal of Finance Pages: 1106-1143 Issue: 10 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2081090 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2081090 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:10:p:1106-1143 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2125818_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Diandian Ma Author-X-Name-First: Diandian Author-X-Name-Last: Ma Author-Name: Adrian Melia Author-X-Name-First: Adrian Author-X-Name-Last: Melia Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Author-Name: John van der Burg Author-X-Name-First: John Author-X-Name-Last: van der Burg Title: Distributional properties of the book to market ratio and their implications for empirical analysis Abstract: Financial accounting standards, government regulatory requirements and the capital market assumptions on which received asset pricing theory is based are used to develop a linear-quadratic diffusion process under which the unconditional probability density of the book to market ratio of equity will be either Gaussian (that is, normal) or the Pearson Type IV. Empirical analysis based on book to market ratios drawn from the Compustat North America Standard & Poor’s Fundamentals Quarterly Database shows the Pearson Type IV probability density provides a superior fit to firm book to market ratio sample distributions when compared to the Gaussian density with around two-thirds of firm sample book to market ratio distributions failing standard Gaussian goodness of fit tests. Moreover, around one in eight of the firm book to market ratio sample distributions return parameter estimates for the Pearson Type IV which are compatible with a non-convergent (that is, undefined) variance and higher moments. It is also shown how the inverse hyperbolic sine transformation can be used to mitigate the adverse consequences of heteroscedasticity and non-convergent moments in empirical work involving the book to market ratio. Journal: The European Journal of Finance Pages: 1330-1353 Issue: 11 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2125818 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2125818 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:11:p:1330-1353 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2116991_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Dimitris Andriosopoulos Author-X-Name-First: Dimitris Author-X-Name-Last: Andriosopoulos Author-Name: Sheikh Tanzila Deepty Author-X-Name-First: Sheikh Author-X-Name-Last: Tanzila Deepty Title: Can social capital and reputation mitigate political and market competition risk? Abstract: We assess whether social capital, captured by CSR, is an effective hedge against risks arising from political and market competition risk. Having a higher CSR score significantly reduces stock return volatility during political uncertainty, but not cash flow volatility. Meanwhile, CSR is also an effective hedge against stock return volatility that arises from peer competition. Finally, the hedging effect of CSR on stock return volatility is transient, but has a positive effect on firms’ future performance and growth opportunities. Journal: The European Journal of Finance Pages: 1229-1266 Issue: 11 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2116991 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2116991 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:11:p:1229-1266 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2124119_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Phong Minh Nguyen Author-X-Name-First: Phong Minh Author-X-Name-Last: Nguyen Author-Name: Wei-Han Liu Author-X-Name-First: Wei-Han Author-X-Name-Last: Liu Title: Portfolio management using time-varying vine copula: an application on the G7 equity market indices Abstract: We consider structural breaks and use vine copulas to hierarchically model the underlying assets’ dependence structure of the portfolio of G7 equity market indices (1998–2019). This framework is noticed for its flexibility in capturing asymmetry and non-linearity in a time-varying style. We compare the portfolio performance in terms of the minimum Conditional Value-at-risk (CVaR) and the maximum return-to-CVaR ratio criteria with the traditional mean-variance framework and the equal-weighted strategy. The outcomes show the outperformance of our method across subperiods. Canonical vine copula marginally outperforms drawable vine copula in terms of return-to-risk ratio. Our proposed vine copula models better capture the risk-return tradeoff especially during critical market moments. Journal: The European Journal of Finance Pages: 1303-1329 Issue: 11 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2124119 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2124119 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:11:p:1303-1329 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2111222_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Baohui Wu Author-X-Name-First: Baohui Author-X-Name-Last: Wu Author-Name: Feng Min Author-X-Name-First: Feng Author-X-Name-Last: Min Author-Name: Fenghua Wen Author-X-Name-First: Fenghua Author-X-Name-Last: Wen Title: The stress contagion among financial markets and its determinants Abstract: The purpose of this paper is to study the spillover effects of financial stress among five important financial markets (bond, stock, foreign exchange, interbank, and real estate markets) in China, and explore the important determinants of financial stress spillover level among the markets and the impact of the Chinese stress spillover situation on the European markets. Our findings are as follows: First, there is a significant stress spillover effect among the five markets, and the total financial stress spillover index (TSSI) is very high during the global financial crisis. Generally, the stock and real estate markets are the major transmitters of stress spillover, and the interbank and bond markets are the major receivers. Second, the most macro factors have significant impacts on the financial stress spillover level among the markets, especially CPI index, the Chinese economic policy uncertainty index and VIX index. And the severity of the COVID-19 epidemic in China and the world has a significant impact on the TSSI, especially from March 2020 to August 2020. Finally, the TSSI can significantly increase the volatility of French stock market, Italian stock market and German government bond market, especially during the Sino-US trade war and the COVID-19 epidemic. Journal: The European Journal of Finance Pages: 1267-1302 Issue: 11 Volume: 29 Year: 2023 Month: 07 X-DOI: 10.1080/1351847X.2022.2111222 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2111222 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:11:p:1267-1302 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2134811_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Andreas Kick Author-X-Name-First: Andreas Author-X-Name-Last: Kick Author-Name: Horst Rottmann Author-X-Name-First: Horst Author-X-Name-Last: Rottmann Title: The relevance of banks to the European stock market Abstract: Banks have always played an ambivalent role in financial markets. On the one hand, they provide essential services for the market; on the other hand, problems in the banking sector can send shock waves through the entire economy. Given this prominent role, it is not surprising that Pereira and Rua [2018. “Asset Pricing with a Bank Risk Factor.” Journal of Money, Credit and Banking 50(5): 993–1032. doi:10.1111/jmcb.12473] found that the health of the banking sector exerts an influence on stock returns in the US. Understanding the relationship between banks and their impact on the asset prices of non-financials is essential to evaluate the risk emanating from an unhealthy banking sector and should be considered in new regulatory requirements. The aim of this study is to determine if the health of European banks is of such importance for the European stock market so that spillover effects are visible. Our results show that none of our banking-health variables have explanatory power on the cross-section of European stock returns. These findings contrast those for the US. The reasons may be manifold, from an unimportant liquidity provisioning channel over reduced room for actions due to regulatory requirements up to a moral hazard situation in Europe, where investors strongly rely on the governmental bailouts of distressed banks. Journal: The European Journal of Finance Pages: 1432-1459 Issue: 12 Volume: 29 Year: 2023 Month: 08 X-DOI: 10.1080/1351847X.2022.2134811 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2134811 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:12:p:1432-1459 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2124530_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Robert Mullings Author-X-Name-First: Robert Author-X-Name-Last: Mullings Title: Do central bank sentiment shocks affect liquidity within the European Monetary Union? A computational linguistics approach Abstract: A common feature of recent financial crises has been the ‘drying up’ of financial market liquidity. Increased attention, therefore, has been directed to central bank policy tools which can affect liquidity, even as policy rates approach the zero lower bound. This study examines the role of the European Central Bank (ECB) Governing Council’s communication in influencing financial market liquidity. A specialized lexicon is used to extract sentiments on (i) monetary policy and (ii) economic outlook from ECB Governing Council statements between 2006 and 2016. The analysis reveals that ECB sentiments on ‘economic outlook’ are more consequential for money market (MM) liquidity than for currency, equity and bond (CEB) liquidity. Sentiments on ‘monetary policy’ produce a statistically significant effect on CEB liquidity; with more ‘hawkish’ sentiments leading to declines in liquidity. Volatility in global financial markets, however, plays a relatively more robust role than ECB sentiments in influencing market liquidity. The results are corroborated using an alternative and more generic quantifier called the Loughran and McDonald (LM) sentiment quantifier. The specialized lexicon provides richer inferences than the LM quantifier, however, since it captures the ‘hawkishness’ or ‘dovishness’ of monetary policy tone and the ‘positivity’ or ‘negativity’ of the Governing Council’s sentiments on economic outlook. Journal: The European Journal of Finance Pages: 1355-1381 Issue: 12 Volume: 29 Year: 2023 Month: 08 X-DOI: 10.1080/1351847X.2022.2124530 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2124530 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:12:p:1355-1381 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2129404_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Zelei Li Author-X-Name-First: Zelei Author-X-Name-Last: Li Author-Name: Dan Tang Author-X-Name-First: Dan Author-X-Name-Last: Tang Author-Name: Xingchun Wang Author-X-Name-First: Xingchun Author-X-Name-Last: Wang Title: Valuing basket-spread options with default risk under Hawkes jump-diffusion processes Abstract: In this paper, we investigate the pricing of basket-spread options with default risk under Hawkes jump-diffusion processes. A self-exciting Hawkes process is employed to describe jump clustering, and jump amplitudes of different assets in baskets are all correlated. In addition, the diffusive components of assets are also assumed to be correlated with each other. We obtain option prices by approximating the arithmetic average of the underlying assets in the basket with their second moment-matched geometric average values, and numerical experiments show that our approximated prices are quite accurate, spanning different underlying asset numbers and alternative strike prices. Finally, we illustrate the effects of default risk and clustered jump risk on the prices of basket-spread options. Journal: The European Journal of Finance Pages: 1406-1431 Issue: 12 Volume: 29 Year: 2023 Month: 08 X-DOI: 10.1080/1351847X.2022.2129404 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2129404 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:12:p:1406-1431 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2131450_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Amedeo De Cesari Author-X-Name-First: Amedeo Author-X-Name-Last: De Cesari Author-Name: Marie Dutordoir Author-X-Name-First: Marie Author-X-Name-Last: Dutordoir Author-Name: Zainab Mehmood Author-X-Name-First: Zainab Author-X-Name-Last: Mehmood Title: The impact of CEO education on convertible bond issuance Abstract: We examine the impact of managerial education on a firm’s decision to issue convertible bonds instead of standard, non-hybrid securities. Upper echelons theory argues that better managerial education attainment fosters a higher ability to process complex information and tolerate ambiguity. Exploiting convertible bonds’ higher degree of complexity, relative to seasoned equity and straight bonds, we hypothesise that Chief Executive Officers (CEOs) with higher education levels are more likely to issue convertible bonds instead of non-hybrid security types. A multinomial probit model analysing firms’ choice between convertibles, seasoned equity, and straight bonds provides evidence consistent with this hypothesis. A one-level increase in a CEO’s highest academic degree raises the likelihood of substituting convertibles for non-hybrid securities by 2.86%, after controlling for standard corporate security choice determinants. Chief Financial Officer (CFO) education levels, by contrast, have no significant impact on convertible bond issuance. Consistent with higher managerial education attainment being associated with a higher cognitive ability, we also find a positive association between CEO education levels and the level of complexity in convertible bond design. Our findings, which hold under a range of alternative specifications, illustrate the influence of CEOs’ personal characteristics on securities issuance and design. Journal: The European Journal of Finance Pages: 1382-1405 Issue: 12 Volume: 29 Year: 2023 Month: 08 X-DOI: 10.1080/1351847X.2022.2131450 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2131450 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:12:p:1382-1405 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2086478_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Fawad Ahmad Author-X-Name-First: Fawad Author-X-Name-Last: Ahmad Author-Name: Raffaele Oriani Author-X-Name-First: Raffaele Author-X-Name-Last: Oriani Title: Is the investor's reliance on cognition and emotional regulation predict preference for selecting value versus growth stocks? Abstract: Economic behavior highlights the importance of differences in individual characteristics like cognition and emotional regulation strategy in predicting the selection and performance of economic choices. However, the literature on value premium has overlooked the effect of cognition and emotional regulation strategy in assessing individual preference to select value versus growth stocks. We fill this gap by employing dual-process and emotional regulation theories to investigate the impact of intuitive cognition (Type 1), analytical cognition (Type 2), expressive suppression, and cognitive reappraisal on individual preferences for the selection of value versus growth stocks. Results confirm that individuals with higher reliance on Type 1 (or Type 2) and expressive suppression (or cognitive reappraisal) exhibit lower (or higher) preferences for the selection of value versus growth stocks. These results imply that emotion alters an individual's decision-making, and both emotion and cognition are inherently intertwined from inception to action. Our findings have implications for investors to avoid (or seek) investment in emotion-driven fundamentally weak overvalued firms (or fundamentally strong undervalued firms) via regulating emotional inhibitors to engage in thorough decision-making. Journal: The European Journal of Finance Pages: 1555-1578 Issue: 13 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2022.2086478 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2086478 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:13:p:1555-1578 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1842223_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Jerry Coakley Author-X-Name-First: Jerry Author-X-Name-Last: Coakley Author-Name: Winifred Huang Author-X-Name-First: Winifred Author-X-Name-Last: Huang Title: P2P lending and outside entrepreneurial finance Abstract: Later stage, unlisted SMEs are typically too old to attract equity crowdfunding, one of the two novel sources of outside entrepreneurial finance. The other source is peer-to-peer (P2P) business lending – sometimes called marketplace lending or debt crowdfunding – where unlisted SMEs raise medium term loans from a combination of the crowd of small investors and financial institutions via internet portals. The institutions benefit from the collective wisdom of the crowd while institutional investments reduce information asymmetries for other investors and may lead to herding by the crowd. This paper studies the incremental decision to choose P2P over bank debt by means of probit and logit regressions. It establishes that firms with relatively high credit ratings, smaller assets, lower levels of prior capital expenditures, and low leverage ratios are more likely to raise P2P rather than bank debt. The conclusion is that P2P debt plays a unique role in accommodating the outside entrepreneurial capital needs of these SMEs wanting medium term funding. The empirical work employs a sample 1,249 small, private SMEs that received P2P loans with maturities of up to five years 2013–2015 from Funding Circle, the leading UK P2P business lender. Journal: The European Journal of Finance Pages: 1520-1537 Issue: 13 Volume: 29 Year: 2023 Month: 9 X-DOI: 10.1080/1351847X.2020.1842223 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1842223 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:13:p:1520-1537 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2038648_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Kim Kaivanto Author-X-Name-First: Kim Author-X-Name-Last: Kaivanto Author-Name: Peng Zhang Author-X-Name-First: Peng Author-X-Name-Last: Zhang Title: Is business formation driven by sentiment or fundamentals? Abstract: The creation of a new business is an act of entrepreneurship. It is also a financial undertaking. Hence it is admissible to apply the apparatus of behavioral finance to study the determinants of business formation. Our results show that aggregate US business formation, nationally and regionally, is jointly predicted by economic fundamentals and sentiment. There is evidence of both ‘pull’ and ‘push’ motives for entrepreneurship. Yet this simple structure does not survive decomposition by payroll propensity. High-payroll-propensity entrepreneurs respond primarily to pull-motive fundamentals, with sentiment accounting for a small fraction of explained variance. Low-payroll-propensity entrepreneurs, on the other hand, respond to both sentiment and fundamentals, representing both pull and push motives, with sentiment accounting for a large fraction of explained variance. Low-payroll-propensity business formation is twice as volatile as high-payroll-propensity entrepreneurship, and similarly to noise-based decision making in behavioral finance, it is substantially driven by sentiment. Journal: The European Journal of Finance Pages: 1493-1519 Issue: 13 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2022.2038648 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2038648 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:13:p:1493-1519 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1841663_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Natalia Dobryagina Author-X-Name-First: Natalia Author-X-Name-Last: Dobryagina Title: Agricultural entrepreneurship fostering from behavioral decision theory perspective. Celebrity branding impact on financial and non-financial motivation Abstract: Agricultural entrepreneurship fostering is an important part of the EU and US rural policies. Despite the fact that literature points attention to the issue of limited number of new entrants in agriculture, existing policies are mostly focused on support of existing entrepreneurs. Recent research describes such behavioral reasons of limited number of new entrants as low attractiveness and not appealing image of the agricultural sector. This paper considers the issue of attracting new entrepreneurs to agriculture from behavioral decision theory perspective and suggests celebrity branding as a tool of agricultural entrepreneurship fostering. Through the application of multi-criteria decision analysis, the paper proves that celebrity branding has a significant positive effect on attractiveness of entrepreneurship in agriculture and on expected financial and non-financial benefits from entrepreneurial career in the sector. Also, the paper reveals that financial motivation plays the most important role for individuals attracted to urban spheres of entrepreneurship and is the second most important factor (after self-realization) for individuals attracted to the agricultural sphere of entrepreneurship. The paper also demonstrates a debiasing effect of celebrity branding on the perception of entrepreneurial career in agriculture. Journal: The European Journal of Finance Pages: 1538-1554 Issue: 13 Volume: 29 Year: 2023 Month: 9 X-DOI: 10.1080/1351847X.2020.1841663 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1841663 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:13:p:1538-1554 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1977360_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Rexford Attah-Boakye Author-X-Name-First: Rexford Author-X-Name-Last: Attah-Boakye Author-Name: Laura A. Costanzo Author-X-Name-First: Laura A. Author-X-Name-Last: Costanzo Author-Name: Yilmaz Guney Author-X-Name-First: Yilmaz Author-X-Name-Last: Guney Author-Name: Waymond Rodgers Author-X-Name-First: Waymond Author-X-Name-Last: Rodgers Title: The effects of top management team strategic cognition on corporate financial health and value: an interactive multi-dimensional approach Abstract: The upper echelons theory posits that the values, personalities, experience and education background of the top management team (TMT) affect both executives’ strategic cognition and corporate outcomes. Since TMT members differ in their cognitive structures, as also acknowledged by the presence of managerial biases and irrationalities in the behavioural finance theories, policy makers and scholars are saddled with the problem of identifying specific cognitive elements that can secure optimum organisational outcomes. Conceptual approaches or linear relationships between TMT strategic cognition (TMT-SC) and outcomes are unable to capture the complex interdependencies among TMT-SC, TMT attributes and performance. We propose and empirically test a dynamic multi-dimensional TMT-SC model. Using handpicked UK company panel data, we provide robust empirical evidence that extends our understanding of the theory. Our PLS-SEM analyses show that heterogeneity in TMT academic and professional qualifications, and work experience alone cannot provide optimal benefits to organisations. However, when they are combined with other TMT cognitive factors such as social networking, innovativeness and risk-taking levels, these aspects appear to improve firm value and financial health. Journal: The European Journal of Finance Pages: 1461-1492 Issue: 13 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2021.1977360 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1977360 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:13:p:1461-1492 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2146521_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Aleksandra Baros Author-X-Name-First: Aleksandra Author-X-Name-Last: Baros Author-Name: Ettore Croci Author-X-Name-First: Ettore Author-X-Name-Last: Croci Author-Name: Viktor Elliot Author-X-Name-First: Viktor Author-X-Name-Last: Elliot Author-Name: Magnus Willesson Author-X-Name-First: Magnus Author-X-Name-Last: Willesson Title: Bank liquidity and capital shocks in unconventional times Abstract: This paper examines bank liquidity management following capital shocks under capital and liquidity regulation in a period of unconventional monetary policies. Studying European banks between 2010 and 2018, we find that bank liquidity is generally not affected by a negative capital shock. Capital shocks are nevertheless transmitted into liquidity positions through balance sheet adjustments. Addressing bank-level balance sheet policies, we find that the banks de-risk assets by replacing corporate loans with financial securities, especially if the shock takes place during periods of heightened central bank interventions. Moreover, asset-side-dominant risk-reducing behavior goes against regulatory intent and indicates that regulatory arbitrage considerations affect banks’ responses to shocks. Finally, we document heterogeneous responses by banks depending on their size, type, and country. These findings imply that compliance with regulation may lead to partial shortages in corporate lending, with banks prioritizing investment in government securities in event of a capital shock. Journal: The European Journal of Finance Pages: 1678-1703 Issue: 14 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2022.2146521 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2146521 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1678-1703 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2144401_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Maher Khasawneh Author-X-Name-First: Maher Author-X-Name-Last: Khasawneh Author-Name: David G. McMillan Author-X-Name-First: David G. Author-X-Name-Last: McMillan Author-Name: Dimos Kambouroudis Author-X-Name-First: Dimos Author-X-Name-Last: Kambouroudis Title: Expected profitability, the 52-week high and the idiosyncratic volatility puzzle Abstract: We investigate the joint ability of fundamental-based and market-based news to explain the anomalous underperformance of stocks with high idiosyncratic volatility (high IVOL). An out-of-sample prediction of future profitability is adopted as a proxy for fundamental–based news while market-based news is represented by the 52-week high price ratio. A sample of UK stocks over the period January 1996 to December 2017 is analysed. The empirical results indicate that both the fundamental-based projected profitability and the 52-week high price ratio are important in explaining the IVOL anomaly. In contrast, individually, neither variable fully accounts for the anomaly. This relation is more pronounced following a period of high sentiment and during an upmarket. Further results suggest that underreaction lies at the heart of this explanation. Journal: The European Journal of Finance Pages: 1621-1648 Issue: 14 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2022.2144401 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2144401 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1621-1648 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2142060_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Bo Liu Author-X-Name-First: Bo Author-X-Name-Last: Liu Author-Name: Yingjie Niu Author-X-Name-First: Yingjie Author-X-Name-Last: Niu Author-Name: Yingjue Wang Author-X-Name-First: Yingjue Author-X-Name-Last: Wang Title: The spirit of capitalism, investment, and consumption smoothing Abstract: We extend the standard real options approach to analyse the interdependence of investment and consumption decisions by incorporating the spirit of capitalism. For investment, when investment payoff is given as a lump-sum payment, the spirit of capitalism erodes the option value to invest and speeds up investment. However, for a flow investment payoff, the spirit of capitalism encourages the agent to postpone investing since the project value after investment is less than the option value before investment. The results on the investment timing are robust to alternative specifications of the payoff process. For consumption, the agent tends to consume less in the presence of the capitalist spirit. Finally, the time-series properties of consumption and welfare implications of the spirit of capitalism are analysed. Journal: The European Journal of Finance Pages: 1598-1620 Issue: 14 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2022.2142060 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2142060 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1598-1620 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2137422_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Jiqian Wang Author-X-Name-First: Jiqian Author-X-Name-Last: Wang Author-Name: Rangan Gupta Author-X-Name-First: Rangan Author-X-Name-Last: Gupta Author-Name: Oğuzhan Çepni Author-X-Name-First: Oğuzhan Author-X-Name-Last: Çepni Author-Name: Feng Ma Author-X-Name-First: Feng Author-X-Name-Last: Ma Title: Forecasting international REITs volatility: the role of oil-price uncertainty Abstract: We forecast realized variance (RV) of Real Estate Investment Trusts for 10 leading markets and regions, derived from 5-minutes-interval intraday data, based on the information content of two alternative metrics of daily oil-price uncertainty. Based on the period of the analysis covering January 2008 to July 2020, and using variants of the popular MIDAS-RV model, augmented to include oil market uncertainties, captured by its RV (also derived from 5-minute intraday data) and implied volatility (i.e. the oil VIX), we report evidence of significant statistical and economic gains in the forecasting performance. The result is robust to the size of the forecasting samples, including that of the COVID-19 period, lag-length, nonlinearities, asymmetric effects, and forecast horizon. Our results have important implications for investors and policymakers. Journal: The European Journal of Finance Pages: 1579-1597 Issue: 14 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2022.2137422 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2137422 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1579-1597 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2141130_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Shenglan Chen Author-X-Name-First: Shenglan Author-X-Name-Last: Chen Author-Name: Jing Li Author-X-Name-First: Jing Author-X-Name-Last: Li Author-Name: Xiaoling Liu Author-X-Name-First: Xiaoling Author-X-Name-Last: Liu Author-Name: Cheng Yan Author-X-Name-First: Cheng Author-X-Name-Last: Yan Title: Mutual fund centrality and the remote acquisitions of listed firms in China* Abstract: We empirically investigate the effect of the centrality of mutual funds (MFs) on the holding network of each listed firm in cross-province acquisitions in China using a unique dataset covering the 2010–2019 period. We find a positive association between the centrality of MFs and the likelihood and value of cross-province acquisitions made by the listed firm, especially when the central blockholder MF pays corporate site visits, when target firms are difficult for the acquirer to reach, and when the central blockholder MF is low-risk or high-performance. We also show that blockholder centrality improves the market valuation and post-acquisition performance of cross-province acquisitions. These results support the notion that a MF with the largest blockholder centrality increases the value of the listed firms it owns by alleviating information asymmetry in cross-province acquisitions. Collectively, our evidence highlights the advisory role of a blockholder network for listed firms. Journal: The European Journal of Finance Pages: 1649-1677 Issue: 14 Volume: 29 Year: 2023 Month: 09 X-DOI: 10.1080/1351847X.2022.2141130 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2141130 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1649-1677 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2145230_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Nikolaos Daskalakis Author-X-Name-First: Nikolaos Author-X-Name-Last: Daskalakis Author-Name: Angelos Kakavas Author-X-Name-First: Angelos Author-X-Name-Last: Kakavas Author-Name: Spyros Missiakoulis Author-X-Name-First: Spyros Author-X-Name-Last: Missiakoulis Title: Do industry differences affect firm-specific capital structure determinants? Abstract: The paper explores whether, and how, capital structure determinants differ across industries. Specifically, we investigate whether the typical capital structure determinants of size, profitability, asset tangibility, non-debt-tax-shields and liquidity affect, in a statistically different way, how capital structure is determined across four different industries: manufacturing, commerce, services, and tourism. We show that even though industry effects have been looked at in the various capital structure determination studies, they have not been thoroughly studied in capital structure literature. We apply an interaction effects methodological approach and show that capital structure determinants do differ in terms of magnitude and direction across industries, concluding that industry specifications should be investigated more thoroughly when exploring the capital structure determination puzzle. Journal: The European Journal of Finance Pages: 1705-1715 Issue: 15 Volume: 29 Year: 2023 Month: 10 X-DOI: 10.1080/1351847X.2022.2145230 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2145230 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:15:p:1705-1715 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2151371_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Christian Haddad Author-X-Name-First: Christian Author-X-Name-Last: Haddad Author-Name: Lars Hornuf Author-X-Name-First: Lars Author-X-Name-Last: Hornuf Title: How do fintech start-ups affect financial institutions’ performance and default risk? Abstract: We examine the impact of fintech start-ups on the performance and default risk of traditional financial institutions. We find a positive relationship between fintech start-up formations and incumbent institutions’ performance for the period 2005–2018 and a large sample of financial institutions from 87 countries. We further analyze the link between fintech start-up formations and the default risk of traditional financial institutions. Fintech start-up formations decrease stock return volatility of incumbent institutions and decrease the systemic risk exposure of financial institutions. The findings indicate that legislators and financial supervisory authorities should closely monitor the development of fintech start-ups, because fintechs not only have a positive effect on the financial sector’s performance but also can improve financial stability relative to the status quo. Journal: The European Journal of Finance Pages: 1761-1792 Issue: 15 Volume: 29 Year: 2023 Month: 10 X-DOI: 10.1080/1351847X.2022.2151371 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2151371 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:15:p:1761-1792 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2152719_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Caner Gerek Author-X-Name-First: Caner Author-X-Name-Last: Gerek Title: The effects of bundling strategy on bank interest margins: theoretical and empirical evidence Abstract: This study theoretically categorizes bank non-interest income as compulsory and complementary parts of the loan transaction, and incorporates them into the [Ho, Thomas S. Y., and Anthony Saunders. 1981. “The Determinants of Bank Interest Margins: Theory and Empirical Evidence.” Journal of Financial and Quantitative Analysis 16: 581–600] bank model in the presence of bundling strategy, as a popular banking strategy. By also considering different information levels of customers, the study finds a negative relationship between interest income and these two non-interest income components. These negative relationships are tested by analyzing the determinants of banks' net interest margins for 14 European countries. The results and robustness tests confirm that the theoretical findings hold. Journal: The European Journal of Finance Pages: 1736-1760 Issue: 15 Volume: 29 Year: 2023 Month: 10 X-DOI: 10.1080/1351847X.2022.2152719 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2152719 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:15:p:1736-1760 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2156804_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Ilias Chondrogiannis Author-X-Name-First: Ilias Author-X-Name-Last: Chondrogiannis Author-Name: Mark Freeman Author-X-Name-First: Mark Author-X-Name-Last: Freeman Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Title: Are fund managers incentivised to ignore stock market jumps? Abstract: In this paper, we show that the way in which fund managers are compensated can, under plausible conditions, lead them to act in a way that does not maximise the wellbeing of their clients. Due to performance bonuses in fund managers' rewards, there is a highly non-linear relationship between the wealth of the client and the fees that the manager receives. We demonstrate that jumps in equity returns can lead to a conflict of interest between the investor and the manager in such a setting. Specifically, the managers' option-type payment structure can incentivise them to not account for the downside risk induced by jumps, especially if the fund manager is only in post for a few years; thus managers may pursue a more aggressive asset allocation strategy than their clients desire. Our key policy recommendation is that regulators should consider imposing a negative fund fee in times of very poor absolute fund performance to mitigate against suboptimal fund management asset allocation decisions. Journal: The European Journal of Finance Pages: 1793-1823 Issue: 15 Volume: 29 Year: 2023 Month: 10 X-DOI: 10.1080/1351847X.2022.2156804 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2156804 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:15:p:1793-1823 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2158112_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Yifei Cao Author-X-Name-First: Yifei Author-X-Name-Last: Cao Author-Name: Kemar Whyte Author-X-Name-First: Kemar Author-X-Name-Last: Whyte Title: Corporate tax-shields and capital structure: leveling the playing field in debt vs equity finance Abstract: A common feature within most corporate income tax systems is that the cost of debt is deductible as an expenditure when calculating taxable profits. An unintended consequence of this tax distortion is the creation of under-capitalized firms – raising default risk in the process. Using a difference-in-differences approach, this paper shows that a reduction in tax discrimination between debt and equity finance leads to better capitalized banks. The paper exploits the exogenous variation in the tax treatment of debt and equity created by the introduction of an Allowance for Corporate Equity (ACE) system in Italy, to identify whether an ACE positively impacts banks' capital structure. The results demonstrate that a move to an unbiased corporate tax environment increases bank capital ratios, driven by an increase in equity rather than a reduction in lending activities. The change also leads to a reduction in risk taking for ex-ante low capitalized banks. Overall, these results suggest that the ACE could be a valuable policy instrument for prudential bank regulators. Journal: The European Journal of Finance Pages: 1716-1735 Issue: 15 Volume: 29 Year: 2023 Month: 10 X-DOI: 10.1080/1351847X.2022.2158112 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2158112 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:15:p:1716-1735 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2170755_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: William A. Barnett Author-X-Name-First: William A. Author-X-Name-Last: Barnett Author-Name: Xue Wang Author-X-Name-First: Xue Author-X-Name-Last: Wang Author-Name: Hai-Chuan Xu Author-X-Name-First: Hai-Chuan Author-X-Name-Last: Xu Author-Name: Wei-Xing Zhou Author-X-Name-First: Wei-Xing Author-X-Name-Last: Zhou Title: The stable tail dependence and influence among the European stock markets: a score-driven dynamic copula approach Abstract: This paper studies the time-varying tail dependence among the European stock markets and assesses the influence of individual financial markets. By utilizing two generalized autoregressive score (GAS) copulas, we compute the tail dependence for 11 European stock indexes and 1 American stock index over the last 16 years. Notably, it is found that the dependencies among European stock indexes are generally stable, even during the crisis periods. Then an influence measure is proposed for each individual market based on the tail dependence. Interestingly, the influence ranking is also stable for both the whole period and two big drawdown days in crisis periods. To be specific, AEX (Netherlands), FCHI (France), and GDAXI (Germany) always show the most significant influences, while SPX (USA) is always the least influential one. Finally, an equal-weighted portfolio is built to measure the systemic risk in the European stock markets. It is found that both patterns of risk (VaR) and expected shortfall (ES) are different from the time-varying tail dependence. There exist obvious inverted spikes on 16 October 2008 and 16 March 2020. The results indicate that the extreme portfolio risk does not come from the increase of dependence among European stock markets, but from the individual jumps. Journal: The European Journal of Finance Pages: 1933-1956 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2023.2170755 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2170755 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1933-1956 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2134812_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Xiaoqing An Author-X-Name-First: Xiaoqing Author-X-Name-Last: An Author-Name: William A. Barnett Author-X-Name-First: William A. Author-X-Name-Last: Barnett Author-Name: Xue Wang Author-X-Name-First: Xue Author-X-Name-Last: Wang Author-Name: Qingyuan Wu Author-X-Name-First: Qingyuan Author-X-Name-Last: Wu Title: Brexit spillovers: how economic policy uncertainty affects foreign direct investment and international trade Abstract: In recent years, the economic policy uncertainty in various countries has gradually increased with the increasing complexity of global economic situation, and foreign direct investment and trade have also been impacted. As a historic event, does Brexit affect the economic consequences of economic policy uncertainty? In this regard, we aim to examine the Brexit spillovers on five major EU member states and the UK through economic policy uncertainty. Cluster analysis and TVP-VAR model are used to analyze the impact of economic policy uncertainty (EPU) on foreign direct investment (FDI) and international trade (TRADE) during Brexit. The results at different time horizons show that, in addition to the Netherlands, impulse responses of foreign direct investment and international trade have the characteristics of positive and negative conversion. Despite all this, impulse responses of international trade are lower than those of foreign direct investment. Time points when foreign direct investment and international trade have the greatest impulse response vary from country to country. Overall, the impact of economic policy uncertainty on them is more reflected in the late Brexit period. Based on the above findings, we draw policy implications. Journal: The European Journal of Finance Pages: 1913-1932 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2022.2134812 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2134812 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1913-1932 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2083978_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Michael Ellington Author-X-Name-First: Michael Author-X-Name-Last: Ellington Author-Name: Marcin Michalski Author-X-Name-First: Marcin Author-X-Name-Last: Michalski Author-Name: Costas Milas Author-X-Name-First: Costas Author-X-Name-Last: Milas Title: Of votes and viruses: the UK economy and economic policy uncertainty Abstract: This paper examines the relation between GDP growth, Divisia money growth, CPI inflation, financial stress, and the UK's economic policy uncertainty in the context of its departure from the European Union. We employ two Bayesian VAR models which account for the extreme observations in macroeconomic and financial time series resulting from the COVID-19 pandemic outbreak. We document a contractionary effect of an economic policy uncertainty shock on GDP growth, which is not present in a model which does not account for the COVID-19-related outliers. Additionally, we find that GDP growth is enhanced by Divisia monetary stimulus but hampered by increases in financial stress. The results from a stochastic volatility in the mean threshold model also uncover different dynamics of transmission of shocks between economic uncertainty and the indicators we study across high and low economic policy uncertainty regimes. Journal: The European Journal of Finance Pages: 1849-1865 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2022.2083978 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2083978 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1849-1865 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2249961_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Rakesh K. Bissoondeeal Author-X-Name-First: Rakesh K. Author-X-Name-Last: Bissoondeeal Author-Name: Jane M. Binner Author-X-Name-First: Jane M. Author-X-Name-Last: Binner Author-Name: Costas Milas Author-X-Name-First: Costas Author-X-Name-Last: Milas Title: Brexit and coronavirus: financial perspectives and future prospects Abstract: The economic landscape of the UK has been significantly shaped by the intertwined issues of Brexit, COVID, and their interconnected impacts. The disruptions caused by Brexit and the COVID pandemic have created uncertainty and upheaval for both businesses and individuals. Whilst the effects of COVID are now receding, Brexit is still dominating headlines seven years after the referendum and is likely to do so for the foreseeable future. In this introduction, we provide an overview of the literature on Brexit. We review the reasons for leaving the European Union, as well examine the consequences of Brexit, with a focus on investment, economic growth, trade, unemployment, and financial markets. We then introduce the seven papers selected from the ‘Post Brexit: Uncertainty, Risk Measurement and Coronavirus Challenges Conference’ held at Birmingham Business School in June 2021, that advance the current literature on the effects of Brexit and COVID on the UK economy. Evidence in these papers suggests that Brexit and COVID are still clearly posing a severe strain on the UK’s economy. However, some papers suggest that not everything about Brexit has been detrimental, or at least certain sectors of the UK economy are displaying a marked resilience. Journal: The European Journal of Finance Pages: 1825-1834 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2023.2249961 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2249961 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1825-1834 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2204194_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Rakesh K. Bissoondeeal Author-X-Name-First: Rakesh K. Author-X-Name-Last: Bissoondeeal Author-Name: Jane M. Binner Author-X-Name-First: Jane M. Author-X-Name-Last: Binner Author-Name: Michail Karoglou Author-X-Name-First: Michail Author-X-Name-Last: Karoglou Title: The impact of uncertainty on money demand in the UK, US and Euro area Abstract: We estimate money demand functions for the UK, the Euro area and the US using Divisia monetary aggregates and investigate the extent to which the uncertainty caused by Brexit and Covid have affected these relationships. Our cointegrated VAR analysis shows that for all three economies Brexit and/or Covid have had some impact on the stability of money demand functions. We find that including a measure of stock market volatility in the money demand specifications helps re-establish stability of the models, particularly for the UK and the Euro area. We also explore the uncertainty and money demand relationship in the context of a Markov-switching model. We find that the effect of uncertainty on the demand for money is more pronounced during periods of heightened uncertainty. The findings of this study lend support to studies calling for Divisia aggregates to be given a more prominent role in policymaking, especially when interest rates are in the zero lower bound environment and are less informative about the stance of monetary policy. Journal: The European Journal of Finance Pages: 1866-1884 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2023.2204194 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2204194 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1866-1884 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2092415_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Tianshu Zhao Author-X-Name-First: Tianshu Author-X-Name-Last: Zhao Author-Name: Kent Matthews Author-X-Name-First: Kent Author-X-Name-Last: Matthews Author-Name: Max Munday Author-X-Name-First: Max Author-X-Name-Last: Munday Title: Neither true nor fairweather friend: relationship banking and SME borrowing under Covid-19 Abstract: A growing literature addresses the costs and benefits associated with relationship banking, particularly for smaller firms, but with much of this work focused on normal trading conditions. Covid-19 provides an ideal testbed to explore the resilience of relationship banking. We examine whether the presence of closer pre-Covid ties between SMEs and their banks helps in accessing funds in the Covid-19 pandemic period. Then are ties between relationship bankers and SME borrowers a case of ‘true love’ or rather are the parties more akin to ‘fair-weather friends?’ Data from the UK SME Finance Monitor from 2018Q2-2020Q3 is used in this paper to examine this question. Our analysis suggests that relationship banking was important for the acquisition of bank credit pre-Covid-19 but was of limited influence in post-Covid-19 lending behaviour. Banks treated SMEs that had a good relationship with them in the same way as those that did not and with public interventions to support lenders material in this. Journal: The European Journal of Finance Pages: 1957-1974 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2022.2092415 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2092415 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1957-1974 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2216240_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Jane Binner Author-X-Name-First: Jane Author-X-Name-Last: Binner Author-Name: Sajid M. Chaudhry Author-X-Name-First: Sajid M. Author-X-Name-Last: Chaudhry Author-Name: James L. Swofford Author-X-Name-First: James L. Author-X-Name-Last: Swofford Author-Name: Meng Tong Author-X-Name-First: Meng Author-X-Name-Last: Tong Title: UK or the Eurozone: which common currency area can work for Northern Ireland after Brexit? Abstract: Brexit and the controversy concerning an Irish border makes the issue of whether Northern Ireland is a common currency area with the rest of UK or the Eurozone topical. We test the microeconomic foundations of a common currency area for Northern Ireland, UK, Great Britain and Northern Ireland in the Eurozone. We provide evidence that all areas meet the microeconomic criteria for a common currency area. Banking data suggest that lending in Northern Ireland is different from lending in the rest of the UK, raising doubt on whether or not the UK forms a common currency area including Northern Ireland. Journal: The European Journal of Finance Pages: 1835-1848 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2023.2216240 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2216240 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1835-1848 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2102432_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Adrian R. Fleissig Author-X-Name-First: Adrian R. Author-X-Name-Last: Fleissig Author-Name: Barry E. Jones Author-X-Name-First: Barry E. Author-X-Name-Last: Jones Author-Name: Zsolt Darvas Author-X-Name-First: Zsolt Author-X-Name-Last: Darvas Title: Euro area monetary asset demand and Divisia aggregates** Abstract: Monetary asset user costs are functions of spreads between a benchmark rate of return and the own rates of return on the monetary assets. We analyze the impact of the benchmark rate on a Euro area Divisia M2 aggregate, on estimated elasticities of substitution, and on estimated impulse response functions. Substitution in response to changes in the user cost of M1 is generally elastic, but we find evidence of inelastic substitution along other dimensions. When a loan rate is used as the benchmark, substitution in response to changes in the user costs of the two components of M2-M1 is inelastic throughout the sample and the corresponding elasticity estimates are near their lowest levels during the pandemic. This is strong evidence that Divisia monetary aggregates are preferable to conventional monetary aggregates. Annual growth rates of simple sum and Divisia M2 monetary aggregates differ significantly in some periods, but not during the pandemic. Estimated impulse response functions using both Divisia and simple sum money measures indicate that money shocks have positive and statistically significant effects on real output. The response of the price level to a money shock tends to be more persistent when the models are estimated using Divisia aggregates. . Journal: The European Journal of Finance Pages: 1885-1912 Issue: 16 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2022.2102432 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2102432 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:16:p:1885-1912 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2157299_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Tianyi Ma Author-X-Name-First: Tianyi Author-X-Name-Last: Ma Author-Name: Kai-Hong Tee Author-X-Name-First: Kai-Hong Author-X-Name-Last: Tee Author-Name: Baibing Li Author-X-Name-First: Baibing Author-X-Name-Last: Li Title: On hedge fund inceptions in a competitive market Abstract: This paper examines hedge fund inceptions in a competitive market. Using the recursive demeaning estimation method, we find hedge fund inceptions are positively related to market competition and market condition, but negatively related to investor sentiment and style performance. This implies hedge fund managers actively seek arbitrage and inception opportunities, when market conditions are recovering with competition heated up. We also find new hedge funds tend to open in a less popular investment area when investor sentiment is lower and/or it has greater potential to grow in the future. Furthermore, funds, launched in a more competitive market when market condition is poorer, tend to perform better in the subsequent months, with multi-strategies hedge funds showing strong results. Important determinants include minimum investment value, initial fund size and redemption fee. Our findings support private investors when selecting new hedge funds for investment. Journal: The European Journal of Finance Pages: 1975-2000 Issue: 17 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2022.2157299 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2157299 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:17:p:1975-2000 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2166864_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Sunny Kumar Singh Author-X-Name-First: Sunny Kumar Author-X-Name-Last: Singh Author-Name: Chandan Kumar Jha Author-X-Name-First: Chandan Kumar Author-X-Name-Last: Jha Title: Are financial development and financial stability complements or substitutes in poverty reduction? Abstract: This paper studies the association between financial development, financial stability, and poverty for a sample of 109 developed and developing countries from 1995 to 2018. Most of the existing studies in this literature have focused on financial development, and only a few recent studies have looked at the effects of financial stability on poverty. However, none of the existing studies has looked at the interaction effect of the two on poverty. Our contribution to this literature is manifold. First and foremost, we investigate whether financial development and financial stability are substitutes or complements in reducing poverty and find evidence in favor of the former: Financial development has greater effects on poverty alleviation in a more fragile financial system and vice-versa. Second, using two different measures of financial stability, we show that financial stability is associated with lower levels of poverty. And finally, while previous studies have presumed that the effect of financial development on poverty is homogeneous at various levels of poverty, we show that financial development and financial stability both exert heterogeneous effects on poverty depending on the level of poverty considered. Journal: The European Journal of Finance Pages: 2001-2031 Issue: 17 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2023.2166864 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2166864 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:17:p:2001-2031 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2190464_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Wenna Lu Author-X-Name-First: Wenna Author-X-Name-Last: Lu Author-Name: Laurence Copeland Author-X-Name-First: Laurence Author-X-Name-Last: Copeland Author-Name: Yongdeng Xu Author-X-Name-First: Yongdeng Author-X-Name-Last: Xu Title: The pricing of unexpected volatility in the currency market Abstract: Many recent papers have investigated the role played by volatility in determining the cross-section of currency returns. This paper employs two time-varying factor models: a threshold model and a Markov-switching model to price the excess returns from the currency carry trade. We show that the importance of volatility depends on whether the currency markets are unexpectedly volatile. Volatility innovations during relatively tranquil periods are largely unrewarded in the market, whereas during the unexpected volatile period, this risk has a substantial impact on currency returns. The empirical results show that the two time-varying factor models fit the data better and generate a smaller pricing error than the linear model, while the Markov-switching model outperforms the threshold factor models not only by generating lower pricing errors but also distinguishes two regimes endogenously and without any predetermined state variables. Journal: The European Journal of Finance Pages: 2032-2046 Issue: 17 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2023.2190464 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2190464 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:17:p:2032-2046 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2175704_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Kun Su Author-X-Name-First: Kun Author-X-Name-Last: Su Author-Name: Yue Lu Author-X-Name-First: Yue Author-X-Name-Last: Lu Title: The impact of corporate social responsibility on corporate financialization Abstract: We examine the impact of corporate social responsibility (CSR) on corporate financialization. Corporate financialization refers to the phenomenon where managers divert corporate resources from the core business to financial assets. Using a sample of Chinese firms between 2010 and 2018, we find that firms with better CSR scores have higher levels of corporate financialization. This result remains valid after a series of tests for robustness and endogeneity issues, suggesting a casual effect of CSR on corporate financialization. We also find that this effect is mitigated in private firms and firms with better internal control, higher management shareholding, and more financial analyst followings. We further explore the economic channel through which CSR promotes corporate financialization and find that CSR relieves financial constraints and enables firms to invest more in financial assets. Finally, we show that both CSR and financialization have significantly negative impacts on firm value. Journal: The European Journal of Finance Pages: 2047-2073 Issue: 17 Volume: 29 Year: 2023 Month: 11 X-DOI: 10.1080/1351847X.2023.2175704 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2175704 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:17:p:2047-2073 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2189020_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Antonio Figueiredo Author-X-Name-First: Antonio Author-X-Name-Last: Figueiredo Author-Name: Ali M. Parhizgari Author-X-Name-First: Ali M. Author-X-Name-Last: Parhizgari Author-Name: Brice Dupoyet Author-X-Name-First: Brice Author-X-Name-Last: Dupoyet Title: The information content of currency option-implied volatilities: implications for ex-ante forecasts of global equity correlations Abstract: We use existing currency models, global capital flows, international parity, the Taylor rule, and some simplifying assumptions to derive and empirically test a link between the information contained in currency option-implied volatilities and future global equity correlations. Using data from January 1999 to May 2020, we test our hypothesis and find that exchange rate option-implied volatilities — coupled with one-period ex-post correlations — more accurately predict subsequent world equity market correlations than other models. Our findings have implications for portfolio diversification, forecasts of overall equity portfolio volatility, and portfolio optimization. Journal: The European Journal of Finance Pages: 2128-2153 Issue: 18 Volume: 29 Year: 2023 Month: 12 X-DOI: 10.1080/1351847X.2023.2189020 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2189020 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:18:p:2128-2153 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2179414_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Kristoffer J. Glover Author-X-Name-First: Kristoffer J. Author-X-Name-Last: Glover Author-Name: Paul V. Johnson Author-X-Name-First: Paul V. Author-X-Name-Last: Johnson Author-Name: Geoffrey W. Evatt Author-X-Name-First: Geoffrey W. Author-X-Name-Last: Evatt Author-Name: Mingliang Cheng Author-X-Name-First: Mingliang Author-X-Name-Last: Cheng Title: Capital ideas: optimal capital accumulation strategies for a bank and its regulator Abstract: We formulate a continuous-time model of a deposit taking bank, operating subject to capital adequacy regulation, and where the bank's loans are exposed to default risk. The bank maximises its market value of equity by appropriately controlling loan and equity issuance, dividend payments, and endogenous closure. Of interest to regulators, we show how the bank responds to the span of capital adequacy requirements and to changes in default variance. We find a nonmonotonic response of bank lending to increased capital requirements (initially increasing and then decreasing). We also find that the probability of early closure (through either insolvency or endogenous closure) can be minimised for a well-chosen capital adequacy ratio. Moreover, the level of capital requirement that minimises the probability of early closure and maximises lending is fairly robust to changes in the bank's default variance/risk; contributing to the ongoing discussion on optimal bank capital. Journal: The European Journal of Finance Pages: 2075-2106 Issue: 18 Volume: 29 Year: 2023 Month: 12 X-DOI: 10.1080/1351847X.2023.2179414 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2179414 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:18:p:2075-2106 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2216754_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Mauro Aliano Author-X-Name-First: Mauro Author-X-Name-Last: Aliano Author-Name: Giuseppe Galloppo Author-X-Name-First: Giuseppe Author-X-Name-Last: Galloppo Author-Name: Viktoriia Paimanova Author-X-Name-First: Viktoriia Author-X-Name-Last: Paimanova Title: People and investor attention to climate change Abstract: The paper analyses whether people’s attention to climate change emergency contributes to the stock market returns by accounting for the mitigation role of the corporate social performance proxied by ESG score. We address one research question: how does climate change attention affect the investors’ trading behavior and, consequently, the stock price returns of local firms? The Google Search Volume Index (GSVI) is used to evaluate the attention parameter. In a global setting, made by 2941 stocks in both advanced and emerging economies between 2006 and 2019, we revealed that attention to climate change helps investors to have a significantly positive effect on returns of stocks with high ESG scores compared to low sustainable stocks. Moreover, we observe an interesting changing in the relationship between corporate social performance and people attention, when deepening the analysis from the perspective of sectorial distribution. Our results are robust to different risk factor models, environmental policy stringency framework, sin industries focus, and when changing people’s attention indicator. Journal: The European Journal of Finance Pages: 2107-2127 Issue: 18 Volume: 29 Year: 2023 Month: 12 X-DOI: 10.1080/1351847X.2023.2216754 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2216754 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:18:p:2107-2127 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2189524_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20230119T200553 git hash: 724830af20 Author-Name: Azizjon Alimov Author-X-Name-First: Azizjon Author-X-Name-Last: Alimov Title: The impact of government borrowing on corporate acquisitions: international evidence Abstract: This study examines how variation in government borrowing affects corporate acquisition activity around the world. Using a large sample of firms and deals from 50 countries between 1991 and 2017, the paper finds that government debt issuance is strongly negatively associated with acquisition activity at the firm and aggregate levels. An instrumental variable approach corroborates these findings, thus supporting their causal interpretation. In response to increases in government borrowing, firms appear to make more value-enhancing deals. These effects are stronger for cash-financed deals and for financially stronger firms. Collectively, these findings suggest that rising government debt leads to ‘real crowding out’ by affecting firms’ ability to make large investments. Journal: The European Journal of Finance Pages: 2154-2179 Issue: 18 Volume: 29 Year: 2023 Month: 12 X-DOI: 10.1080/1351847X.2023.2189524 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2189524 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:29:y:2023:i:18:p:2154-2179 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1841664_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Christopher Godfrey Author-X-Name-First: Christopher Author-X-Name-Last: Godfrey Author-Name: Andreas G. F. Hoepner Author-X-Name-First: Andreas G. F. Author-X-Name-Last: Hoepner Author-Name: Ming-Tsung Lin Author-X-Name-First: Ming-Tsung Author-X-Name-Last: Lin Author-Name: Ser-Huang Poon Author-X-Name-First: Ser-Huang Author-X-Name-Last: Poon Title: Women on boards and corporate social irresponsibility: evidence from a Granger style reverse causality minimisation procedure Abstract: We hypothesise bi-directional causality between gender diversity on boards and corporate social irresponsibility (CSI). Firms exposed to CSI incidents are likely to increase their board gender diversity for reputational purposes. Simultaneously, gender diversity adds skills and networks to boards which supports their monitoring function and should reduce CSI incidents. Econometrically, this relationship is plagued with reverse causality. Consequently, we propose a Granger-style reverse causality minimisation procedure. Our procedure involves three steps. Firstly, we regress board diversity (BD) on lagged CSI to separate diversity into two components, one driven by CSI (BDDCS) and another unrelated to CSI (BDUCS), with the latter being the sum of the intercept and the disturbance term. Secondly, we confirm that BDUCS experiences a near-zero correlation to CSI and that a Granger causality F-test for CSI affecting BDUCS is clearly insignificant. Thirdly, we regress CSI on lagged BDUCS, lagged CSI and its interaction term. Applying our procedure to 2,880 US firms between 2007 and 2016, we find that boards with higher diversity, for reasons other than CSI, were significantly better than their lower diversity counterparts in reducing CSI incidents once encountering them. This effect is economically stronger for diversity unrelated to CSI than for overall diversity. Journal: The European Journal of Finance Pages: 1-27 Issue: 1 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2020.1841664 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1841664 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:1:p:1-27 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1842784_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Bader Jawid Alsubaiei Author-X-Name-First: Bader Jawid Author-X-Name-Last: Alsubaiei Author-Name: Giovanni Calice Author-X-Name-First: Giovanni Author-X-Name-Last: Calice Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Title: How does mutual fund flow respond to oil market volatility? Abstract: We comprehensively study the impact of oil market volatility on mutual fund flow. In particular, using an extensive dataset on Saudi Arabia covering virtually all equity funds over 2006–2017, this paper provides the first analysis of the linkages between fund flow and oil market volatility. Our main findings show that investors shift substantially their asset allocation to the equity mutual fund sector in periods of high volatility. Our further evidence suggests that flow to high oil-exposed funds is more sensitive to oil volatility than low oil-exposed funds. This is consistent with investors valuing professional management highly during risky periods in a setting where alternatives to equity investment are limited. Our study provides new evidence for a fast-growing market and reveals important implications for the mutual fund market which helps investors, academics and regulators to better understand the behaviour of this market. Journal: The European Journal of Finance Pages: 28-52 Issue: 1 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2020.1842784 File-URL: http://hdl.handle.net/10.1080/1351847X.2020.1842784 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:1:p:28-52 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_1908390_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Fan Fang Author-X-Name-First: Fan Author-X-Name-Last: Fang Author-Name: Waichung Chung Author-X-Name-First: Waichung Author-X-Name-Last: Chung Author-Name: Carmine Ventre Author-X-Name-First: Carmine Author-X-Name-Last: Ventre Author-Name: Michail Basios Author-X-Name-First: Michail Author-X-Name-Last: Basios Author-Name: Leslie Kanthan Author-X-Name-First: Leslie Author-X-Name-Last: Kanthan Author-Name: Lingbo Li Author-X-Name-First: Lingbo Author-X-Name-Last: Li Author-Name: Fan Wu Author-X-Name-First: Fan Author-X-Name-Last: Wu Title: Ascertaining price formation in cryptocurrency markets with machine learning Abstract: The cryptocurrency market is amongst the fastest-growing of all the financial markets in the world. Unlike traditional markets, such as equities, foreign exchange and commodities, cryptocurrency market is considered to have larger volatility and illiquidity. This paper is inspired by the recent success of using machine learning for stock market prediction. In this work, we analyze and present the characteristics of the cryptocurrency market in a high-frequency setting. In particular, we applied a machine learning approach to predict the direction of the mid-price changes on the upcoming tick. We show that there are universal features amongst cryptocurrencies which lead to models outperforming asset-specific ones. We also show that there is little point in feeding machine learning models with long sequences of data points; predictions do not improve. Furthermore, we solve the technical challenge to design a lean predictor, which performs well on live data downloaded from crypto exchanges. A novel retraining method is defined and adopted towards this end. Finally, the trade-off between model accuracy and frequency of training is analyzed in the context of multi-label prediction. Overall, we demonstrate that promising results are possible for cryptocurrencies on live data, by achieving a consistent $ 78\% $ 78% accuracy on the prediction of the mid-price movement on live exchange rate of Bitcoins vs. US dollars. Journal: The European Journal of Finance Pages: 78-100 Issue: 1 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2021.1908390 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.1908390 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:1:p:78-100 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2009892_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: P. Dłotko Author-X-Name-First: P. Author-X-Name-Last: Dłotko Author-Name: W. Qiu Author-X-Name-First: W. Author-X-Name-Last: Qiu Author-Name: S. T. Rudkin Author-X-Name-First: S. T. Author-X-Name-Last: Rudkin Title: Financial ratios and stock returns reappraised through a topological data analysis lens Abstract: Firm financials are well-established predictors of stock returns, being the basis for both the traditional econometric, and growing Machine Learning, asset pricing literature. Employing topological data analysis ball mapper (TDABM), we revisit the association between seven of the most commonly studied financial ratios and stock returns. Upon outlining the methodology to the finance literature, this paper offers three key contributions to the study of asset pricing. Firstly, the characteristic space is visualised to showcase non-monotonic relationships in multiple dimensions that were as yet unseen. Secondly, the means through which neural networks and random forest regressions fit stock returns is also visualised, showing where Machine Learning is contributing to understanding. Finally, an initial application of TDABM for the segmentation of the cross-section is posited, with significant abnormal returns identified. Collectively these three expositions signpost the value of TDABM for financial researchers and practitioners alike. The scope for benefit is limited only by the availability of information to the analyst. Journal: The European Journal of Finance Pages: 53-77 Issue: 1 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2021.2009892 File-URL: http://hdl.handle.net/10.1080/1351847X.2021.2009892 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:1:p:53-77 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2190465_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Robinson Kruse-Becher Author-X-Name-First: Robinson Author-X-Name-Last: Kruse-Becher Author-Name: Yuze Liu Author-X-Name-First: Yuze Author-X-Name-Last: Liu Title: Improving financial volatility nowcasts* Abstract: Recently, a simple nowcasting model for volatility has been proposed by Breitung and Hafner [2016. A Simple Model for Now-Casting Volatility Series. International Journal of Forecasting 32 (4): 1247–1255. doi:10.1016/j.ijforecast.2016.04.007]. They suggest a model in which today's volatility is not only driven by past returns, but also by the current information from the same day. Empirical results demonstrate the relevance of the current squared return for volatility nowcasting. Their model obeys an ARMA representation estimable by maximum likelihood. However, their estimation approach builds on a number of simplifications and we suggest improvements. Rather than assuming normality of the innovations in the ARMA representation for highly skewed and leptokurtic log-squared returns, we take non-normality explicitly into account. Contrary to most situations regarding volatility estimation and forecasting, the distribution actually plays a crucial role in the construction of volatility nowcasts. We devise an exact maximum likelihood estimator which offers significant improvements in estimation efficiency and volatility nowcast accuracy in finite samples. In our empirical application, we investigate five major international stock markets from 2000 to 2019 (including sub-samples relating to the Great Financial Crisis). The results suggest that our estimation approach significantly outperforms the one by Breitung and Hafner [2016. A Simple Model for Now-Casting Volatility Series. International Journal of Forecasting 32 (4): 1247–1255. doi:10.1016/j.ijforecast.2016.04.007] in all cases. Financial volatility can be nowcasted more accurately by applying our suggested estimation approach. Journal: The European Journal of Finance Pages: 101-126 Issue: 2 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2023.2190465 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2190465 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:2:p:101-126 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2201470_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Huseyin Ozturk Author-X-Name-First: Huseyin Author-X-Name-Last: Ozturk Author-Name: Yukihiro Yasuda Author-X-Name-First: Yukihiro Author-X-Name-Last: Yasuda Title: Disentangling prefectural similarities in the capital structure of Japanese SMEs through pairwise testing Abstract: We investigate the capital structure of small- and medium-sized enterprises in Japan during 2007–2019 to identify whether firm-specific determinants of leverage exhibit locational differences among Japanese prefectures. To do so, we propose a testing scheme that disentangles potential similarities across prefecture pairs. When we apply the proposed testing scheme by creating 1081 prefecture pairs, we find that the impact of the firm-specific determinants of leverage does not greatly differ between prefecture pairs in terms of both sign and magnitude in contrast to the significant difference found by conventional hypothesis testing. As a convenient tool for other geographical research, we also discuss that the proposed testing scheme is helpful for regional policy-making, specifically during period of external shocks, the latest of which could be regarded as the COVID-19 pandemic. Journal: The European Journal of Finance Pages: 173-204 Issue: 2 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2023.2201470 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2201470 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:2:p:173-204 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2206972_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Moez Bennouri Author-X-Name-First: Moez Author-X-Name-Last: Bennouri Author-Name: Sonia Falconieri Author-X-Name-First: Sonia Author-X-Name-Last: Falconieri Author-Name: Daniel Weaver Author-X-Name-First: Daniel Author-X-Name-Last: Weaver Title: The cost of fragmentation: lessons from initial public offerings Abstract: This paper investigates both theoretically and empirically the impact of market structure on the price discovery process at the opening of trading of IPOs. Some papers suggest that IPO value uncertainty is not fully resolved at the offering but continues into the aftermarket. Our model predicts that this ex-post uncertainty, i.e. the residual uncertainty about the firm value in the aftermarket, is related to the level of fragmentation in the aftermarket. Our model further predicts that consolidated markets are more efficient in resolving ex-post uncertainty than fragmented markets. Using the introduction of the opening IPO Cross on Nasdaq as a natural experiment, our empirical analysis provides compelling evidence that IPOs in fragmented markets exhibit larger levels of ex-post uncertainty and, consequently, larger underpricing than in consolidated markets. Journal: The European Journal of Finance Pages: 205-228 Issue: 2 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2023.2206972 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2206972 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:2:p:205-228 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2199938_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Huong Le Author-X-Name-First: Huong Author-X-Name-Last: Le Author-Name: Tung Nguyen Author-X-Name-First: Tung Author-X-Name-Last: Nguyen Author-Name: Andros Gregoriou Author-X-Name-First: Andros Author-X-Name-Last: Gregoriou Author-Name: Jerome Healy Author-X-Name-First: Jerome Author-X-Name-Last: Healy Title: Natural disasters and corporate innovation Abstract: We examine how natural disasters affect corporate innovation. Using a comprehensive sample of U.S. firms and inventors, we find that natural disasters significantly drop innovation quantity and quality. The results are robust to include a broad set of regional characteristics, matching analysis, and alternative proxies for innovation. These effects persist for up to three years after the disaster. We also provide suggestive evidence that financial constraints due to natural disasters give firms less incentive to innovate. Further analysis shows that natural disasters have impacts on inventor relocation, innovation productivity, and innovation risk. Journal: The European Journal of Finance Pages: 144-172 Issue: 2 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2023.2199938 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2199938 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:2:p:144-172 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2193703_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Son-Nan Chen Author-X-Name-First: Son-Nan Author-X-Name-Last: Chen Author-Name: Pao-Peng Hsu Author-X-Name-First: Pao-Peng Author-X-Name-Last: Hsu Author-Name: Kuo-Yuan Liang Author-X-Name-First: Kuo-Yuan Author-X-Name-Last: Liang Title: Pricing credit-risky bonds using recovery rate uncertainty and macro-regime switching Abstract: A proposed model is used to account for both the recovery rate and regime-switching uncertainties for pricing credit-risky bonds. A two-factor hazard rate model (TFHRM) is also considered, where the dynamics of both instantaneous forward rates and asset values are modeled using Markov-modulated geometric Brownian motions (MMGBMs). Moreover, a macroeconomic factor is incorporated into the MMGBMs. The model complexity is resolved through the introduction of an endogenous intensity function and a recovery rate under the TFHRM. A semi-closed-form solution for pricing defaultable bonds is derived along with a pricing formula for credit spread. A credit cycle is constructed to reflect changes in industry characteristics and macroeconomic factors. The empirical study demonstrates that the inclusion of a stochastic recovery rate increases the model’s pricing accuracy, and the results indicate a close interaction among business cycles, recovery rates, and credit ratings. Journal: The European Journal of Finance Pages: 127-143 Issue: 2 Volume: 30 Year: 2024 Month: 01 X-DOI: 10.1080/1351847X.2023.2193703 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2193703 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:2:p:127-143 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2204195_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Benjamin Lynch Author-X-Name-First: Benjamin Author-X-Name-Last: Lynch Author-Name: Martha O’Hagan-Luff Author-X-Name-First: Martha Author-X-Name-Last: O’Hagan-Luff Title: Finally, it seems to be working – the evolving valuation effect of the European Union’s emissions trading system Abstract: This research examines the market reaction to the publication of firm-specific environmental news for participating firms in the European Union’s Emissions Trading System (EU ETS) during its third phase. Our sample of 123 publicly listed participating firms, located in 21 European countries, accounted for 45.43% of emissions in the EU ETS in 2020. Using an event study methodology during the period 2014–2021, we find that positive news was rewarded with increased returns for publication events related to the latter years of the phase (2017–2020) while it had an insignificant impact for earlier year (2013–2016). This indicates that the EU ETS is finally fulfilling its intended function of incentivising participating firms to reduce their emissions. Our study highlights the contextually contingent nature of the relationship between environmental and financial performance. Journal: The European Journal of Finance Pages: 229-248 Issue: 3 Volume: 30 Year: 2024 Month: 02 X-DOI: 10.1080/1351847X.2023.2204195 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2204195 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:3:p:229-248 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2201471_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Jerome Monne Author-X-Name-First: Jerome Author-X-Name-Last: Monne Author-Name: Janette Rutterford Author-X-Name-First: Janette Author-X-Name-Last: Rutterford Author-Name: Dimitris P. Sotiropoulos Author-X-Name-First: Dimitris P. Author-X-Name-Last: Sotiropoulos Title: Risk taking in the context of financial advice: does gender interaction matter? Abstract: This study tests a gender threat hypothesis whereby having a financial advisor of the opposite gender results in gender stereotypical risk attitudes in portfolio choice. We employ a unique dataset of 1,621 advised UK investors, combined with information on the gender of their financial advisors. Confirming the hypothesis, our results show that men advised by a woman take more risk than when advised by a man. Women advised by a man adopt a more cautious approach than when advised by a woman. When the gender threat is alleviated, that is when women are advised by women, and men are advised by men, we found no gender gap in risk-taking. Journal: The European Journal of Finance Pages: 249-268 Issue: 3 Volume: 30 Year: 2024 Month: 02 X-DOI: 10.1080/1351847X.2023.2201471 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2201471 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:3:p:249-268 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2208168_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Konstantinos N. Baltas Author-X-Name-First: Konstantinos N. Author-X-Name-Last: Baltas Author-Name: Robert Mann Author-X-Name-First: Robert Author-X-Name-Last: Mann Title: What drives the performance and causality of green bond indices? Abstract: This paper empirically assesses the performance of green bond indices and the causality of that performance using a range of financial and commodity data. We present new insights from the novel application of datasets, neural networks and performance measurements. We find that green bond indices do not outperform the market when factors beyond market return are considered. We find that Brent crude oil has the most significant effect on certain indices, a finding that contrasts with other studies on green bonds. A greater sensitivity to oil prices and global green equities also evinces a negative impact on a green bond index’s ability to outperform the market. For the first time, a linear causal relationship is established between Title Transfer Facility (TTF) returns and green bond index returns. Additionally, a fundamental shift in causal relationships is observed over the COVID-19 period. In this way, we contribute to the literature on sustainable green bonds and the impact of COVID-19. These insights provide more clarity to market participants for navigating the uncertainties of both the global energy transition and the postpandemic period. Journal: The European Journal of Finance Pages: 269-287 Issue: 3 Volume: 30 Year: 2024 Month: 02 X-DOI: 10.1080/1351847X.2023.2208168 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2208168 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:3:p:269-287 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2224832_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Adrian Melia Author-X-Name-First: Adrian Author-X-Name-Last: Melia Author-Name: Xiaojing Song Author-X-Name-First: Xiaojing Author-X-Name-Last: Song Author-Name: Mark Tippett Author-X-Name-First: Mark Author-X-Name-Last: Tippett Author-Name: John van der Burg Author-X-Name-First: John Author-X-Name-Last: van der Burg Title: Hedging quantitative easing Abstract: Arguably the greatest concern surrounding quantitative easing is its potential for expanding the money supply at a rate which outstrips the rate of growth in national output. This will almost surely lead to greater uncertainty in inflationary expectations and this, in turn, can have adverse consequences for stock prices. Our analysis employs the hedging procedures which underscore the Fundamental Theorem of Asset Pricing in conjunction with stochastic processes for stock prices and the money supply to design hedging strategies against potential downside movements in stock prices caused by the uncertainty in inflationary expectations associated with rapid monetary growth. Journal: The European Journal of Finance Pages: 323-338 Issue: 3 Volume: 30 Year: 2024 Month: 02 X-DOI: 10.1080/1351847X.2023.2224832 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2224832 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:3:p:323-338 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2215836_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Antonios Siganos Author-X-Name-First: Antonios Author-X-Name-Last: Siganos Title: International music preferences as a measure of culture: evidence from cross-border mergers Abstract: This paper introduces the significance of international music preferences as a determinant of cross-border mergers. We argue that international music preferences capture the distance in culture between nations. We find that country pairs whose citizens experience relatively small distance in their music preferences (listen to each other’s music) exhibit more cross-border mergers. Overall, this study highlights that music preferences can measure international similarities in culture. Journal: The European Journal of Finance Pages: 288-304 Issue: 3 Volume: 30 Year: 2024 Month: 02 X-DOI: 10.1080/1351847X.2023.2215836 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2215836 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:3:p:288-304 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2215827_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20231214T103247 git hash: d7a2cb0857 Author-Name: Kong-lin Ke Author-X-Name-First: Kong-lin Author-X-Name-Last: Ke Author-Name: Xiaohui Hou Author-X-Name-First: Xiaohui Author-X-Name-Last: Hou Author-Name: Chun Liu Author-X-Name-First: Chun Author-X-Name-Last: Liu Title: Keeping it in the family: financial constraints and the succession intention of micro and small enterprises in China Abstract: Despite the significance of business succession in the family firm literature, few studies have paid attention to the role of financial constraints, a common feature of micro and small firms, in entrepreneurs’ succession intention. Using a nationally representative survey of micro and small firms in China, we find that a higher degree of financial constraints significantly strengthens the entrepreneur’s intention of passing the firm on to the next generation. Moreover, the effect of financial constraints works particularly for firms whose entrepreneurs possess lower levels of financial literacy and for firms in regions with less-developed financial markets. Our results still hold after addressing potential endogeneity problems and conducting a wide array of robustness checks. Journal: The European Journal of Finance Pages: 305-322 Issue: 3 Volume: 30 Year: 2024 Month: 02 X-DOI: 10.1080/1351847X.2023.2215827 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2215827 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:3:p:305-322 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2147443_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Conrado Diego García-Gómez Author-X-Name-First: Conrado Diego Author-X-Name-Last: García-Gómez Author-Name: Ender Demir Author-X-Name-First: Ender Author-X-Name-Last: Demir Author-Name: José María Díez-Esteban Author-X-Name-First: José María Author-X-Name-Last: Díez-Esteban Author-Name: Edmundo Lizarzaburu Bolaños Author-X-Name-First: Edmundo Author-X-Name-Last: Lizarzaburu Bolaños Title: Corruption, national culture and corporate investment: European evidence Abstract: In this paper, we provide further evidence about the influence of corruption on corporate investment. Using a large sample of the European region non-financial firms for the period 2011–2020, our results suggest that corruption in Europe negatively affects corporate investment, thus, supporting the ‘sanding the wheel' hypothesis. This relationship is moderated by all six dimensions of the national culture proposed by Hofstede. Using appropriate panel data methodology, namely GMM estimations, we find that a higher degree of uncertainty avoidance, power distance, masculinity, and indulgence exacerbate the adverse effects of corruption on corporate investment while a higher degree of long-term orientation and individualism alleviates this effect. Journal: The European Journal of Finance Pages: 411-429 Issue: 4 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2022.2147443 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2147443 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:4:p:411-429 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2175703_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Teresa Elvira-Lorilla Author-X-Name-First: Teresa Author-X-Name-Last: Elvira-Lorilla Author-Name: Inigo Garcia-Rodriguez Author-X-Name-First: Inigo Author-X-Name-Last: Garcia-Rodriguez Author-Name: M. Elena Romero-Merino Author-X-Name-First: M. Elena Author-X-Name-Last: Romero-Merino Author-Name: Marcos Santamaria-Mariscal Author-X-Name-First: Marcos Author-X-Name-Last: Santamaria-Mariscal Title: Country corruption and corporate cash holdings: the mediating effect of firm’s anti-bribery policy Abstract: The literature about the influence of country corruption on corporate cash holdings is not conclusive as there are studies supporting both a positive and negative relationship. To better explain this relationship, our study introduces a corporate-level mediating variable, i.e. the company's willingness to fight bribery as part of its CSR policy. Using a sample of 1,075 listed firms from 21 European Union countries for the period 2008–2019 (7,771 firm-year observations), we find a partial mediating effect of the corporate anti-bribery policy on the relationship between country corruption and corporate cash holdings. On the one hand, according to the shielding argument, country corruption negatively influences corporate cash holdings. And, on the other hand, there is a mediating effect such that firms in corrupt countries adopt less tough anti-bribery policies and, instead, they reduce their cash holdings both to protect themselves from expropriation and to signal their limit on bribe payments. Journal: The European Journal of Finance Pages: 385-410 Issue: 4 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2023.2175703 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2175703 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:4:p:385-410 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2240846_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Jorge Farinha Author-X-Name-First: Jorge Author-X-Name-Last: Farinha Author-Name: Oscar López-de-Foronda Author-X-Name-First: Oscar Author-X-Name-Last: López-de-Foronda Title: The impact of corruption on investment and financing in the European Union: new insights Abstract: Corruption is a phenomenon that is not just restricted to less developed nations, but also touches developed countries like those in the European Union, often seen as one of the least corrupt economic areas in the world. Corruption practices and perceptions can seriously hinder economic growth and innovation, This can be due to lower access to corporate funding, greater cost of capital, its effects on competition, misallocation of resources, and distortions in the composition of public spending and the effectiveness of government policies. This paper first provides a short discussion and an overview of some academic literature on the link between corruption, financing decisions and economic growth. It then summarizes the findings of the five papers in this special issue on the topic of Corruption in a European context, discusses some insights from their results and finally points out at some avenues for future research in related topics. Journal: The European Journal of Finance Pages: 339-344 Issue: 4 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2023.2240846 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2240846 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:4:p:339-344 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2112731_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Marta Alonso Author-X-Name-First: Marta Author-X-Name-Last: Alonso Author-Name: Judith Arnal Author-X-Name-First: Judith Author-X-Name-Last: Arnal Author-Name: Andrés Mesa-Toro Author-X-Name-First: Andrés Author-X-Name-Last: Mesa-Toro Author-Name: Antonio Moreno Author-X-Name-First: Antonio Author-X-Name-Last: Moreno Title: Do corruption perceptions impact the pricing and access of euro area corporations to bond markets? Abstract: Public sector corruption affects economic and financial outcomes, such as GDP growth, foreign direct investment, and government funding costs. Less is known about the spillovers from perceptions of public sector corruption on the private sector corporate bond market. In this paper, we assess the role of public sector corruption perception on corporate bond market variables in Europe using data of both country-level corporate bond indexes and firm-level corporate bond market issuances. At the aggregate country level, we find some evidence that country indices of corporate bonds' yields and coupons are higher in countries with more corruption. While we do not find effects of corruption on coupon rates at the individual firm level, we show that higher government corruption perception increases their yield to maturity and reduces the amounts raised by corporations through their bond issuances. Journal: The European Journal of Finance Pages: 370-384 Issue: 4 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2022.2112731 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2112731 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:4:p:370-384 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2102433_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: David Blanco-Alcántara Author-X-Name-First: David Author-X-Name-Last: Blanco-Alcántara Author-Name: Jorge Gallud Cano Author-X-Name-First: Jorge Author-X-Name-Last: Gallud Cano Author-Name: Florencio Lopez-de-Silanes Author-X-Name-First: Florencio Author-X-Name-Last: Lopez-de-Silanes Title: Determinants of the use of European Structural and Investment Funds Abstract: We investigate the determinants of the effective use of European Structural and Investment Funds. We use a newly constructed database of the 1024 programmes from the last two programme periods that started in 2007 and 2014, respectively. Our results show that virtually all programmes fail to meet the initial deadline and need the extension period to be able to spend the funds initially allocated. About 45% of EU funds allocated are not used by the initial deadline and a tenth of the programmes end up not using over 10% of the funds. Our econometric analysis shows that beyond institutional framework measures of accountability, law and order, corruption and public officials’ attitudes, education and management capacity are key determinants in the efficient use of fund allocation. These findings are in line with previous work documenting that, as in the private sector, management capacity plays an important role in explaining government efficiency. In such circumstances, implementing measures that help bureaucracies deal with the lack of management skills and processing capacity – such as outsourcing fund management – may improve the efficient use of EU funds. Journal: The European Journal of Finance Pages: 430-455 Issue: 4 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2022.2102433 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2102433 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:4:p:430-455 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2153073_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Pablo de Andrés Author-X-Name-First: Pablo Author-X-Name-Last: de Andrés Author-Name: Salvatore Polizzi Author-X-Name-First: Salvatore Author-X-Name-Last: Polizzi Author-Name: Enzo Scannella Author-X-Name-First: Enzo Author-X-Name-Last: Scannella Author-Name: Nuria Suárez Author-X-Name-First: Nuria Author-X-Name-Last: Suárez Title: Corruption-related disclosure in the banking industry: evidence from GIPSI countries Abstract: This paper empirically investigates corruption-related disclosure in the banking industry, aiming to shed light on the reasons why financial institutions disclose corruption-related information in their annual financial reports. Using a total sample of 88 banks from the GIPSI countries during the period 2011-2019, our results reveal that, on average, banks involved in corruption issues disclose less on corruption-related matters than banks not involved in any corruption scandal. Moreover, banks not involved in corruption cases disclose even more information after other banks’ corruption events become public. These basic relationships, however, are shaped by the characteristics of each particular country in terms of control of corruption and the specific regulation on non-traditional banking activities. Our results are robust to different specifications of econometric models, to alternative empirical methods accounting for potential reverse causality and sample selection concerns and to the inclusion of internal corporate governance mechanisms. Journal: The European Journal of Finance Pages: 345-369 Issue: 4 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2022.2153073 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2153073 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:4:p:345-369 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2206523_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Jovana Cadenovic Author-X-Name-First: Jovana Author-X-Name-Last: Cadenovic Author-Name: Marc Deloof Author-X-Name-First: Marc Author-X-Name-Last: Deloof Author-Name: Ine Paeleman Author-X-Name-First: Ine Author-X-Name-Last: Paeleman Title: Do dividend policies of privately held firms follow a life cycle? Abstract: We investigate whether the dividend policies of privately held firms follow a predictable pattern that parallels their life cycles. Our analyses are based on a large sample of 113,599 Belgian privately held firms with 666,135 firm-year observations that cover the period from 2005 to 2018. We find that as the retained earnings of privately held firms increase, they are more likely to pay dividends and to pay higher amounts. We find a significant effect of retained earnings on dividend policy in a subsample of established firms, but not in a subsample of young firms. Firms are also more likely to initiate (omit) a dividend as their retained earnings increase (decrease) over time. Overall, our results support the life cycle theory in the context of privately held firms. Journal: The European Journal of Finance Pages: 457-480 Issue: 5 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2023.2206523 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2206523 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:5:p:457-480 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2202821_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Shiyu Song Author-X-Name-First: Shiyu Author-X-Name-Last: Song Author-Name: Xingchun Wang Author-X-Name-First: Xingchun Author-X-Name-Last: Wang Author-Name: Xiaowen Zhang Author-X-Name-First: Xiaowen Author-X-Name-Last: Zhang Title: Valuation of spread options under correlated skew Brownian motions Abstract: In this paper, we employ correlated skew Brownian motions to describe the dynamics of the two assets underlying the spread option. In the pricing model, the two underlying assets are exposed to exogenous risks captured by the same Brownian motion, and their endogenous risks are also assumed to be correlated with each other. We obtain an approximate pricing formula of spread options and calibrate model parameters to real data. In addition, we compare the results obtained from the approximate formula with those derived from the exact closed-form formula and from the Monte Carlo method. Finally, we analyze the impact of the skewness parameter on option prices after checking the accuracy of the approximations numerically. Journal: The European Journal of Finance Pages: 503-523 Issue: 5 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2023.2202821 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2202821 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:5:p:503-523 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2208621_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Zhi Wang Author-X-Name-First: Zhi Author-X-Name-Last: Wang Author-Name: Gerhard Kling Author-X-Name-First: Gerhard Author-X-Name-Last: Kling Author-Name: Peter Rejchrt Author-X-Name-First: Peter Author-X-Name-Last: Rejchrt Title: Kindness or hypocrisy: political mindset and corporate social responsibility decoupling in Chinese firms Abstract: This study examines the effects of executives’ political mindsets on their Corporate Social Responsibility (CSR), which has corporate and societal implications. We focus on the Chinese market, where political connections shape business activities. We find that executives with a promotion or ideology-oriented mindset issue more substantive CSR reports than their peers. However, only executives with ideology-oriented mindsets contribute to society, whereas promotion-oriented executives are associated with lower societal impact. This ‘CSR decoupling' also manifests itself in firms’ CSR activities. Chairpersons with political connections are more likely to pursue financial performance at the expense of societal contributions than their unconnected peers. In contrast, chairpersons with party membership are less likely to do so than their unaffiliated peers. Lastly, this paper shows that executives’ political perception affects the relationship between political mindset and CSR. Journal: The European Journal of Finance Pages: 524-548 Issue: 5 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2023.2208621 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2208621 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:5:p:524-548 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2206040_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Shuning Chen Author-X-Name-First: Shuning Author-X-Name-Last: Chen Author-Name: Jianxin Wang Author-X-Name-First: Jianxin Author-X-Name-Last: Wang Title: A new channel for global volatility propagation Abstract: We compare two channels for global impact on local volatility: the direct channel in which global variables affect the expected value of local volatility, and a new channel in which they affect local volatility persistence. Using 21 equity indices in 17 developed economies, we show that (1) global variables are the main determinants of local volatility persistence; (2) the volatility-persistence channel contributes far more to local volatility variations than the direct channel; and (3) global average return contributes far more to local volatility variations than global average volatility. The global impact on local volatility persistence help explain the commonality in global volatility dynamics. Journal: The European Journal of Finance Pages: 481-502 Issue: 5 Volume: 30 Year: 2024 Month: 03 X-DOI: 10.1080/1351847X.2023.2206040 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2206040 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:5:p:481-502 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2217220_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Nader Virk Author-X-Name-First: Nader Author-X-Name-Last: Virk Author-Name: Farrukh Javed Author-X-Name-First: Farrukh Author-X-Name-Last: Javed Author-Name: Basel Awartani Author-X-Name-First: Basel Author-X-Name-Last: Awartani Author-Name: Stuart Hyde Author-X-Name-First: Stuart Author-X-Name-Last: Hyde Title: A reality check on the GARCH-MIDAS volatility models Abstract: We employ a battery of model evaluation tests for a broad set of GARCH-MIDAS models and account for data snooping bias. We document that inferences based on standard tests for GM variance components can be misleading. Our data mining free results show that the gain of macro-variables in forecasting total (long-run) variance by GM models is overstated (understated). Estimation of different components of volatility is crucial for designing differentiated investing strategies, risk management plans and pricing derivative securities. Therefore, researchers and practitioners should be wary of data-mining bias, which may contaminate a forecast that may appear statistically validated using robust evaluation tests. Journal: The European Journal of Finance Pages: 575-596 Issue: 6 Volume: 30 Year: 2024 Month: 04 X-DOI: 10.1080/1351847X.2023.2217220 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2217220 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:6:p:575-596 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2227228_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: María Rubio-Misas Author-X-Name-First: María Author-X-Name-Last: Rubio-Misas Title: Culture and integration of Eurozone life insurance markets Abstract: This paper provides the first evidence on the role of national culture in the integration of Eurozone life insurance markets. It analyzes seven markets over a sixteen-year sample period that includes the financial crisis. We focus on three cultural values, which are individualism, trust, and hierarchy. The results indicate that collectivism culture increases cost and revenue performance and integration of Eurozone life insurance markets. Trust contributes to this integration, particularly in financial crisis, and egalitarian culture facilitates it in non-crisis time. We find that these relations prevail for unaffiliated single companies, but they weaken or do not even hold for groups of insurers. Our findings are robust with tests designed to alleviate endogeneity concerns. Journal: The European Journal of Finance Pages: 597-617 Issue: 6 Volume: 30 Year: 2024 Month: 04 X-DOI: 10.1080/1351847X.2023.2227228 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2227228 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:6:p:597-617 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2217225_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Shimeng Shi Author-X-Name-First: Shimeng Author-X-Name-Last: Shi Author-Name: Jia Zhai Author-X-Name-First: Jia Author-X-Name-Last: Zhai Author-Name: Yingying Wu Author-X-Name-First: Yingying Author-X-Name-Last: Wu Title: Informational inefficiency on bitcoin futures Abstract: This paper investigates the dynamics and drivers of informational inefficiency in the Bitcoin futures market. To quantify the adaptive pattern of informational inefficiency, we leverage two groups of statistics which measure long memory and fractal dimension to construct a global-local market inefficiency index. Our findings validate the adaptive market hypothesis, and the global and local inefficiency exhibits different patterns and contributions. Regarding the driving factors of the time-varying inefficiency, our results suggest that trading activity of retailers (hedgers) increases (decreases) informational inefficiency. Compared to hedgers and retailers, the role played by speculators is more likely to be affected by the COVID-19 crisis. Extremely bullish and bearish investor sentiment has more significant impact on the local inefficiency. Arbitrage potential, funding liquidity, and the pandemic exert impacts on the global and local inefficiency differently. No significant evidence is found for market liquidity and policy uncertainty related to cryptocurrency. Journal: The European Journal of Finance Pages: 642-667 Issue: 6 Volume: 30 Year: 2024 Month: 04 X-DOI: 10.1080/1351847X.2023.2217225 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2217225 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:6:p:642-667 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2229866_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Dongyeol Lee Author-X-Name-First: Dongyeol Author-X-Name-Last: Lee Author-Name: Woo Chang Kim Author-X-Name-First: Woo Chang Author-X-Name-Last: Kim Title: Optimal intertemporal liquidation of institutional investors with cash requirements and viable loans Abstract: This study examines the optimal intertemporal liquidation strategies to meet the cash requirements of large institutional investors in the presence of permanent and temporary price impacts. We construct a two-period optimal liquidation problem tailored to investors with intertemporal cash requirements, such as pension funds that need to meet periodic payment obligations. We impose viable government loans that can be deployed by state-owned investors, thereby extending the existing literature, which has focused largely on the private sector. The optimal liquidation strategies from a broader perspective can be sorted into three types: preemptive, conventional, and deferred liquidation. The use of viable large-scale loans can be attractive as a buffer in intertemporal decisions. Proper consideration of the timing and amount for liquidation of institutional investors is necessary. This study has important implications for policy makers and can inform the design of strategies for managing the liquidity needs of large institutional investors. Journal: The European Journal of Finance Pages: 618-641 Issue: 6 Volume: 30 Year: 2024 Month: 04 X-DOI: 10.1080/1351847X.2023.2229866 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2229866 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:6:p:618-641 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2216730_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: S. Burcu Avci Author-X-Name-First: S. Burcu Author-X-Name-Last: Avci Title: Profitability of insider trading in Turkey Abstract: This study presents the first comprehensive evidence of insider trading patterns and abnormal profits in the Turkish stock market using almost 65,000 insider transactions for the period of 2008–2019. Our findings show that insiders earn a significant 6.58% abnormal profit during the one year following insider trading. Officers, directors, and institutional investors earn even more. Both purchases and sales are profitable. Top executives, major shareholders, and institutional investors earn significant dollar profits. Additionally, uninformed investors can beat the market by mimicking the portfolios of insiders, while evidence shows that regulatory changes do not reduce insiders’ profits. Finally, this study provides important trading implications for investors and regulatory implications for policymakers everywhere. Journal: The European Journal of Finance Pages: 549-574 Issue: 6 Volume: 30 Year: 2024 Month: 04 X-DOI: 10.1080/1351847X.2023.2216730 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2216730 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:6:p:549-574 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2251532_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Stylianos Asimakopoulos Author-X-Name-First: Stylianos Author-X-Name-Last: Asimakopoulos Author-Name: Chardin Wese Simen Author-X-Name-First: Chardin Wese Author-X-Name-Last: Simen Author-Name: Andrew Vivian Author-X-Name-First: Andrew Author-X-Name-Last: Vivian Title: Sustainable finance and governance: an overview Abstract: We are currently facing great challenges around balancing environmental and social issues with economic development. This article provides an overview and insight into these challenges from a Finance perspective. It then introduces contemporary research that address specific points of interest. Journal: The European Journal of Finance Pages: 669-672 Issue: 7 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2023.2251532 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2251532 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:7:p:669-672 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2137423_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Adam Blomqvist Author-X-Name-First: Adam Author-X-Name-Last: Blomqvist Author-Name: Francesco Stradi Author-X-Name-First: Francesco Author-X-Name-Last: Stradi Title: Responsible investments: an analysis of preference – the influence of local political views on the return on ESG portfolios Abstract: We analyse whether environmental, social, and governance (ESG) investments generate different abnormal returns depending on preferences towards responsible assets in the United States. To measure investor preferences for ESG assets, we consider whether the company’s headquarters is located in a Democratic or Republican state and how the state scored in an Environmental survey from Yale University. When investors strongly prefer responsible investments (Democrats), the abnormal returns on ESG investments in these states are negative. Since ESG-motivated investors gain additional utility by holding green assets, they are willing to sacrifice a portion of their returns to incorporate the ESG factor into their portfolio. Conversely, when investors do not value ESG factors to the same extent (Republicans), abnormal returns are not significantly different from zero. We also divide states according to their opinions on environmental issues using a survey and perform the same analysis, confirming the previous results. Our methodology gains validity since the U.S. is in a home bias context. As a result, people tend to invest more in their home state; thus, the returns will reflect their preferences. Furthermore, the results of our research agree with existing theories connecting preferences for ESG investments and expected excess returns. Journal: The European Journal of Finance Pages: 696-725 Issue: 7 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2022.2137423 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2137423 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:7:p:696-725 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2150559_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Panagiotis Asimakopoulos Author-X-Name-First: Panagiotis Author-X-Name-Last: Asimakopoulos Author-Name: Stylianos Asimakopoulos Author-X-Name-First: Stylianos Author-X-Name-Last: Asimakopoulos Author-Name: Xinyu Li Author-X-Name-First: Xinyu Author-X-Name-Last: Li Title: The combined effects of economic policy uncertainty and environmental, social, and governance ratings on leverage Abstract: This paper examines the combined effects of Economic Policy Uncertainty (EPU) and Environmental, Social, and Governance (ESG) ratings on the level of leverage and its speed of adjustment (SOA). We find that both the EPU and ESG ratings are negatively associated with leverage when assessed separately. However, when EPU and ESG ratings are combined, we show that ESG ratings mitigate the detrimental impact of EPU on leverage. Our results also indicate that higher EPU levels force firms to increase their speed of adjustment due to tighter financing requirements, while ESG ratings overcome that issue and enable firms to maintain lower SOA. These results are robust to various robustness checks and are mainly driven by environmental and social factors. Our paper contributes to the growing ESG literature by showing that ESG ratings can alleviate the adverse effects of EPU on leverage and SOA. Journal: The European Journal of Finance Pages: 673-695 Issue: 7 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2022.2150559 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2150559 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:7:p:673-695 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2157300_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Meryem Duygun Author-X-Name-First: Meryem Author-X-Name-Last: Duygun Author-Name: Stephen Hall Author-X-Name-First: Stephen Author-X-Name-Last: Hall Author-Name: Aliya Kenjegalieva Author-X-Name-First: Aliya Author-X-Name-Last: Kenjegalieva Author-Name: Amangeldi Kenjegaliev Author-X-Name-First: Amangeldi Author-X-Name-Last: Kenjegaliev Title: ESG complementarities in the US economy Abstract: This paper investigates ESG from the perspective of changes in input elasticities of substitution and complementarity. Rather than compute these elasticities from the cost function, we compute them from the Input Distance Function (IDF). Our data are from Refinitiv Eikon Datastream database. We focus on the US economy due to her global role in the world economy and hence spillover effects of uncertainties on the rest of the world. The data consist of 5,798 companies comprising 38 US industries that span for 12 years from 2009 to 2020 and include: (i) financial data on sales, capital and employees; (ii) two financial ratios and (iii) three main ESG indicators. We compute Antonelli Elasticity of Complementarity (AEC) and Allen-Uzawa Elasticity of Substitution (AES) from the translog of IDF function. We find that the standard inputs have positive AEC elasticities; however, ESG cross-elasticities exhibit negative signs, classifying them as q-substitutes. Therefore, an increase in one of the ESG values leads to a decrease in the marginal value of the other. On the other hand, AES elasticities have a negative sign only for the Governance-Environment “doublet'; the rest of the pairs are positive implying that they are p-complements. Journal: The European Journal of Finance Pages: 753-771 Issue: 7 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2022.2157300 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2157300 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:7:p:753-771 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2113812_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Francesca Cuomo Author-X-Name-First: Francesca Author-X-Name-Last: Cuomo Author-Name: Silvia Gaia Author-X-Name-First: Silvia Author-X-Name-Last: Gaia Author-Name: Claudia Girardone Author-X-Name-First: Claudia Author-X-Name-Last: Girardone Author-Name: Stefano Piserà Author-X-Name-First: Stefano Author-X-Name-Last: Piserà Title: The effects of the EU non-financial reporting directive on corporate social responsibility Abstract: Using a large sample of EU non-financial firms over the period 2008–2018, this study examines the effect of the 2014 EU Non-Financial Reporting Directive on corporate social responsibility (CSR) and finds that the Directive has led to an increase in CSR transparency and performance. Further, it shows that the association between the Directive and CSR transparency is stronger for smaller firms, firms highly followed by analysts and firms headquartered in countries with strong legal systems. The adoption of CSR reporting after the Directive’s enactment, small firm size and investments in research and development strengthen the positive effects of the Directive on CSR performance. However, the mandating of CSR reporting assurance by some EU member states seems not to have any significant impact. Lastly, our study shows that after the Directive’s enactment, firms adopting CSR reporting experienced lower systematic risk and cost of equity. Our study contributes to the debate about whether and how non-financial disclosure should be regulated and shows the positive effects of the ‘comply or explain’ approach. It also provides insights for the EU in relation to the recently approved proposal to extend CSR reporting regulation to listed small and medium-sized enterprises and mandate CSR reporting assurance. Journal: The European Journal of Finance Pages: 726-752 Issue: 7 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2022.2113812 File-URL: http://hdl.handle.net/10.1080/1351847X.2022.2113812 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:7:p:726-752 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2244553_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Tinashe C. Bvirindi Author-X-Name-First: Tinashe C. Author-X-Name-Last: Bvirindi Author-Name: Ode-Ichakpa Inalegwu Author-X-Name-First: Ode-Ichakpa Author-X-Name-Last: Inalegwu Title: The impact of the global financial crisis and the European sovereign debt crisis on the capital structure of firms in Europe: do SMEs, and listed firms respond the same? Abstract: This study examines the evolution of the capital structure of European firms during the global financial crisis and European debt crisis. We compare the experiences of SMEs, listed firms and private firms in different industries and investigate the role of country and institutional factors in affecting capital structure. We find that SMEs, private firms, and non-listed firms experience lower declines in leverage relative to large firms during the global financial crisis and the European debt crisis. During these crises’ periods, SMEs experience steeper declines in debt maturity, which suggests reliance on short term debt that carries high roll over risks. This behaviour is protracted for firms in the agriculture industry. Both the global financial crisis and EU debt crisis have asymmetric effects on leverage, long term debt issuance and debt maturity across different industries, and across firms of different sizes. Moreover, in countries with more developed financial systems, stronger frameworks for insolvency, resolving firm insolvency, and strong systems for shareholder suits, and director liability, SMEs experience much lower reduction in leverage and debt maturity. This finding suggests that institutional factors help attenuate adverse capital supply shocks. Journal: The European Journal of Finance Pages: 889-913 Issue: 8 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2023.2244553 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2244553 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:8:p:889-913 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2220118_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Julia S. Mehlitz Author-X-Name-First: Julia S. Author-X-Name-Last: Mehlitz Author-Name: Benjamin R. Auer Author-X-Name-First: Benjamin R. Author-X-Name-Last: Auer Title: Memory-enhanced momentum in commodity futures markets Abstract: Motivated by the deteriorating performance of traditional cross-sectional momentum strategies in commodity futures markets, we propose to resurrect momentum by incorporating autocorrelation information into the asset selection process. Put differently, we introduce measures of short and long memory (variance ratios and Hurst coefficients, respectively) telling us whether past winners and losers are likely to persist or not. Our empirical findings suggest that a memory-enhanced momentum strategy based on variance ratios significantly outperforms traditional momentum in terms of reward and risk, effectively prevents momentum crashes and is not bound to the movement of the overall commodity market. The strategy returns cannot be explained by typical factor portfolios and macroeconomic variables. They are also robust to alternative data sets, transaction costs and data snooping. In comparison, Hurst coefficients carry less investment-relevant information and cannot outperform variance ratios in terms of risk premia and investment alpha. Journal: The European Journal of Finance Pages: 773-802 Issue: 8 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2023.2220118 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2220118 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:8:p:773-802 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2244008_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Maoxi Tian Author-X-Name-First: Maoxi Author-X-Name-Last: Tian Author-Name: Rim El Khoury Author-X-Name-First: Rim El Author-X-Name-Last: Khoury Author-Name: Nohade Nasrallah Author-X-Name-First: Nohade Author-X-Name-Last: Nasrallah Author-Name: Muneer M. Alshater Author-X-Name-First: Muneer M. Author-X-Name-Last: Alshater Title: Assessing systemic risk spillovers from FinTech to China’s financial system Abstract: Today, the potential of FinTech in China is immense. After a prolonged period of dormancy, a blazing trail in finance surges. This study estimates the extent to which risk is transmitted from FinTech to various sub-industries within the Chinese financial sector, employing the GARCH copula quantile regression model. Our empirical findings indicate that FinTech exerts significant risk spillover effects on these financial sub-industries. Notably, at lower risk levels of 0.1 and 0.05, the securities and state-owned commercial banks sub-industries demonstrate the most substantial and least significant risk spillovers, respectively. Conversely, at the highest risk level of 0.01, the joint-stock commercial banks and securities exhibit the largest and smallest risk spillovers, respectively. Additionally, our analysis reveals that the dynamic risk spillovers for each financial sub-industry differ and reflect the influences of the stock market crash that occurred during 2015–2016. The implications of our study extend to portfolio managers and financial authorities, highlighting the importance of enhancing supervision and regulation of FinTech companies to uphold financial stability. Journal: The European Journal of Finance Pages: 803-826 Issue: 8 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2023.2244008 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2244008 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:8:p:803-826 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2247440_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Sze Nie Ung Author-X-Name-First: Sze Nie Author-X-Name-Last: Ung Author-Name: Bartosz Gebka Author-X-Name-First: Bartosz Author-X-Name-Last: Gebka Author-Name: Robert D. J. Anderson Author-X-Name-First: Robert D. J. Author-X-Name-Last: Anderson Title: An enhanced investor sentiment index* Abstract: We propose an enhancement to the well-known market-based investor sentiment index by Baker, M., and J. Wurgler. (2006. “Investor Sentiment and the Cross-Section of Stock Returns.” The Journal of Finance 61 (4): 1645–1680). The low forecasting power of that index for future aggregate stock market returns has long been a puzzle, and we demonstrate that its ability to empirically capture latent investor sentiment can be significantly improved by allowing contributions of its individual components to vary over time, rather than being fixed. Our enhanced index represents an improved measure of investor sentiment: empirically, we find that our sentiment index not only instils forecasting power to the original Baker and Wurgler (2006) index, it also outperforms competitor measures in empirically capturing unobservable sentiment. This superior empirical performance is demonstrated to be due to investors’ irrational expectations about future discount rates. Lastly, sentiment measured by our enhanced index contains useful and unique information about future market returns, as it outperforms fundamental economic predictors in forecasting, in both the statistical and economic sense. Journal: The European Journal of Finance Pages: 827-864 Issue: 8 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2023.2247440 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2247440 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:8:p:827-864 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2241539_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Haijie Huang Author-X-Name-First: Haijie Author-X-Name-Last: Huang Author-Name: Steven Xianglong Chen Author-X-Name-First: Steven Xianglong Author-X-Name-Last: Chen Author-Name: Edward Lee Author-X-Name-First: Edward Author-X-Name-Last: Lee Author-Name: Dongdong Li Author-X-Name-First: Dongdong Author-X-Name-Last: Li Title: Information search costs and trade credit: evidence from high-speed rail connections Abstract: We investigate the impact of information search costs on firms’ access to trade credit used as a major source of interfirm financing. Using the openings of high-speed rails (HSR) in China as exogenous shocks, we find that firms located in cities with HSR connections receive more trade credit from their suppliers. Further analyses show that the HSR effect on trade credit concentrates among customers with poor information transparency and that HSR openings improve the customers’ information environment, suggesting that a decline in information search costs promotes supplier financing. Our finding reveals a positive externality of HSR construction on interfirm financing. Journal: The European Journal of Finance Pages: 865-888 Issue: 8 Volume: 30 Year: 2024 Month: 05 X-DOI: 10.1080/1351847X.2023.2241539 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2241539 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:8:p:865-888 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2256799_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Marie Racine Author-X-Name-First: Marie Author-X-Name-Last: Racine Title: Indigenous corporate responsibility and financial performance Abstract: The impact of Corporate Social Responsibility with respect to Indigenous (CSRI) initiatives and issues on financial performance was studied using several CSRI metrics, both innovated (where necessary) and pre-existing (where possible). We find that CSRI initiatives based on dollar expenditures and firm website scores are positively associated with financial performance while increase to reputation risk has a negative impact. We also find that a CSRI score can only be moderated by an overall ESG score that is substantially stronger than the CSRI metric. In a world that increasingly emphasizes the importance of ‘truth and reconciliation’ with its Indigenous populations while meeting environmental resource needs, we must seek a path that recognizes and respects Indigenous rights and cultural practices. Providing well developed, consistently measured and acceptable CSRI metrics and assessing their impact on firm financial performance is a crucial step in this reconciliation process. This paper makes important contributions to that goal. Journal: The European Journal of Finance Pages: 1008-1029 Issue: 9 Volume: 30 Year: 2024 Month: 06 X-DOI: 10.1080/1351847X.2023.2256799 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2256799 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:9:p:1008-1029 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2251531_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Jingbin Zhuo Author-X-Name-First: Jingbin Author-X-Name-Last: Zhuo Author-Name: Yufan Chen Author-X-Name-First: Yufan Author-X-Name-Last: Chen Author-Name: Bang Zhou Author-X-Name-First: Bang Author-X-Name-Last: Zhou Author-Name: Baiming Lang Author-X-Name-First: Baiming Author-X-Name-Last: Lang Author-Name: Lan Wu Author-X-Name-First: Lan Author-X-Name-Last: Wu Author-Name: Ruixun Zhang Author-X-Name-First: Ruixun Author-X-Name-Last: Zhang Title: A Hawkes process analysis of high-frequency price endogeneity and market efficiency Abstract: We use the Hawkes process to model the high-frequency price process of 108 stocks in the Chinese stock market, in order to understand the endogeneity of price changes and the mechanism of information processing. Using a piece-wise constant exogenous intensity, we employ non-parametric estimation, residual analysis, and Bayesian Information Criterion (BIC) to determine that a power-law kernel is the most appropriate for our data. We propose the internal branching ratio to represent endogeneity within a finite interval. The branching ratio tends to be higher after the market opens and before the market closes, with a mean value of around 0.81, suggesting significant endogeneity in price changes. In addition, we explore the relationship between branching ratios and stock characteristics using panel regression. Higher branching ratios are associated with lower levels of price efficiency at high, but not low, frequencies. Finally, the branching ratio increases over time without significant impact from COVID-19. Journal: The European Journal of Finance Pages: 949-979 Issue: 9 Volume: 30 Year: 2024 Month: 06 X-DOI: 10.1080/1351847X.2023.2251531 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2251531 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:9:p:949-979 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2241528_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Raslan Alzuabi Author-X-Name-First: Raslan Author-X-Name-Last: Alzuabi Author-Name: Sarah Brown Author-X-Name-First: Sarah Author-X-Name-Last: Brown Author-Name: Daniel Gray Author-X-Name-First: Daniel Author-X-Name-Last: Gray Author-Name: Mark N. Harris Author-X-Name-First: Mark N. Author-X-Name-Last: Harris Author-Name: Christopher Spencer Author-X-Name-First: Christopher Author-X-Name-Last: Spencer Title: Portfolio allocation and borrowing constraints Abstract: Using the US Survey of Consumer Finances, we explore the empirical relationship between borrowing constraints and financial portfolio allocation by American households. To help motivate our empirical analysis we initially draw insights from a mean-variance model of optimal portfolio allocation with three tradable asset classes defined by increasing risk, and establish a link between borrowing restrictions and portfolio allocation in the presence of background risk. Our main contribution, however, lies in estimating the role that borrowing constraints play in shaping households' financial portfolio allocation. This is achieved using an ordered fractional probit model. In addition to revealing the significant empirical role played by household borrowing constraints in determining portfolio allocation, our analysis helps us to resolve ambiguity surrounding the behaviour of the medium-risk asset in our motivational theoretical framework. Further, the empirical distribution of medium-risk assets is found to be remarkably similar to that for high-risk assets, suggesting the presence of a more general ‘risk puzzle’, which our borrowing constraints measures partially explain. Journal: The European Journal of Finance Pages: 915-948 Issue: 9 Volume: 30 Year: 2024 Month: 06 X-DOI: 10.1080/1351847X.2023.2241528 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2241528 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:9:p:915-948 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2259438_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Guangzi Li Author-X-Name-First: Guangzi Author-X-Name-Last: Li Author-Name: Yili Lian Author-X-Name-First: Yili Author-X-Name-Last: Lian Author-Name: Yi Zhang Author-X-Name-First: Yi Author-X-Name-Last: Zhang Title: Labor unions and debt covenant violations* Abstract: This study examines the relationship between labor unions and firms’ decisions to violate debt covenants. We find that firms with high unionization rates are more likely to violate debt covenants than firms with low unionization rates. This relationship is stronger for firms with larger cash reserves. Our analysis also reveals that debt covenant violations lead to a lower probability of a strike. Additionally, we find that high-unionization firms are in better financial condition prior to covenant violations than low-unionization firms. Our study confirms the existing literature by showing that long-term abnormal stock returns after covenant violations are significantly positive. However, our results also show that high-unionization firms experience smaller stock returns compared to low-unionization firms. Furthermore, we provide evidence that high-unionization firms tend to manipulate earnings downward before covenant violations. These findings suggest that firms may strategically violate debt covenants to gain bargaining flexibility and force labor unions to make concessions in subsequent negotiations. Journal: The European Journal of Finance Pages: 1030-1047 Issue: 9 Volume: 30 Year: 2024 Month: 06 X-DOI: 10.1080/1351847X.2023.2259438 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2259438 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:9:p:1030-1047 Template-Type: ReDIF-Article 1.0 # input file: REJF_A_2250379_J.xml processed with: repec_from_jats12.xsl darts-xml-transformations-20240209T083504 git hash: db97ba8e3a Author-Name: Théo Nicolas Author-X-Name-First: Théo Author-X-Name-Last: Nicolas Title: Bank market power and interest rate setting: why consolidated banking data matter Abstract: The literature on the effects of bank market power on access to credit has produced many results that are sometimes contradictory. Yet, all of these studies are based on unconsolidated data that ignore the national market power of banking groups. This results in an underestimation bias that this paper proposes to correct. Using a panel of more than 55,000 French firms covering the period 2006–2017, I consider a set of structural and non-structural measures of bank market power both at the unconsolidated and consolidated levels. My results strongly support the market power hypothesis which emphasizes the virtues of competition on interest rate setting. I find that bank market power increases the interest rate charged, but only when using my consolidated measures. This effect is stronger for small and risky firms and is concentrated on long-term loans. My findings highlight the need to take into account the capital linkages of subsidiaries within the same banking group in order to fully assess the implications of bank market power. Journal: The European Journal of Finance Pages: 980-1007 Issue: 9 Volume: 30 Year: 2024 Month: 06 X-DOI: 10.1080/1351847X.2023.2250379 File-URL: http://hdl.handle.net/10.1080/1351847X.2023.2250379 File-Format: text/html File-Restriction: Access to full text is restricted to subscribers. Handle: RePEc:taf:eurjfi:v:30:y:2024:i:9:p:980-1007