Investment Management and Financial Innovations

Online ISSN: 1812-9358
Print ISSN: 1810-4967
Filter rule profitability tests.
A portfolio of small capitalization stocks formed from securities listed on the Australian Stock Exchange (ASX) fails to adjust to market-wide news instantaneously and displays a significant amount of predictability from lagged returns on large and medium size firms. Despite apparently large excess payoffs generated by filter rules, the lagged adjustments become economically insignificant once transaction costs associated with taking a position in each constituent security are taken into account. I suggest that the observed predictability is largely due to a lack of small cap portfolio derivatives which could facilitate index arbitrage and enhance price discovery in the Australian market.
Growth Portfolio and the Benchmark Portfolios 
A number of investment strategies designed to maximise portfolio growth are tested on a long run Australian equity data ste. The application of these growth optimal portfolio techniques produces impressive rates of growth, despite the fact that the assumptions of normality and stability that underlie the growth optimal model are shown to be inconsistent with the data. Growth optimal portfolios are constructed by rebalancing the portfolio weights of 25 Australian listed companies each month with the aim of maximising portfolio growth. These portfolios are shown to produce growth rates that are up to twice those of the benchmark, equally weighted, minimum variance and 15% drift portfolios. The key to the success of the classic, no short-sales, growth optimal portfolio strategy lies in its ability to select for portfolio inclusion a small number of Australian stocks during their high growth periods. The study introduces a variant of ridge regression to form the basis of one of the grwoth focussed investment strategies. The ridge growth optimal technique overcomes the problem of numerically unstable portfolio weights that dogs the formation of short-sales allowed growth portfolios. For the short sales not allowed growth portfolio, the use of the ridge estimator produces increased asset diversification in the growth portfolio, while at the same time reducing the amount of portfolio adjustment required in rebalancing the growth portfolio from period to period.
The discussion about the best method to be used in capital budgeting has been long and intensive. Differences between Net Present Value and Internal Rate of Return seem to cause everlasting problems, while especially the Internal Rate of Return often is neglected as an appropriate measure. A famous example of the problems caused by the different approaches is the ranking of mutually exclusive projects. The following paper is presenting an easy explanation, without introducing new and more complicated measures, but by simply explaining the nature of and differences between Net Present Value and Internal Rate of Return.
Tests results for causality between energy consumption and economic growth do not have a consensus in the financial economics literature. Empirical evidence varies on the economies examined and methodology employed. This paper proposes a wavelet analysis as a semi- parametric model for detecting multi-scale causality between electricity consumption and growth in emerging economies. Using wavelet analysis we find that in the short run there is feedback relationship between GNP and energy consumption, while in the long run GNP leads to energy consumption. Wavelet correlation between GNP and energy consumption is maximum at 3rd time-scale(5-8 years) and this shows that GNP effects electricity consumption maximally around 5-8 years later in the long-run. We also find that the magnitude of the wavelet correlation changes based on time-scales for GNP and energy consumption and thus indicate that GNP and energy consumption are fundamentally different in the long run.
This paper estimates the exchange market pressure (EMP) on currencies of EU4 countries (Czech Republic, Hungary, Poland, Slovakia) during the period 1993-2005. Therefore, it is one of a very few studies focused on this region and the very first paper applying the model-dependent approach to the EMP estimation on these countries. Moreover, the model proposed by Spolander (1999) is used in the paper along with quarterly data. Thus, this paper, tests the suitability of this model for the countries analysed. Regarding the results obtained, EMP is of similar magnitude in all countries except Poland. We found that EMP was significantly lower and less volatile during the periods when a floating exchange rate arrangement was applied than in periods with fixed exchange rates. It implies that unavoidable entry into ERM II (a quasi-fixed regime) could lead to the EMP increase during the period of the exchange rate stability criterion fulfilment. Hence, a revision of the current definition and understanding of the criterion fulfilment is suggested. Since the model estimation was burdened by some factors reducing the estimates validity we also propose some modifications and extensions of the methodology applied.
Relative P/E-ratio valuation apparently still plays an important role among investment research analysts and advisors (cf. Goldman Sachs,1999). In a valuation model of this kind, the value of owners�equity is typically calculated as a function of an observed P/E-ratio for some peer company, or the mean/median P/E-ratio for some group of peer companies. The research question being addressed in the paper is concerned with the validity of a benchmark P/E-ratio being assessed in this way. Assuming that there is only one peer company, the importance of differences (between the company being valued and its peer company) with regard to the book return on owners�equity and the growth of owners�equity have been investigated. In the main, it is shown that relative P/E-ratio valuation will not be able to handle differences in the expected book return or growth of owners�equity. In an empirical context, however, controlling for industry and the expected book return for next year, together with some modification of the valuation model itself, can improve the quality of earnings-based relative valuation.
In this research, we investigate the valuation effect on acquiring banks during different window of events. The research is conducted on the US and the European banks mergers and acquisition during the period of 2004 through 2010 with special focus on bank mergers during the financial crisis of this decade. During this crisis period when many big banks are also on the verge of bankruptcy, many mergers and acquisitions take place in the United States in Europe. Using traditional event study methodology, we investigate the wealth effect on acquiring banks to understand the market reaction in bank acquisitions announcements. We observe those acquisition announcements, on average; create a 0.3% and 0.8% gain in the United States and European countries, respectively to the acquiring bank. When we focus on banks with different size and location, we, however, find that, on average, American acquiring banks lose 18% who employ 10,000-100,000 and European banks lose 6% with same employment size. Furthermore, American acquiring banks lose 17% and 12% that are headquartered in the Western and Midwestern states respectively. Our results offer further evidence to the literature that, shareholders of acquiring banks face negative wealth effect even when they acquire other banks during crisis period.
In the last decade, Turkey followed a managed floating exchange rate regime until the late 1999s. In January 2000, Turkey signed a stand-by agreement with the IMF and began following a stabilization program, which involved implementing a crawling peg exchange rate regime. In February 2001, an argument between Prime Minister Bulent Ecevit and President Ahmet Necdet Sezer over how to fight public-sector corruption triggered a severe financial crisis leading to a sky-high overnight rate as much as 6200 percent in uncompounded terms, and a huge decline in foreign exchange reserves of the Central Bank. Consequently, the exchange rate system collapsed and the Central Bank had no option but allow the Lira to float freely. This article argues that the political considerations were an important factor behind the crisis of the Turkish Lira in February 2001. To test this hypothesis, a linear probability model based on five conventional macroeconomic indicators, and two political variables spanning the period between 1982 and 2001 is built. Evidence emerges that traditional variables such as domestic credit, money supply, and stock market index, as well as the number of political parties in the government, and the timing of elections are significant in explaining the crisis. Results further suggest that inclusion of political variables in the regression model helped in explaining the crisis better through augmenting the fitness of the regression line.
Initial sample, reasons for deletion and frequency distribution by industry Panel A presents the initial sample and the reason for deletion. Panel B presents a frequency distribution of the final sample based upon the first two digits of the 2007 North American Industry Classification System (NAICS). N is the number of observations within each group and % is the percentage of the observations relative to the total number of observations in the final sample; na indicates not applicable.
Do mandated changes in accounting policy result in the reapportionment of executive equity compensation? Specifically, is this true for firms accounting for employee stock options (ESOs) under FAS 123R? This research addresses how this policy change motivated firms to substitute restricted stock awards (RSAs) and other non-option compensation for ESOs. Accelerating firms that overweighted options in their compensation structure are shown to utilize the implementation of FAS 123R as a deadline to reduce ESOs relative to RSAs. The evidence does not indicate that accelerating firms are managing option expense recognition in an effort to minimize management option compensation costs.
In this performance evaluation study, two questions are addressed. First, do active fund managers possess macro and micro forecasting skills that deliver superior risk-adjusted returns? Second, what is the nature of market timing/stock selectivity trade off in the generation of alpha? The answers from this study are as follows: as an industry, managers delivered inferior returns for superannuation investors for the period 1991 through 2000. The study provides little evidence that the Australian funds management industry holds sufficient macro and/or micro forecasting abilities to generate positive alpha. While previous research has found that inferior market timing decisions are compensated for by superior stock selection skills, this study finds no substantive inverse relationship between timing and selectivity. Yes Yes
Percentage of companies with positive AR on each day
Percentage of Companies with Positive CAR in each sub-period
Distribution of Companies with respect to percentage of higher volume (Benchmark: daily average volume for the third month)
Trading volume pattern for Group and Non-Group companies
Categorization of all the 42 companies based on the criteria proposed
Insider trading activity is investigated prior to merger announcement in Indian capital market. An attempt is made to check it out whether trading take place on the basis of asymmetric and private information. For examining the behaviour of stock prices a modified market model is used to estimate the parameters for the estimation window. These estimates are used to compute average return and cumulative average returns for the event window, which are measures of abnormal returns. Besides price run-ups, it is also common to see unusually high levels of share trading volume before public announcement of merger. Daily trading volume pattern of the target companies is also investigated. The analysis carried out in this study is based on a sample of 42 companies for which merger announcement date was announced during the period of 1996-1999. Based on the analysis for each company individually, we recommend investigation in six companies for existence of possible insider trading.
Average CAR of portfolios formed for three-year sort and test periods for recent sub-period January 1983 and December 2003
Are the returns accruing to De Bondt and Thaler's (1985) (DT) much celebrated overreaction anomaly pervasive? Using the CRSP data set used by for the period 1926 through 1982, and, for the first time, an additional two decades of data (1983 through 2003), we provide preliminary support for the original work of DT, reporting that the overreaction anomaly has not only persisted over the past twenty years but has increased, on a risk-unadjusted basis. However, using the three factor model of Fama and French (1993) (FF), we find no statistically significant alpha can be garnered via the overreaction anomaly, with contrarian returns driven by the factors of size and value, not the behavioral biases of investors. It is our conjecture that the anomaly is not robust under the FF framework, with 'contrarian' investors following such a scheme simply compensated for the inherent portfolio risk held. Yes Yes
In this paper we introduce a measure testing the degree of efficiency in securities markets with bidask spreads. The measure tests relative arbitrage profits when there are transaction costs on the prices and payoffs of the assets. Moreover, we prove that the measure is the minimum of the measures of efficiency in all frictionless markets where the prices and payoffs lie between the bid and the ask prices and payoffs respectively. In particular, we fmd that the model is arbitrage-free if and only if there exist convex combinations of the bid and the ask prices and payoffs such that the corresponding frictionless model is arbitrage-free.
Dynamics connected to the age and the evaluation time 
The value of the reserve and the impact ratio
The recent wide development and changes in insurance markets highlighted the necessity to map out the solvency analysis in a more complete framework. The approach we present in the paper comes up with an integrated analysis of the risk profile of an insurance business, taking into account the actual European directives about solvency assessment. The aim of the paper is to construct a methodology apt to incorporate properly the effect of the risk sources in calculating mathematical provisions related to a portfolio of insurance policies.
It is well-known that the CAPM valuation formula results from a quadratic utility of the representative investor. In this paper we show that the CAPM valuation rule remains valid if the representative investor exhibits an exponential utility and asset and market returns are bivariate normally distributed. In contrast to quadratic utility, exponential utility implies a positive stochastic discount factor that guarantees positive (option) prices. In particular, within our discrete-time framework, options are priced according to the Black-Scholes formula. In addition, our approach allows the valuation of single assets if their return follows an intertemporal market model with stochastic beta. The resulting valuation formula differs from the standard CAPM only in that the expected beta replaces the deterministic one. It turns out that the expected beta can easily be estimated from the return time series.
This paper develops the approach suggested by Howe, Madura and Tucker (1993) to examine the impact of cross-listings on stock price volatility in Brussels. In general, bad news on and around Friday listings appears to be the most prevalent for laxer shareholder protection rules of regulatory environments. © Nicholas Papasyriopoulos, Constantinos Katrakilidis, Athanasios Koulakiotis, 2006.
The Time Plot of the Daily Series of 10-year JGB Yields (November 17, 2002-July 18, 2004)
The Histogram of the 10-year JGB Yields Series (November 17, 2002-July 18, 2004)
The Plot of Residual Sums of Squares of SETAR Models of the JGB Yields Series against Potential Thresholds (November 17, 2002-July 18, 2004)
In this paper, the author explores the presence of non-linearity for the daily series of 10-year Japanese government bond (JGB) yields by using the Tsay (1989) test, she finds the threshold non-linearity due to a significant change in Japanese debt management policy.The author also tests to find the sixth lag of the series as the threshold variable, then locates the threshold, and estimates a 2-regime self-exciting threshold autoregressive model (SETAR) for this time series.
This study examines the effect of publicly announced changes in official interest rates on the stock returns of the major banks in Australia during the period from 1990 to 2005. Previous studies of such effects have reported inconclusive and mixed results. US evidence suggests that banking stocks are generally negatively (positively) impacted by increases (decreases) in official interest rates. We find, somewhat unexpectedly, that Australian bank stock returns are not negatively impacted by the announced increases in official interest rates. Furthermore, banks apparently experience net-positive abnormal returns when cash rates are increased, which is consistent with dividend valuation theory that suggests if income effects dominate, then stock returns need not be negatively impacted. We explain our findings by the fact that Australian banks, which operate in a less competitive and concentrated banking environment compared to the US, are able to advantageously manage earnings impacts when cash rate changes are announced.
Bond portfolio of EU-13 countries and the US (in bln EUR)
Development of the equity and bond home bias
Development of the regional equity and bond bias of European investors
(cont.). Determinants of the Equity home bias (OLS regression)
Finance theory suggests that investors should hold an internationally diversified portfolio. In practice, investors show a strong preference for domestic securities (equities and bonds). One of the explanations for this home bias is the existence of exchange rate risk. This paper tests whether the arrival of the euro has caused a decline in the home bias. Our empirical findings suggest that the home bias has declined in Europe. As expected, this decline is stronger in the EMU countries than in the non-EMU countries. We also find that EMU-based investors have switched from home to euro-area securities (regional bias).
We look for the existence of a value premium in the UK equity market for the period 1987-2002. Previous studies are subject to four methodological biases: (1) survivorship bias, (2) look-ahead bias, (3) a downward bias in post-formation growth stock returns caused by excluding recently listed growth stocks from the data, and (4) an upward bias in post-formation value stock returns caused by computing long-term returns by cumulating monthly returns (Conrad and Kaul (1993)). We eliminate the first three biases by using a new survivorship bias and look-ahead bias free dataset, which contains a complete history of all UK stocks that were fully listed at any time during 1987-2002. We eliminate the fourth bias by computing post-formation holding period returns, as recommended in Conrad and Kaul (1993). Our results indicate that the value effect is far smaller than is reported in previous studies, and is neither economically nor statistically significant.
Given the sharp increase of bond yield spreads and the considerable losses to the value of bond portfolios during the recent financial market crisis, the reliable estimation of haircuts on bond values has become increasingly important. The banking supervisors motivate this too, when they demand institutes to hold an adequate level of liquidity. We analyse different data sets of Bloomberg Fair Market Curves of different sectors, credit qualities, and maturities for deducing spreads and haircuts. Starting with a regular market environment, the analysis shows a clear ex ante underestimation of spreads as well as haircuts. The analysis indicates evident rises in average spreads, e.g. up to 13 times for one-year maturities even for AAA securities. In the crisis situation we see haircuts of up to 35% even for investment grade bonds. Financial institutes have to take into consideration these findings for a reliable liquidity management.
Management should end the costly search for their cost of capital in view of the confluence of several interrelated conceptual and practical reasons. The universally used definition is seriously deficient. There is dispute as to whether cost of capital expresses investors rational demands. On top of this there is accumulating evidence that any such rational demands are obscured by the influences of a host of irrational decision criteria. Furthermore there are insuperable measurement difficulties. Any measurements which emerge are subject to such disagreement as to be of virtually no practical value. These problems are compounded when attempts are made to adapt cost of capital to the specific circumstances of an enterprise. Any such attempt requires assumptions which are so heroic that they undermine the usefulness of the resulting estimate. Current practice is untutored, inconsistent and incomplete and therefore cannot be used as a source of guidance. Pending new insights, cost of capital should therefore be relegated to the position of a theoretical construct of no practical significance.
This paper addresses the changing nature of the correlations between the equity returns of the U.S. and Russian markets and the factors that cause these correlations to change. Correlations were estimated using the “Dynamic Conditional Correlation Model.” The sovereign credit risk of Russia, changes in exchange rates and changes in world energy prices were significant factors that affected the correlations of equity returns.
List of Ratios
Prediction of insurance companies insolvency has arised as an important problem in the field of financial research, due to the necessity of protecting the general public whilst minimizing the costs associated to this problem. Most methods applied in the past to tackle this question are traditional statistical techniques which use financial ratios as explicative variables. However, these variables do not usually satisfy statistical assumptions, what complicates the application of the mentioned methods.In this paper, a comparative study of the performance of a well-known parametric statistical technique (Linear Discriminant Analysis) and a non-parametric machine learning technique (See5) is carried out. We have applied the two methods to the problem of the prediction of insolvency of Spanish non-life insurance companies upon the basis of a set of financial ratios. Results indicate a higher performance of the machine learning technique, what shows that this method can be a useful tool to evaluate insolvency of insurance firms
We develop a continuous-time evolutionary market model where prices are endogenously generated by supply and demand. Investment strategies are assumed to be fix-mix, which means that the relative budget shares are constant in time. The model is therefore a hybrid. While given portfolio rules remain constant over time, assets, market-clearing and in particular market shares of the individual portfolio strategies evolve in continuous time. Our main goal is to understand the wealth dynamics which describes the evolution of market shares. We study its asymptotic properties and identify evolutionary stable investment strategies. These strategies prevent entrants to the financial market from gaining wealth in the long run and furthermore, in the existence of a small diversified number of mutant strategies, drive the invading strategy out of the market. Our definition of evolutionary stability is therefore a close adaptation of Maynard-Smith and Price's (1973) original definition of an ESS [8].
We investigate the term structure of credit spreads and credit default swaps for different rating categories. It is well-known quite that for issuers with lower credit quality higher spreads can be observed in the market and vice versa. However, empirical results on spreads for bonds with the same rating but different maturities are rather controversial. We provide empirical results on the term structure of credit spreads based on a large sample of Eurobonds and domestic bonds from EWU-countries. Further we investigate maturity effects on credit default swaps and compare the results to those of corporate bonds. We find that for both instruments a positive relationship between maturity and spreads could be observed for investment grade debt. For speculative grade debt the results are rather ambiguous. We also find that spreads for the same rating class and same maturity exhibit very high variation.
This study presents an empirical investigation of the UK stock market response to the implementation of the UK Statement of Standard Accounting Practice (SSAP) No. 20 "Foreign Currency Translation" (issued in April 1983). Such an empirical investigation has not yet been undertaken for the UK. Our results show that the stock market generally appeared to have anticipated the implementation of SSAP 20. For the aggregate set of adopters, we found a positive stock market response in the official year of adoption, reflecting the appreciation of the income-stabilising effects of the standard. This paper also presents a cross-sectional analysis that tests for a relationship between the stock returns and the accounting measures of those firms that adopted SSAP 20. We found a significant relation between the stock returns and the related accounting measures in the actual adoption period of the aggregate set of adopters. This study generally focuses on the interpretation of the financial impacts of the various accounting choices of firms within their financial and economic environments. © Publishing Company Business Perspectives All rights reserved.
This paper analyses the impact of foreign currency exposure on the value of the New Zealand public listed companies using the New Zealand/US exchange rate and Trade Weighted Index factor return. Augmented market model (Adler and Dumas, 1984; Di Iorio and Faff, 2000; Dominguez and Tesar, 2001) would be employed to study the relationship between exchange rate movements and firm value. Using daily data, we test the following hypotheses in this paper: a) Foreign cu rency exposure is a function of firm’s size and its industry affiliation; b) Foreign currency exposure is a function of financial indicators, such as dividend yield, liquidities and P/E ratio. However, we find very weak and ambiguous evidence for the foreign currency exposure on the value of New Zealand companies.
Different Stream of expected cash flows
Sensitivity to g 1 and g 2 and joint sensitivity for the two-stage model 1
Component of Joint Sensitivity due to g 2 , as a function of the length of the first stage
Duration of the second stage as a function of the coefficient of liquidity FCFF T /IC T 1
This paper matches the sensitivity analysis of two-stage DCF models to the assumption of Long Term Steady-State. It proposes the definition of ‘Joint Sensitivity’ that measures the effect on the firm’s value of joint variations of more input parameters. The duration of the first stage of explicit forecast is one of the most important of these parameters. The assumptions leading to the definition of such length is that the company exhausts in that year its competitive advantage over the competitors and begins a period of Steady-State. So, the end of the Competitive Advantage Period, defined as the period during which the return on capital can be higher than its cost, coincides with the end of the first stage of explicit forecast of the DCF. This paper proposes an instrument (Excess Return) that measures the theoretical reliability of a valuation by verifying if the return on invested capital is asymptotically equal to its average cost.
This paper examines the relationships between changes in firm’s debt and its effects on firm’s market value in a transitional market. The market value is considered as a measure of the investment worthiness. The signaling effect refers to the effects of debt on firm’s market value.The paper examines the signaling effects of the determinants of capital structure that are relevant to a transitional market. These determinants cover the basics of tradeoff model, pecking order hypothesis and free cash flow hypothesis. The methodology begins with the determination of the relevant determinants of debt in a transitional economy. Next, the potential signaling effects of the relevant determinants of debt are examined. The robustness of the signaling effect is examined using the ‘Extreme Bound Analysis.’ The overall results indicate that the worthiness of the investment (market value) is determined by interest rates (macro factor) and financial flexibility (firm-specific factor). These two factors have robust and significant signaling effects.
This paper deals with issues related to the choice of the interest rate model to price interest rate derivatives. After the development of the market models, choosing the interest rate model has become almost a trivial task. However, their use is not always possible, so that the problem of choosing the right methodology still remains. The aim of this paper is to compare some of the most used interest rate derivatives pricing models to understand what are the issues and the drawbacks connected to each one. It is shown why and in which cases the use of each model does not give appreciable results and when, on the other hand, the opposite occurs. More exactly, it will be shown that the lack of data on the implied volatilities or the inefficiencies in the financial market can prevent the use of the market models, because a satisfying calibration of the interest rate trajectories cannot be guaranteed. Moreover, it is shown how the smile effect in the interest rate options market can affect the price provided by each model and, more exactly, that the difference between the price provided by the models and the observed market prices gets larger, as the strike price increases.
This study examines the measurement of the market reaction (MB ratio is a proxy for shareholder value) to fundamental financial information. The issue of measuring the stock market reaction to fundamental information stems from the fact that there is a strong need to focus on those fundamentals that support shareholder value. The methodology utilizes the dynamic properties of the partial adjustment model that shows the extent to which shareholder value in a previous period adjusts to a target level because of the presence of financial fundamentals. The results indicate that (a) shareholder value is positively associated with elements of short-term debt financing, earnings power, liquidity, stock returns, (b) in contrast, the shareholder value is negatively associated with elements of capital expenditure, accounts receivables and long-term debt financing, (c) shareholder value is positively associated with elements of cash flow rather than accruals basis. The results of the sensitivity analysis indicate that the fundamentals related to the income statement and financial ratios (regarded as an example of co-integrated financial information) are very informative in a sense that they help adjust the shareholder value to a target level. The models examined in this papers have practical use to investment analysts, particularly in transitional markets, in a sense that these models indicate the sources and types of fundamentals that help adjust the MB ratio from a pervious level to a target level. The overall results of this paper help investment analysts measure the informativeness of the financial information they communicate with stockholders.
The distribution frequency of the OIP over time with barrier set at 115  
Pension funds evolved over time towards the adoption of more complex risk-sharing schemes in order to keep up with the financial market complexities and volatility. Among these, the adoption of an indexation policy is widespread and it is now conditional to the solvability of the fund. Pension funds recognizing conditional inflation indexation targets are obliged to pay an additional payoff that is linked to the inflation rate through some specific rule. The additional payoff normally takes the form of a contingent claim conditional to a “measure” of sustainability of the payoff itself. This contingent claim can be valued with the same techniques that are used to value options. This valuation technique is an indispensable tool for improving pension fund risk management and correlated fair valuation issues. The paper provides a valuation methodology for the inflation indexation as embedded option by means of scenario-based analysis. Results derive from a simulation procedure applied to an exemplar case and give the opportunity to state the nature and the value of the indexation option.
Compound option prices under Brownian motion, NIG, VG, and Meixner processes when K 2 is respectively 102 (a), 100 (b), 98 (c) and K 1 = 2.
European put option prices under NIG, VG, and Meixner process
(cont.). Delta, gamma and Bermudan put option prices with daily exercise dates under the assumption the log returns follow NIG, VG, Meixner processes and their Monte Carlo valuation
Compound option prices under Brownian motion, NIG, VG, and Meixner processes.
European and Bermudan (early exercise on daily basis) floating strike lookback put option prices, where monitoring is on daily and weekly basis using NIG, VG and Meixner processes
This paper proposes the markovian approach to price exotic options under Lévy processes. The markovian approach is simpler than the others proposed in literature for these processes and it allows to define hedging strategies. In particular, we consider three Lévy processes (Variance-Gamma, Meixner and Normal Inverse Gaussian) and we show how to compute American, barrier, compound and lookback option prices. We first discuss the use of an homogeneous Markov chain approximating the risk neutral log-return distribution. Then, we describe the methodology to price exotic contingent claims under the three different distributional assumptions and we compare the convergence results.
The neglected firm effect is the phenomenon where stocks of less widely-known firms have larger returns than that predicted by asset pricing models. Researchers have found mitigating variables, such as the price of the stock, that have partially explained the performance of neglected firms. Neglect and price may be proxies for the liquidity of each firm's stock, and the higher observed returns may actually be a premium for the lack of liquidity. This paper compares two definitions of neglect and their relationship with liquidity. When neglect is measured by the number of analysts following a stock, more analysts are associated with higher liquidity for the stock. An even stronger relationship is observed when the proxy for neglect is widely disseminated earnings announcements. These results are confirmed in regression analyses that control for the stock price.
The FTSE/ATHEX-20 cash-futures mispricing
This study investigates the pricing efficiency of FTSE/ATHEX-20 index futures contracts and examines whether arbitrage profits exist in the Greek market. By comparing ex-post mispricing with round-trip total transaction costs faced by different groups of market participants, the empirical investigation suggests that profitable arbitrage opportunities are likely to be common in the Athens Exchange. The current paper also documents and tests the factors that determine the occurrence and the magnitude of the arbitrage opportunities in the Greek futures market. The findings suggest that variables, such as futures maturity, dividends, volatility, liquidity and short-selling restrictions, explain effectively the cash-futures mispricing.
The main theme of the paper is to analyze whether the size has any effect on return-volume relationship. It also examines the casual relationship between returns and trading volume. The study also examines the duration of impact of stock returns on trading volume and the trading volume on stock price and the impact of size on this relationship. Further, the study also looks at the role of the trading volume in predicting the returns and the role of returns in predicting the trading volume. The study has employed the VAR (Vector Auto Regression) framework for the analysis along with Granger Causality/Block Exogeneity Wald Tests, Impulse response function and Variance Decomposition analysis. The study shows that the returns cause the trading volume. As size decreases, there is a bidirectional causality between returns and volume. After subprime crisis the causal relationship between returns and volume is almost nonexistent. The duration of impact is more prominent as the size decreases. The study also shows that size is not having an impact on the information content of variables. The information content is extremely important during crisis period.
Distribution of monetary added value ' r i based on a comparison between the prospect theory efficient portfolios and mean-variance efficient portfolio with the highest prospect theory value 
Distribution of monetary added value (in basis points) based on a comparison between prospect theory efficient portfolios and master portfolios on the mean-variance efficient frontier 
We show that prospect theory is a valuable paradigm for wealth management. It describes well how investors perceive risk and with appropriate modeling it can be made consistent with rational decision making. Moreover, it can be represented in a simple reward-risk diagram so that the main ideas are easily communicated to clients. Finally, we show on data from a large set of private clients that there are considerable monetary gains from introducing prospect theory instead of mean-variance analysis into the client advisory process.
Due payments at the end of Q1 and Q2 by industry
Value of due payments at the end of the month (in PLN billion)
Share of companies with problems in a given sector at the end of Q1 and Q2*
Spearman's rank correlation coefficient between due payments in Q1 and Q2 and the share of companies with problems in Q1 and Q2*
The emergence of the COVID-19 pandemic has undoubtedly caused many perturbations, at the same time hindering the functioning and operation of enterprises from various industries, which, due to the often inability to conduct business, found themselves in a very difficult financial situation, with a difficult ability to settle their liabilities. Too high share of receivables that are not settled in a timely manner can result in various problems for enterprises, including, in particular, financial problems that can lead to large-scale bankruptcy. Considering a huge number of connections between individual entities, the bankruptcy of one may pose a risk of a wave of bankruptcy of others. The paper aims to analyze the impact of the COVID-19 pandemic on the payment situation of Polish enterprises. The research was conducted on the basis of an analysis of data on the payment situation of Polish enterprises from selected industries. Basic descriptive statistics was used in the study to characterize the material. The non-parametric Wilcoxon pair order test, which is the equivalent of the Student’s t-test for related variables, was used for the research. The research proved that at enterprises from almost every industry, the value of debts at the end of the second quarter of 2020 was higher than in the first quarter. It can therefore be concluded that the outbreak of the pandemic contributed to an increase in arrears, which, in turn, resulted in an increased risk of doing business. The greater the share of arrears with contractors, the greater the risk of financial problems at the enterprise, and hence the increased risk of bankruptcy.
The PD per class of two models
Classification according to state support
LR Model -Adjustment of the portfolio
LDA model -Adjustment of the portfolio
LR model -the EL per class (million MAD)
This study proposed a method for constructing rating tools using logistic regression and linear discriminant analysis to determine the risk profile of SME portfolios. The objective, firstly, is to evaluate the impact of the crisis due to the Covid-19 by readjusting the profile of each company by using the expert opinion and, secondly, to evaluate the efficiency of the measures taken by the Moroccan state to support the companies during the period of the pandemic. The analysis in this paper showed that the performance of the logistic regression and linear discriminant analysis models is almost equivalent based on the ROC curve. However, it was revealed that the logistic regression model minimizes the risk cost represented in this study by the expected loss. For the support measures adopted by the Moroccan government, the study showed that the failure rate (critical situation) of the firms benefiting from the support is largely lower than that of the non-beneficiaries.
Abnormal returns for G-7 in the observation window (0-89)
Abnormal returns for BRICS in the observation window (0-89)
The unprecedented outbreak of COVID-19 has affected every aspect of the human life, be it health, social, or economic dimensions. The anxiety and uncertainty wobbled the economies of affected countries worldwide. This study attempts to quantify the impact of COVID-19 on the performance of major stock markets of G-7 nations vis-à-vis BRICS nations. An event study methodology is employed to capture the effect of the systematic event in the form of Buy and Hold Abnormal Returns (BHAR) and Average Buy and Hold Abnormal Returns (ABHAR). The study considers a 90-day observation window, consisting of six sub-event windows after the COVID-19 news up-doves the world, and 120 days prior to the selected event date to estimate average expected returns. BHAR values in the four event windows are statistically significant, covering stock markets from panic and nosedive to their correction and recovery. ABHAR values reported are significantly negative in the event window ranging from –0.15% to –38.43% for G-7 and –0.06% to –37.12% for BRICS nations. Despite similar ABHAR trends, the BHAR values and correlation matrix exhibit a diverse reaction in BRICS nations compared to the highly synchronized reaction in the G-7 group of nations in the COVID period.
Value-at-risk (VaR) is the most common and widely used risk measure that enterprises, particularly major banking corporations and investment bank firms employ in their risk mitigation processes. The purpose of this study is to investigate the value-at-risk (VaR) estimation models and their predictive performance by applying a series of backtesting methods on BRICS (Brazil, Russia, India, China, South Africa) and US stock market indices. The study employs three different VaR estimation models, namely normal (N), historical (HS), exponential weighted moving average (EMWA) procedures, and eight backtesting models. The empirical analysis is conducted during three different periods: overall period (2006–2021), global financial crisis (GFC) period (2008–2009), and COVID-19 period (2020–2021). The results show that the EMWA model performs better compared to N and HS estimation models for all the six stock market indices during overall and crisis sample periods. The results found that VaR models perform poorly during crisis periods like GFC and COVID-19 compared to the overall sample period. Furthermore, the study result shows that the predictive accuracy of VaR methods is weak during the COVID-19 era when compared to the GFC period.
This paper investigates the topological evolution of the Casablanca Stock Exchange (СSE) from the perspective of the Coronavirus 2019 (COVID-19) pandemic. Cross-correlations between the daily closing prices of the Moroccan most active shares (MADEX) index stocks from March 1, 2016 to February 18, 2022 were used to compute the minimum spanning tree (MST) maps. In addition to the whole sample, the analysis also uses three sub-periods to investigate the topological evolution before, during, and after the first year of the COVID-19 pandemic in Morocco. The findings show that, compared to other periods, the mean correlation coefficient increased remarkably through the crisis period; inversely, the mean distance decreased in the same period. The MST and its related tree length support the evidence of the star-like structure, the shrinkage of the MST in times of market turbulence, and an expansion in the recovery period. Besides, the CSE network was less clustered and homogeneous before and after the crisis than in the crisis period, where the banking sector held a key role. The degree and betweenness centrality analysis showed that Itissalat Al-Maghrib and Auto Hall were the most prominent stocks before the crisis. On the other hand, Attijariwafa Bank, Banque Populaire, and Cosumar were the leading stocks during and after the crisis. Indeed, the results of this study can be used to assist policymakers and investors in incorporating subjective judgment into the portfolio optimization problem during extreme events.
Summary of the movement of the average ERC value in 2018-2020
Partial significance test results (t-test)
Earnings response coefficient (ERC) is one of the important things for companies and investors, as it reflects a company’s good value. The COVID-19 pandemic, which is happening globally, has greatly affected capital market conditions and companies in general. It is necessary to examine what factors affect ERC significantly to provide an overview to the company while maintaining the good name of the company. This study aims to analyze the effect of firm growth, leverage, information asymmetry, and systematic risk on ERC with dividend payout ratios as moderating on the Indonesia Stock Exchange and Singapore Stock Exchange. The study uses a quantitative approach with secondary data in the form of companies’ annual reports. Population was made up of food and beverage and tobacco manufacturing companies in 2018–2020. It consists of 38 JASICA index companies on IDX, and 33 SGX index companies on SGX. The results showed that, firstly, leverage and systematic risk had a significant negative effect on ERC. Second, firm growth and information asymmetry have no effect on ERC. Third, dividend payout ratio can weaken a positive influence of information asymmetry on ERC. Fourth, dividend payout ratio failed to moderate a positive effect of firm growth and a negative effect of leverage and systematic risk on ERC. All variables have no significant statistical difference between the two stock exchanges. These results indicate that a company must improve the performance and quality of information; pay attention to obligations, mitigate and manage risk to obtain optimal ERC.
Investment cannot be separated from the level of return and risk inherent in assets. Today, investment instruments are not only stocks, currencies, bonds, deposits, savings and others. The beginning of Bitcoin’s emergence as a pioneer of Cryptocurrency was in 2009. Crypto assets are emerging rapidly and are accompanied by an increase in the number of transactions each period. The growth in the market capitalization value of crypto assets has also grown significantly. During COVID-19, many investments, such as stocks, experienced a decline due to market uncertainty. The results of this study prove that with the existence of COVID-19, the crypto market is not affected. Crypto is an attraction characterized by a high degree of fluctuation, and there is no limit to transactions in the open market 24 hours to trade. The Cryptocurrency market is currently a market that can provide short-term benefits to risk-taking investors, while the market in other investment instruments is declining. 78% of the value capitalization of the top 200 cryptocurrencies is represented by the top 9 cryptos used as samples in this study. So that if there is a decrease in these 9 cryptos, it will also have an impact on the overall capitalization value of crypto in the market. The future development of Cryptocurrencies will no longer be digital assets traded with many speculators who can control prices, it can even be digital money that can be used worldwide without any transaction fees and is controlled on a blockchain system.
Panel correlation matrix for all the twenty firms under investigation Source: Authors' computation.
The lockdown shocks resulting from the global pandemic of COVID-19 in March 2020 brought untold economic imbalance to the financial sector in South Africa. The government’s proactive alternative measure of control to the new wave of COVID-19 must be investigated to offer policy suggestions for future economic and financial planning. Consequently, this study investigated the impact of the new wave of COVID-19 on the financial market with a special interest in the twenty JSE listed companies in South Africa. To enhance the quality in the frequency of study, daily panel data from November 2020 to January 2021 were sourced from S&P Capital IQ and Google online. The impact of COVID-19 was investigated alongside other variables that can influence the return of the stock markets on twenty JSE listed companies. The variables under investigation are daily exchange rate (dollar terms), dividend-adjusted share pricing, daily COVID-19 infection rate. Both robust descriptive and fixed effects time-variant analyses were adopted as the estimating techniques. The study provided empirical evidence that there is a direct but slow link between the daily incidence of infectious COVID-19 and returns on the stock market as key variables. This positive relationship indicates that both COVID-19 and financial activities could co-habit together to enhance greater return on the stock in South Africa. Hence, lockdown may not be most appropriate to the national economy of South Africa.
Descriptive statistics during the pre-pandemic period Source: Compiled by the authors.
Stationarity results Source: Compiled by the authors.
Johansen's co-integration results Source: Compiled by the authors.
The paper examines the shift in stock indices’ behavior in BRICS nations, prior to and following the outbreak of the COVID-19 pandemic, using daily data of relevant stock indices from April 2019 to March 2021. The study seeks to ascertain the influence of COVID-19 on stock markets of BRICS countries. The descriptive analysis and graphical presentation established that the pandemic period was extremely variable, with high average returns. Furthermore, the findings reveal that, with the exception of China and South Africa, the BRICS nations’ stock indices were not cointegrated prior to the epidemic. Interdependence has increased throughout the epidemic, as three BRICS nation pairings, particularly Brazil and China, China and South Africa, and Russia and South Africa, are all cointegrated. This demonstrates that the COVID-19 problem strengthened the BRICS countries’ cointegration or relatedness. As a result, portfolio diversification opportunities have dwindled. Additionally, given the relatively high average stock indices, investors may generate significant returns by investing in indices rather than individual firms, especially during the pandemic crisis time.
Although the coronavirus pandemic hit Europe in the early days of 2020, European stock markets had signaled fluctuations in the days before. This paper assesses the observed volatility on European stock exchanges and searches for its sources during the first four months of 2020. To investigate the issue, a panel VAR model is adopted, and the generalized impulse response function and the variance decomposition methods are used. The estimations show that about 34% of the volatility in European stock markets is due to the Chinese stock market, while 7% is due to international uncertainty, as measured by VIX. The impact of pandemic cases and deaths on European stock markets is negligible, below 1%. This means that the European stock market faced two risk elements: the first is the transmission volatility from the Chinese stock market, and the second is the international uncertainty. The findings also support the view that COVID-19 is more like a systematic risk.
Identification and measurement of variables
Correlation matrix of variables
Descriptive statistics of variables
The market value of a public company reflects the expectations of investors. It is influenced by many factors, both internal and external to the company. This study aims to analyze whether intellectual capital moderates the effect of the debt-to-equity ratio and earnings per share on the market value of equity. A set of historical data was collected and analyzed based on a sample of 114 manufacturing companies listed on the Indonesia Stock Exchange from 2017 to 2019. This study uses moderated regression analysis to test proposed hypotheses and a robustness test to examine the sensitivity and consistency of the study results. The findings show that the debt to equity ratio affects the market value of equity, whilst earnings per share does not affect the market value of equity. The analysis also shows that intellectual capital could strengthen the effect of the debt to equity ratio on the market value of equity. In contrast, intellectual capital could not strengthen the effect of earnings per share on the market value of equity. AcknowledgmentsThe study was conducted with the support of the Universitas Riau, Indonesia.
Determination of the candidate of the optimum portfolio, ERB > C* Source: Authors' elaboration.
Z i and W i of ERBi and C* values Source: Authors' elaboration.
Portfolio risk and portfolio performance Source: Authors' elaboration.
This paper examines how to build a portfolio and assess the impact of the COVID-19 on portfolio performance using the Sharpe single index model. The research sample consists of ten high market capitalization stocks representing five price fractions of the population listed stocks on the Indonesia Stock Exchange during the COVID-19 outbreak from March 1 to May 31, 2020. The results show that there are four stocks that are included in the portfolio formation, namely CASA with a proportion of 50%, BNLI with a proportion of 26 %, UNVR with a proportion of 15%, and HMSP with a proportion of 9%. Based on portfolio performance testing using the Sharpe single index model, it is known that the portfolio during the COVID-19 has a negative Sharpe ratio, meaning that portfolio performance is underperforming. The findings provide evidence that COVID-19 has had a negative impact on the stock market so that many investors have suffered losses on their portfolios. The implications of findings are that investors must evaluate portfolio performance and restructure the formation of new portfolios by considering the COVID-19 pandemic outbreak as a systematic risk factor that can determine the expected returns.
Top-cited authors
Minsoo Lee
  • Asian Development Bank
Mohammed Amidu
  • University of Ghana
K.C. Tseng
  • California State University, Fresno
Svetlozar Rachev
  • Texas Tech University
Seyfettin Unal
  • Dumlupinar Üniversitesi