March 2001, VOL 7:1 | June 2001, VOL 7:2 | September 2001, VOL 7:3 | December 2001, VOL 7:4 |
European Financial Management, VOL 7:1 March 2001
Efficiency in the pricing of the FTSE 100 futures contract
Joelle Miffre ISMA Centre, The University of Reading, Reading, Berks. UK
Abstract
This paper studies the pricing efficiency in the FTSE
100 futures contract by linking the predictable movements in futures returns to
the time-varying risk and risk premia associated with prespecified factors. The
results indicate that the predictability of the FTSE 100 futures returns is
consistent with a conditional multifactor model with time-varying moments. The
dynamics of the factor risk premia, combined with the variation in the betas,
capture most of the predictable variance of returns, leaving little variation to
be explained in terms of market inefficiency. Hence the predictive power of the
instruments does not justify a rejection of market efficiency.
Keywords: FTSE 100 Futures Contract, Efficiency, Time-varying Risk,
Risk Premia.
JEL: G12, G13, G14
The Pricing of French Unit Seasoned Equity Offerings
Pierre
Chollet and Edith Ginglinger
IAE, University de Tours, Tours cedex 3,
France
ESA, IRG, University Paris XII, Creteil, France
Abstract
Units are bundles of common stock and warrants. By
issuing units, firms precommit to a future and uncertain seasoned offering at
the exercise price of the warrants. This study shows that the issuance of units
seasoned offerings in France is accompanied by significant abnormal returns of
on average 9 to 12%, depending on the computing methods. Underpricing increases
with the risk of the issuer and the relative size of the future seasoned equity
issue linked to warrant exercises. Our results are consistent with our signaling
hypothesis.
Keywords:Units, Warrants, Seasoned Equity Offerings, Underpricing, Signaling
JEL: G14, G32
Competition and Integration Among Stock Exchanges in Europe: Network
Effects, Implicit Mergers and Regulatory Considerations
Carmine Di
Noia
Divisione Mercati, Commissione Nazionale per le Societa e la Borsa
(CONSOB) Roma, Italy
Abstract
The economic theory of network externalities and a
simple-game theoretical framework are used to explore the issue of competition
among stock exchanges and the possibility of consolidation in the European
stock-exchange industry, among the different exchanges. The main features of
this paper are the following: the treatment of exchanges as firms; the
application of network externalities to study competition among exchanges; the
extension of network externalities, through implementing ``cross-network''
effects; and the existence of equilibria where exchanges may decide, even
unilaterally, to achieve full compatibility through implicit mergers and remote
access, specializing only in trading or listing services. One implication is
that consolidation of European exchanges into one may occur with a
welfare-efficient outcome or with a lock-in to a Pareto-inferior equilibrium.
This is due to the network externalities and the different starting points of
the various exchanges. ``Implicit mergers'' among exchanges together with remote
access are always weakly (in half of the cases, strictly) more efficient than
the actual competition. This finding also sheds light on the existence and
efficacy, especially in the U.S., of automated trading systems, which are
exchanges specializing in trading services.
Keywords:Securities Exchanges, Competition, Implicit Merger, Network Effect, Remote Access
JEL: C71, D43, F36, G15
Improving Portfolio Performance with Option Strategies: Evidence from
Switzerland
Dusan Isakov and Bernard Morard
HEC, University
of Geneva, Switzerland
HEC, University of Geneva, Switzerland
Abstract
This paper investigates the performance of a global
investment strategy that combines diversification and option strategies, in
particular the covered call strategy, on the Swiss Exchange over the epriod
1989-1996. As the return distributions of portfolios including options are
possibly non-normal, the mean-variance framework may not be appropriate to
assess the relative performance of such portfolios. Stochastic dominance and
modified betas are the alternative approaches, robust to departure from
normality, used in this paper to compare the performance of portfolios. The
results show that the use of option strategies consistently improves the
performance of stock portfolios, even in the presence of transaction costs.
Keywords:Covered Call Options, Portfolio Management, Stochastic Dominance
JEL: G11, G13
Stock Exchange Reforms and Market Efficiency: The Italian Evidence
Giovanni Majnoni and Massimo Massa
Banca d'Italia, Research
Department, Italy
INSEAD, France
Abstract
This paper examines whether the reforms introduced by
the Italian Stock Exchange from 1991 to 1994 (creation of specialised
intermediaries, obligation to trade on the official markets, screen-based
trading and cash settlement) did increase market efficiency. The issue is
addressed using both the traditional information efficiency model, which tests
market efficiency by verifying the predictability of prices conditional on some
information subset and a microstructure approach that measures efficiency as the
distance of the price movements from their efficient components, represented by
a random walk process. The joint analysis of daily and intraday data on prices
and volumes validates the hypothesis that most of the reforms have increased
market efficiency over the sample period, except for cash settlement, which
appears to have substantially reduced it.
Keywords:Stock Market, Informational Efficiency, Trading Systems
JEL: G14
PROFESSIONAL FORUM
Efficiency Barriers to the Consolidation of the European Financial
Services Industry
Allen N. Berger, Robert DeYoung, Gregory F.
Udell
Board of Governors of the Federal Reserve System and Wharton
Financial Institutions Center
Federal Reserve Bank of Chicago
Kelley
School of Business, Indiana University
Abstract
Cross-border consolidation of financial
institutions within Europe has been relatively limited, possibly reflecting
efficiency barriers to operating across borders, including distance; differences
in language, culture, currency and regulatory/supervisory structures; and
explicit or implicit rules against foreign competitors. EU policies such as the
Single Market Programme and European Monetary Union attenuate some but not all
of these barriers. The evidence is consistent with the hypothesis that these
barriers offset most of any potential efficiency gains from cross-border
consolidation. Banks headquartered in other EU nations have slightly lower
average measured efficiency than domestic banks and non-EU-based foreign banks.
Keywords: Banks, Mergers, Efficiency, Europe, Financial institutions.
JEL: G21, G22, G24, G28, G34, F23
European Financial Management, VOL 7:2 June 2001
Identifying The Risk Structure of Mutual Fund Returns
Martin J.
Gruber
Stern School of Business, NYU
Keynote Address at the European Financial Management Association 2000 Annual Meetings, Athens, Greece, June 2000.
Keywords: Mutual Fund Returns; Risk; Benchmarks and Indexes; Asset Management; Performance Measures
JELClassification : G11, G12
The Structure of Banking Systems in Developed and Transition Economies
DwightJaffee and Mark Levonian
Haas School of Business,
University of California, Berkeley, USA
Visiting Scholar, Federal Reserve
Bank of San Francisco, USA
Abstract
The paper empirically analyzes the determinants of
banking system structure (as measured by bank assets, number, branches and
employees) for 26 developed OECD countries. The estimated regressions are
then applied to 23 transition economies, to obtain benchmarks for the efficient
structure of their banking systems. The actual and benchmark measures of
banking structure are compared to evaluate the state of banking system
development, including the computation of a measure of "banking system
convergence". The results are objective and replicable multidimensional measures
of banking system development for the transition economies.
Keywords: Banks, Banking systems, Banking structure, Transition economies, Developing Economies
JEL Classification: G21, O16, P34
Paying for Minimum Interest Rate Guarantees: Who Should Compensate
Who?
Bjarne A. Jensen and Carsten Sorensen
Abstract
Defined contribution pension schemes and life insurance
contracts often have a mandatory minimum interest rate guarantee as an
integrated part of the contract. This guarantee is an embedded put option issued
by the institution to the individual, who is forced to hold the option in the
portfolio. However, taking the inability to short this saving and other
institutional restrictions into account the individual may actually face a
restriction on the feasible set of portfolio choices, hence be better off
without such guarantees. We measure the effect of the minimum interest guarantee
constraint through the wealth equivalent and show that guarantees may induce a
significant utility loss for relatively risk tolerant investors. We also
consider the case with heterogenous investors sharing a common portfolio.
Investors with different risk attitudes will experience a loss of utility by
being forced to share a common portfolio. However, the relatively risk averse
investors are partly compensated by the minimum interest rate guarantee, whereas
the relatively risk tolerant investors are suffering a further utility loss.
Keywords:Minimum interest rate guarantee, asset allocation restrictions, utility loss, wealth equivalent, heterogenous investors.
JEL Classification: G11,G13
European Managerial Perceptions of the Net Benefits of Foreign Stock
Listings
Franck Bancel and Usha R. Mittoo
ESCP-EAP, France
University of Manitoba, Canada
Abstract
This study surveys the European managers on the costs,
benefits and net benefits of foreign listing. Increase in prestige and
visibility and growth in shareholders are perceived as the major benefits and
the costs of public relations and legal fees are cited as the major costs by the
managers. While a majority of managers (60 percent) perceive that benefits
outweigh the costs of foreign listing, about 30 percent also view the net
benefits to be negative. Perceived net benefits are positively related to the
increase in the total trading volume after foreign listing, the financial
disclosure levels of the firm and the dual listing on both the U.S. and European
foreign exchanges. Without the influence of these factors, the perceived net
benefits are negative.
Keywords: Foreign listing, European Managers, survey, costs and benefits
JEL Classification: G15, G30, G39
Shareholder Wealth Effects of Corporate Selloffs: Impact of Growth
Opportunities,Economic Cycle and Bargaining Power
George Alexandrou
and Sudi Sudarsanam
University of Essex, UK
Cranfield University
School of Management, UK
Abstract
Most of the existing empirical evidence on corporate
selloffs documents significant wealth gains for the seller’s shareholders. We
investigate the sources of these wealth gains by examining the impact of
business and financial strategy, the economic environment during selloff, the
bargaining advantages of the seller including information asymmetry. We find
evidence that sellers with growth opportunities and financially strong sellers
enjoy higher returns. Selloffs during recessions generate larger wealth gains
than those during economic boom. Information asymmetry due to the buyer’s
location being different from the purchased division’s gives the seller a
bargaining advantage leading to larger wealth gains. Relatively large
divestments are more beneficial to seller shareholders than small ones. The
study highlights the importance of both firm specific and environmental factors
in explaining the wealth gains associated with corporate selloffs.
Keywords: Selloffs, business strategy, financial distress, economic environment and information asymmetry
JEL Classification:
The Effects of Liberalization on Market and Currency Risk In The European
Union
Francesca Carrieri
Faculty of Management, McGill
University, Canada
Abstract
This paper investigates the effects of liberalization on
the pricing of market and currency risk for a number of financial markets in the
European Union(EU). An International Asset Pricing Model with a multivariate
GARCH-in-Mean specification and time-varying prices of risk is used for the four
markets with the largest capitalization in the EU. Only one price of market risk
exists and international investors are rewarded for their exposure to currency
risk. The evidence shows that all prices of risk are time-varying and have been
decreasing during the process of liberalization. There is also evidence that
markets react to period of uncertainty in the process toward the completion of
liberalization. In addition, the operation of the European Monetary System has
generated lower covariances. As a consequence, total risk premia have declined
in the last decade.
Keywords: International Asset Pricing, Currency Risk, Liberalization, European Union
JEL Classification: G12, G15
European Financial Management, VOL 7:3 September 2001
Value Maximization, Stakeholder Theory and the Corporate Objective
Function
Michael Jensen (Mjensen@hbs.edu)
Harvard Business
School.
Abstract.
This paper examines the role of the corporate objective
function productivity and efficiency,social welfare ,and the
accountability of managers and directors.I argue that since it is logically
impossible to maximize in more than one dimension,purposeful behavior requires a
single valued objective function.Two hundred years of work in economics and
finance implies that in the abscence of externalities and monopoly(and when all
goods are priced),social welfare is maximized when each firm in an economy
maximizes its total market value.Total value is not just the value of the equity
but also includes the market values of all other financial claims including
debt,preferred stock and warrants.
Stakeholders
theory argues that managers should make decisions so as to take account of all
the stakeholders in a firm(including not only financial claimants but also
employees,customers,communities,government officials and under some
interpratations the environment,terrorists,blackmailers and thieves).Because the
advocates of stakeholder theory refuse to specify how to make the necessary
tradeoffs among these competing intereststhay leave managers with a theory that
makes it impossible for them to make purposeful decisions.With no way to keep
score,stakeholder theory makes managers unaccountable for their actions.It seems
clear that such a theory can be attractive to the selfinterest of managers and
directors.
It takes more
than the acceptance of value maximization as the organizational objective to
create value.As a statement of corporate purpose or vision,value maximization is
not likely to tap into the energy and enthusiasm of employees and managers to
create value.Seen in this light,changes in longterm market value becomes the
scoreborad that managers,directors and others use to assess the success or
failure of the organization.It must be complemented by the corporate
vision,strategy and tactics that unite participants in the organization in
its struggle for survival and dominance in its competitive arena.
Since a firm cannot maximize value if it ignores
the interests of its stakeholders,enlightened value maximization can utilize
much of the structure of stakeholder theory by accepting longterm maximization
of the value of the firm as the criterion for making the requisite tradeoffs
among its stakeholders,managers, directors,strategists and management
scientisits can benefit from enlightened stakeholder theory as well.enlightened
stakeholder specifies value maximization or value seeking as the firm's
objective and therefore resolves the logical problems that cause traditional
stakeholder theory to fail as a guide to corporate action.
Keywords: Value Maximization; Stakeholder Theory; Balanced Scorecard; Multiple Objectives; Social Welfare; Social Responsibility; Corporate Objective Function; Corporate Purpose; Tradeoffs; Corporate Governance; Strategy; Special Interest Groups
JEL Classification: G3, G30, G32
Agency Costs and Strategic Considerations behind Sell-offs: The UK
Evidence
Kevin M.J. Kaiser and Aris Stouraitis
McKinsey &
Co, Paris, France
Department of Economics and Finance, City University of
Hong Kong,Hong Kong
Abstract.
We analyse the impact of the motivation behind the
sell-off and the use of the proceeds from the sale on the value of UK firms
divesting assets during 1984-1994. Our findings suggest that managers do not
create value when they divest assets in order to raise cash, in order to
reshuffle assets without increasing corporate focus and when they do not
announce the motivation behind the transaction. In contrast, we find value
increases for firms refocusing during the 1990s and for firms divesting
loss-making assets for operational reasons. Returning the proceeds from the sale
yo shareholders or reducing leverage were also associated with value increases,
whereas reinvesting the proceeds for growth had a negative impact during the
1980s, which disappeared after 1990, as a result of disciplinary role of the
economic turndown on the investment behaviour of firms.
Keywords:Corporate Structuring, Sell-offs, Agency Costs, Refocusing
JEL Classification: G34, G14
Smiles, Bid-Ask Spread and Option Pricing
Ignacio Pena, Gonzalo
Rubio and Gregorio Serna
Universidad Carlos III de Madrid, Spain
Universidad del Pais Vasco, Spain
Universidad Carlos III de Madrid,
Spain
Abstract.
Given the evidence provided by Longstaff (1995) and
Pena, Rubio and Serna (1999) a serious candidate to explain the pronounced
pattern of volatility estimates across exercise prices might be related to
liquidity costs. Using all calls and puts transacted between 16:00 and 16:45 on
the Spanish IBEX-35 index futures from January 1994 to October 1998 we extend
previous papers to study the influence of liquidity costs, as proxied by the
relative bid-ask spread, on the pricing of options. Surprisingly, alternative
parametric option pricing models incorporating the bid-ask spread seem to
perform poorly relative to Black-Scholes.
Keywords:Smiles, Bid-Ask Spread, Implied Volatility Function, Option Pricing
JEL Classification: G12, G13
Belgian Intragroup Relations and the Determinants of Corporate Liquid
Reserves
Marc Deloof
Faculty of Applied Economics, University
of Antwerp - UFSIA, Belgium
Abstract.
The determinants of liquid reserves are investigated for
a sample of 1038 large Belgian non-financial firms in the 1992-1994 period. The
results confirm the hypothesis that the terms of payment of intragroup claims
can be adjusted to the firm’s liquidity needs, thereby reducing the need for
liquid reserves. Furthermore, the results confirm the transaction motive for
holding liquid reserves, but only partially confirm the precautionary motive
Finally, the results indicate that liquid reserves play a significant role in
the financing of new investments, as predicted by the pecking order model of
Myers and Majluf (1984).
Keywords:Liquid Reserves, Corporate Groups, Pecking Order
JEL Classification: G31, G32
Decomposing and Testing Long-Run Returns With An Application to Initial
Public Offerings in Denmark
Jan Jakobsen and Ole Sorensen
Department of Finance, Copenhagen Business School, Denmark
Department of
Accounting and Auditing, Copenhagen Business School, Denmark
Abstract.
An improved method for measuring and testing long-run
returns is proposed. The method adjusts for the right-skewed distribution of
long-run buy-and-hold returns by decomposing average cross-sectional
buy-and-hold returns into mean components and volatility components. The method
is applied to initial public offerings in Denmark. The mean component under
performance of initial public offering stocks compared to the market is 30
percent and significant after five years. Comparing to matching firms, the
underperformance of IPO stocks is 13 percent after five years but insignificant.
Keywords: Initial Public Offerings; Long-Run Returns; Right Skewed Distributions
JEL Classification: G14, G32
PROFESSIONAL FORUM
The Impact of the Introduction of the Euro on Foreign Exchange Risk Management in UK Multinational Companies
Eilidh Christie and Andrew Marshall
Arthur Anderson, Glasgow and
the Department of Accounting and Finance, University of Strathclyde,UK
Department of Accounting and Finance, Curran Building, Glasgow ,Scotland,UK
Abstract
One of the arguments in favour of the euro is that it
will eliminate foreign exchange risk for companies in the euro-zone. There could
also be benefits for companies outside this zone, although their currency risk
with the euro remains. This paper considers this, by examining the effect of the
euro on the currency risk management of UK multinational companies (MNCs). Using
the responses from a questionnaire and interviews we found that the euro, which
is being widely used in UK MNCs, is generally favoured due to reductions in
exchange uncertainty and costs of managing currency risk. Nonetheless, contrary
to what would theoretically be expected, there was no exact relationship in the
reduction in hedging activity accompanied by this reduction in risk. The
majority of MNCs stated that their hedging activities would remain unchanged.
The capacity of MNCs to benefit from reductions in risk and hedging depend on
the proportion of non-UK European trade, the industry sector and the ability to
transfer risk down the supply chain. Finally, despite the reductions in currency
exposure experienced by the majority of companies the euro will not encourage UK
MNCs to expand international trade.
Keywords: Euro, foreign exchange risk management.
JEL Classification : F23; F31
European Financial Management, VOL 7:4 December 2001
The Emerging Role of the European Commission
in Merger and
Acquisition Monitoring:The Boeing / Mc Donnell Douglas Case
Nihat Aktas,Eric de Bodt,Michel Levasseur and Andre Schmitt
Institut d’Administration et de Gestion, Universite Catholique de
Louvain,Belgium
Institut d’Administration et de Gestion, Universite
Catholique de Louvain,Belgium and Ecole Superieure des Affaires,
University de Lille , France
Institut d’Administration et de Gestion,
University Catholique de Louvain,Belgium and Ecole Superieure des
Affaires, University de Lille , France
Ecole Superieure des Affaires,
University de Lille , France
Abstract:
The object of this study is to evaluate the consequences
of the application of the EEC regulation n 4064/89 to non-European
companies. We focus on the Boeing – Mc Donnell Douglas merger case, one of the
first non-European mergers considered by the Commission. The analysis of
abnormal returns on the two securities shows that the threat of a ban of the
merger by the Commission were not perceived as credible at first. But when
Boeing decided to ask the support of the American government, just after the
decision of the European Commission to extend its investigations to the long
term exclusivity contracts, the role of the Commission emerged.
Key words: mergers and acquisitions, regulation costs, concentration control, event studies
JEL Classification : G14; G18; G34
Why do firms raise foreign currency denominated debt?Evidence from Finland
Matti Keloharju and Mervi Niskanen
Helsinki School of Economics
and Business Administration, Helsinki,Finland
H宥 Polytechnic University,
Finland
Abstract
This study examines the determinants of the decision to
raise currency debt. The results suggest that
hedging figures importantly in the currency-of-
denomination decision: firms in which exports
constitute a significant fraction of net sales are more likely to
raise currency debt.However, firms also tend to borrow
in periods when the nominal interest rate for the loan
currency, relative to other currencies, is lower than usual.
This is consistent with the currency debt issue decision
being affected by speculative motives. Large firms, with a
wider access to the international capital markets, are
more likely to borrow in
foreign currencies than
small firms.
Keywords: Currency of denomination, hedging, speculation
JEL classification: F23, G32
Simulating the Evolution of the Implied Distribution
George Skiadopoulos and Stewart Hodges
Associate Research Fellow
at the Financial Options Research Centre,University of Warwick,UK
Director
of the Financial Options Research Centre, Warwick Business School,University of
Warwick.UK.
Abstract:
Motivated by the implied stochastic volatility
literature (Britten-Jones and Neuberger (1998), Derman and Kani (1997), Ledoit
and Santa-Clara (1998)),this paper proposes a new and general method for
constructing smile-consistent stochastic volatility models. The method is
developed by recognizing that option pricing and hedging can be accomplished via
the simulation of the implied risk neutral distribution. We devise an algorithm
for the simulation of the implied distribution, when the first two moments
change over time. The algorithm can be implemented easily and it is based on an
economic interpretation of the concept of mixture of distributions. It
can
also be generalized to cases where more complicated forms for the mixture are
assumed.
Keywords: Smile-Consistent stochastic volatility models, Implied Distribution, Mixture of Distributions, Simulation.
JEL Classification: G 13
What Determines IPO Gross Spreads in Europe?
Sami Torstila
Helsinki School of Economics and Business
Administration, Finland.
Abstract
This paper examines the behavior of underwriting gross
spreads in European IPO markets using a data set of 565 IPOs by European issuers
in the period 1986 - 1999. Privatizations have lower gross spreads than other
IPOs, other things remaining equal. Gross spreads on European listings by
European issuers are significantly lower than on U.S. listings by European
issuers, except on the technology stock - oriented EASDAQ and Frankfurt Neuer
Markt exchanges. IPOs involving a U.S. bulge bracket underwriter (for joint
U.S./Europe listings) or bookbuilding are characterized by relatively higher
spreads.
Keywords: initial public offerings, gross spreads, European equity markets
JEL classification: G24, G32
Binomial Option Pricing Biases and Inconsistent Implied Volatilities
Brent J. Lekvin and Ashish Tiwari
School of Business and
Economics, Michigan Technological University, Houghton, MI,USA
Department of
Finance, Henry B. Tippie College of Business Administration, University of Iowa,
Iowa City, IA ,USA
Abstract
We evaluate the binomial option pricing methodology (OPM)
by examining simulated portfolio strategies. A key aspect of our study involves
sampling from the empirical distribution of observed equity returns. Using
a Monte Carlo simulation, we generate equity prices under known volatility and
return parameters. We price American-style put options on the equity and
evaluate the risk-adjusted performance of various strategies that require
writing put options with different maturities and moneyness
characteristics. The performance of these strategies is compared to an
alternative strategy of investing in the underlying equity. The relative
performance of the strategies allows us to identify biases in the binomial OPM
leading to the well-known volatility smile. By adjusting option prices so
as to rule out dominated option strategies in a mean-variance context, we are
able to reduce the pricing errors of the OPM with respect to option prices
obtained from the LIFFE. Our results suggest that a simple recalibration
of inputs may improve binomial OPM performance.
Keywords: option pricing; binomial model; implied volatility; volatility smile
JEL classification: G13