European Financial Management 2002 Archive
European Financial Management, VOL 8:1 March 2002
Short-Run Returns Arond the Trades of Corporate Insiders on the London
Stock Exchange
Sylvain Friederich, Alan Gregory, John Matatko and Ian
Tonks
Financial Markets Group, London School of Economics and Universite
de Paris - I.
School of Business and Management, University Of
Exeter.
Department of Economics, University of Bristol.
Abstract
Previous work examined the long-run profitability of
strategies mimicking the trades of company directors in the shares of their own
company, as a way of testing for market efficiency. The current paper examines
patterns in abnormal returns in the days around these on the London Stock
exchange.
We find movements in returns that are consistent with the directors
engaging in short-term market timing. We also report that some types of trades
have superior predictive content over future returns. In particular,
medium-sized trades are more informative for short-term returns than large ones,
consistently with Barclay and Warner's(1993) "stealth trading" hypothesis
whereby informed traders avoid trading in blocks.
Another contribution of
this study is to properly adjust the abnormal return estimates for
microstructure (spread) transactions costs using daily bid-ask spread data. On a
net basis, we find that abnormal returns all but disappear.
Keywords: market efficiency, corporate insiders, insider trading,
informed trading, London Stock Exchange
JEL Classification: G14
Backtesting Derivative Portfolios with Filtered Historial
Simulation(FHS)
Giovanni Barone-Adesi, Kostas Giannopoulos and Les Vosper
Usi, via
Buffi 13, Lugano 6900 Switzerland.
University of Westminster, London,
UK
The London Clearing House, Aldgate High Street, London, UK.
Abstract
Filtered historical simulation provides the general
framework to our backtests of portfolios of derivative securities held by a
large sample of financial institutions. We allow for stochastic volatility and
exchange rates. Correlations are preserved implicitly by our simulation
procedure. Options are repriced at each node. Overall results support the
adequacy of our framework, but our VaR numbers are too high for swap portfolios
at long horizons and too low for options and futures portfolios at short
horizons.
Keywords: Value-at-risk; historical simulation; GARCH.
JEL Classification: G19
Estimating Systematic Risk Using Time Varying Distributions
Gregory Koutmos and Johan Knif
Charles F. Dolan School of Business,
Fairfield University, Fairfield, CT,06430, USA
Hansen, Swedish School of
Business and Economic Administration, P.O.Box#287, FIN-65101, Vasa Finland.
Abstract
This article proposes a dynamic vector GARCH model for the
estimation of time-varying betas. The model allows the conditional variances and
the conditional covariance between individual portfolio returns and market
portfolio returns to respond asymmetrically to past innovations depending on
their sign. Co variances tend to be higher during market declines. There is
substantial time variation in betas but the evidence on beta Asymmetry is mixed.
Specifically, in fifty percent of the cases betas are Higher during market
declines and for the remaining fifty percent the opposite is true. A time series
analysis of estimated time varying betas reveals that they follow stationary
mean-reverting processes. The average degree of persistence is approximately
four days. It is also found that the static market model overstates non-market
or, unsystematic risk by more than ten percent. On the basis of an array of
diagnostics it is confirmed that the vector GARCH model provides a richer
framework for the analysis of the dynamics of systematic risk.
Keywords: dynamic betas; mean-reversion in betas; asymmetric
covariance; time-varying distributions; vector GARCH;
JEL classification: G12, G15
European Mutual Fund Performance
Roger Otten and Dennis Bams
Maastricht University and
FundPartners, PO BOX 616 6200 MD Maastricht, The Netherlands
Maastricht
University and ING Group, PO BOX 616 6200 MD Maastricht, The Netherlands.
Abstract
This paper presents an overview of the European mutual
fund industry and investigates mutual fund performance using a survivorship bias
controlled sample of 506 funds from the 5 most important mutual fund countries.
The latter is done using the Carhart (1997) 4-factor asset-pricing model. In
addition we investigate whether European fund managers exhibit hot hands,
persistence in performance. Finally the influence of fund characteristics on
risk-adjusted performance is considered. Our overall results suggest that
European mutual funds and especially small cap funds are able to add value, as
indicated by their positive after cost alphas. If we add back management fees, 4
out of 5 countries exhibit significant out-performance at an aggregate level.
Finally, we detect strong persistence in mean returns for funds investing in the
United Kingdom. Our results deviate from most US studies that argue mutual funds
under-perform the market by the amount of expenses they charge.
Key words: Mutual Funds, Performance Evaluation, Portfolio
Management, Style Analysis
JEL Classification: G12, G20, G23
PROFESSIONAL FORUM
The New Basel Capital Accord: Making it Effective with Stronger Market
Discipline
Harald Benink and Clas Wihlborg
Rotterdam School of Management,
Erasmus University Rotterdam,P.O. Box 1738, 3000 DR Rotterdam, The
Netherlands
Department of Finance, Copenhagen Business School, Solbjerg Plads
3, DK-2000 Frederiksberg, Denmark & School of Economics and Commercial Law,
Gothenburg University, Sweden
Abstract
In January 2001 the Basel Committee on Banking Supervision
proposed a new capital adequacy framework to respond to deficiencies in the 1988
Capital Accord on credit risk. The main elements or “pillars” of the proposal
are capital requirements based on the internal risk-ratings of individual banks,
expanded and active supervision and information disclosure requirements to
enhance market discipline. We discuss the incentive effects of the proposed
regulation. In particular, we argue that it provides incentives for banks to
develop new ways to evade the intended consequences of the proposed regulation.
Supervision alone cannot prevent banks from “gaming and manipulation” of
risk-weights based on internal ratings. Furthermore, the proposed third pillar
to enhance market discipline of banks’ risk-taking is too weak to achieve its
objective. Market discipline can be strengthened by a requirement that banks
issue subordinated debt. We propose a first phase for introducing a requirement
for large banks to issue subordinated debt as part of the capital requirement.
Key words: asset pricing, general equilibrium, value-at-risk, risk
management.
JEL classification: G11, G12
European Financial Management, VOL 8:2, June
2002
Neoclassical Finance, Alternative Financeand the Closed End Fund Puzlle
Stephen A. Ross
Keynote Address at the European Financial Management Association 2001 Annual Meetings, Lugano Switzerland, June 2001.
The Effect of VaR Based Risk Management on asset and the Volatility Smile
Arjan Berkelaar, Phornchanok Cumperayot and Roy Kouwenberg
Abstract
Value-at-Risk (VaR) has become the standard criterion for accessing risk in the financial industry. Given the widespread usage of VaR, it becomes increasingly important to study the effects of VaR based risk management on the prices of stocks and options. We solve a continuous-time asset pricing model, based on Lucas (1978) and Basak and shapiro ( 2001), to investigate these effects. We find that the presence of risk manegements tends to reduce market
volatility, as intended. Howeverl, in some cases VaR risk management undesirably raises the probablity of extreme losses. Finally, we demonstrate that option prices in an economy with VaR risk managers display a volatility smile.
Key words: Mutual Funds, Performance Evaluation, Portfolio
Management, Style Analysis
JEL classification: G11, G12
Board Overlap, Seat Accumulation and Share Prices
Claudio Loderer and Urs Peyer
Abstract
We examine the board overlap among firms listed in Switzerland. Collusion, managerial entrenchment and financial participation cannot explain it. The overlap appears to be induced by banks and by the accumulation of seats by the most popular directors. We also document that seat accumulation is negatively related to firm value, possibly because of the conflicts of interest that multiple directorships induce and the time constraints directors face. Contrary to popular beliefs, however, the directors of traded firms do not generally hold more than one mandate in other traded firms. They do hold multiple seats in nontraded firms.
Key words: Board of Director, Board Overlap, Board Composition, Firm Value
JEL classification: G34
Planning Your Own Debt
Soren Nielson and Rolf Poulsen
Abstract
We model the Danish market for mortgage backed securities with a two-factor interest re=ate model and use a stochastic programming approach to analyse now an individual home-owner should initially compose and subsequently readjust his mortgage in an optimal way. Results show that the "rules of thumb" used by financial institutions are reasonable, although best suited formore aggressive mortgagors, for whom the delivery option of some value. More risl-averse investors should also re-adjust frequently, but use more diversified portfilios. Results are insensitive to whether one or two factor model is used, provided the former is suitably calibrated.
Key words: Term structure of interest, mortgage-backed securities,
portfolio choice, stochastic programming.
JEL classification: C61, D81, E43, G11, G21
Dispersion in Analyst Forecasts and the Profitability of Earnings Momentum Strategies
Andreas Dische
Abstract
This paper shows that the dispersion in analysts' consensus forecasts contains incremental information to predict future stock returns. Consistent with prior research, stock prices in the German market underreact to news about future earnings and drift in the direction suggested by analysts' forecasts revisions. Even higher abnormal returns can be achieved by applying such an earnings momentum strategy to stocks with a low dispersion in analyst forecasts. These results support one of the recent behavioral models in which investors underweight new evidence and conservatively update their beliefs in the right direction, but by too little in magnitude with respect to more objective information.
Keywords: analyst forecasts, dispersion, momentum, underreaction,
investor behavior.
JEL classification: G12, G14
European Financial Management, VOL 8:3 September 2002
Performance and Policy of Foundation-Owned Firms in Germany
Markus Herrmann and Gunter Franke
Abstract
This paper compares performance and policy of foundation owned firms and of listed corporations in Germany. Foundations have no owners so that there exist no natural persons with financial ownership claims on firms which are wholly owned by foundations. This suggests weaker outside control of foundation owned firms implying lower profitability. The empirical findings show a slightly better performance of foundation owned firms compared to
corporations. Foundation owned firms display higher labor intensity, lower labor productivity and lower salary levels. This policy promotes job security without endangering the viability of foundation owned firms.
Keywords: corporate governance, foundation owned firms,
performance, business policy, ownership structure.
JEL Classification: G30 - G33
Diversification, Ownership and Control of Swedish Corporations
John A. Doukas, Martin Holmen and Nickolaos G. Travlos*
Abstract
We study the short- and long-term valuation effects of
Swedish takeovers. Using a sample of 93 bidding firms that acquired 101 targets
between 1980 and 1995, we find that diversifying acquisitions lead to a negative
market reaction and deterioration of the operating performance of the bidder.
Announcement and performance gains in each of the three years following the
acquisition occur only when bidders expand their core than their peripheral
lines of business. Our findings suggest that focused acquisitions lead to
greater synergies and operating efficiencies than diversifying acquisitions.
Intra-group acquisitions, however, show that bidders do not realize significant
gains whether they adopt diversifying or focusing investment strategies by
purchasing firms controlled by the Wallenberg and SHB conglomerate groups.
Intra-group targets realize significant gains regardless bidder’s investment
strategy. Finally, the evidence does not support the view that
intra-conglomerate acquisitions are associated with expropriation of minority
shareholders. However, they appear to enhance the control rights of large
shareholders of the bidding firm.
Keywords: Conglomerate and Non-conglomerate Acquisitions; Corporate
Focus; Diversification
JEL classification: G34
External Financing Costs and Economies of Scale in Investment Banking: The
Case of Seasoned Equity Offerings in Germany
Thomas Buhner and Christoph Kaserer
Abstract
This paper is focused on the cost of raising equity
capital in Germany. In the spirit of Altinkilic and Hansen (2000) it challenges
the conventional wisdom that flotation costs are characterized by economies of
scale.
For a sample of 120 SEOs on the German capital market over the years
1993-1998 it is found that average total flotation costs amount to 1.61 percent
of gross proceeds, while average underwriting fees are about 1.32 percent.
Moreover, it turns out that flotation costs rise the larger the free float of
the company is and the larger the share of stocks offered within a firm
commitment cash offering is. As far as the economies of scale view is concerned,
we do not find clear evidence in favour of decreasing marginal flotation costs.
Moreover, fixed costs seem not to be very high in that they account on average
for not more than 14 to 24 percent of total flotation costs or total
underwriting fees, respectively.
Keywords: raising capital, seasoned equity offerings, underwriting
fees, economies of scale, German stock market
JEL Classification: G24
Stock Index-Linked Debt and Shareholder Value: Evidence from the Paris
Bourse
Gordon S. Roberts, Vasumathi Vijayraghavan and Sebouh Aintablian
Abstract
French banks and nonfinancial companies issue index-linked
debt whose value at maturity is indexed to the CAC 40 or to a basket of European
indices. This paper examines stock announcement effects associated with these
bonds on three dates: the date the issuer&88217;s General Assembly decides future
capital needs, the publication in the journal of the COB (the stock market
board) and the issue date. We find the issuance of index-linked debt has
significant positive announcement effects on the issue date, which we attribute
to its market-completion property. In order to examine further whether market
completion is at play, we decompose the value of the bond at issue into its
straight bond and option values. We determine that the bonds are overvalued
again supporting market completion.
Keywords: announcement effect, index-linked debt, market
completion
JEL Classification: G14, G32
The Distribution of Information Among Institutional and Retail Investors in IPOs
Matti Keloharju and Sami Torstila
Abstract
This study examines investor performance in IPOs using a unique database comprising 85,384 investors and 29 offerings from Finland. The evidence indicates that on average institutional investors do not obtain larger initial returns than retail investors, as the incentive to acquire information is limited by allocation rules which favour small orders. This result is in contrast to findings by Aggarwal et al. (2001), who show that institutional
investors perform better in a bookbuilding environment. Within each investor category, however, large orders are associated with the best performance, suggesting that information differences figure more importantly within rather than between categories.
Key words: IPOs, investment performance, institutional investors, retail investors
JEL classification: G32, G14
PROFESSIONAL FORUM
Anatomy of the Eurobond Market 1980-2000
Anouk Claes, Marc J.K. De Ceuster, Ruud Polfliet
University of
Antwerp UFSIA, Prinsstraat 13, 2000 Antwerp, Belgium
Abstract
In this paper, we provide descriptive evidence of primary
market activity in the Eurobond market for the period 1980-2000. This study
explores the Bondware Database that contains 33 024 publicly issued Eurobonds.
We analyse some characteristics of the issuers (nationality, industry and credit
quality), the intermediary parties (bookrunners, lead managers) and the
structures used for the bonds (currencies, size, years to maturity, interest and
repayment structure, embedded options).
Keywords: Eurobond market, primary market, Bondware
JEL Classification: G15, G100
European Financial Management, VOL 8:4 December 2002
Competition on the London Stock Exchange
Nicholas Taylor
Abstract
This paper investigates the determinants of the level of
competition on the order-driven market organised by the London Stock Exchange.
In contrast to previous empirical market microstructure studies, we treat the
level of competition as an endogenous variable. The statistical nature of the
measures of competitive activity used in this paper necessitate use of a count
regression model. Using a sample of 50 stocks, we find that users of the system
tend to follow the lead of other users (termed the 'herding effect') and that
competition is greater during the period when the US exchanges are open (termed
as 'US effect'). In addition, the level of competition is positively related to
the bid-ask spread pertaining to a particular stock (termed the 'spread
effect'). The latter result is most likely due to traders following a strategy
where trade immediacy is traded off against price advantage. Finally, we find
that the magnitude of the herding effect, the spread effect and the fit of the
count regression models (termed the 'fit effect') vary in a predictable manner
across the liquidity of stocks.
Keywords: Count models, competition, limit-orders, liquidity.
P>JEL Classification: G14; C32
The Impact of Macroeconomic and Financial Variables on Market Risk: Evidence
from International Equity Returns
Dilip K. Patro, John K. Wald and Yangru Wu*
Abstract
Using a GARCH approach, we estimate a time-varying two-factor
international asset pricing model for the weekly equity index returns of 16 OECD
countries. We find significant time-variation in the exposure (beta) of country
equity index returns to the world market index and in the risk-adjusted excess
returns (alpha). We then explain these world market betas and alphas using a
number of country-specific macroeconomic and financial variables with a panel
approach. We find that several variables including imports, exports, inflation,
market capitalization, dividend yields and price-to-book ratios significantly
affect a country’s exposure to world market risk. Similar conclusions are
obtained by using lagged explanatory variables and thus these variables may be
useful as predictors of world market risks. Several variables also significantly
impact the risk-adjusted excess returns over this time period. Our results are
robust to a number of alternative specifications. We further discuss some
economic hypotheses that may explain these relationships.
Keywords: World market risk; Determinants of country risk exposure;
Panel estimation
JEL classification: F30, G12
Yield Spread and Term to Maturity: Default vs. Liquidity
Antonio Diaz and Eliseo Navarro
Abstract
The aim of this paper is the analysis of the yield spreads
between Treasury and non-Treasury Spanish fixed income assets and its
relationship with the term to maturity. We find a downward sloping term
structure of yield spreads for investment-grade bonds that seems to be contrary
to the crisis at maturity theory. However, we claim that this outcome is caused
mainly by the effect of liquidity on yield spreads. Once the effect of liquidity
and other factors are removed we find that there is a positive relationship
between default premiums and term to maturity. That result is now consistent
with the existing literature.
Keywords: Corporate bonds; Yield spread; Default risk; Liquidity;
Term to maturity market
JEL Classification: G10, E43
Valuation Effects of Listing on a More Prominent Segment of the Stock
Market
J. F. Bacmann, M. Dubois and C. Ertur
Abstract
We examine the behaviour of stock prices during the period
around the transfer to the March a Reglement Mensuel. First, we discuss the
financial reasons, which can justify abnormal returns around the transfer.
Second, an event study based on a sample of 71 firms is set up to test the
existence of the exchange listing effect on the French market. Third, we explore
three hypotheses in order to explain the impact on stock returns: the
informative content of the transfer, the increase in the relative size of the
firm’s investor base and the reduction of trading costs (immediacy and adverse
selection). Cross-sectional regressions show that the increase in the relative
size of the firm’s investor base is the only variable, which helps to explain
the valuation effect.
Keywords: Exchange listing, event study, analyst following,
liquidity, trading activity, systematic risk, firm’s investor base.
JEL Classification: G12, G14
Extracting Information from Options Markets: Smiles, State-Price Densities
and Risk-Aversion
Christophe Perignon and Christophe Villa
Abstract
In this paper, recent techniques of estimating implied
information from derivatives markets are presented and applied empirically to
the French derivatives market. We determine nonparametric implied volatility
functions, state-price densities and historical densities from a high-frequency
CAC 40 stock index option dataset. Moreover, we construct an estimator of the
risk-aversion function implied by the joint observation of the cross-section of
option prices and time-series of underlying asset value. We report a decreasing
implied volatility curve with the moneyness of the option. The estimated
relative risk-aversion functions are positive and globally consistent with the
decreasing relative risk-aversion assumption.
Key words: Risk-aversion; state-price density; non-parametric
methods
JEL classification: G12, G13, C13
A Note on the Three-Portfolio Matching Problem
Fabio Trojani, Paolo Vanini and Luigi Vignola
Abstract
A typical problem arising in the financial planning for
private investors consists in the fact that the initial investor’s portfolio,
the one determined by the consulting process of the financial institution and
the universe of instruments made available to the investor have to be
matched/optimized when determining the relevant portfolio choice. We call this
problem the three-portfolios matching problem. Clearly, the resulting portfolio
selection should be as close as possible to the optimal asset allocation
determined by the consulting process of the financial institution. However, the
transition from the investor’s initial portfolio to the final one is complicated
by the presence of transaction costs and some further more specific constraints.
Indeed, usually the portfolios under consideration are structured at different
aggregation levels, making portfolios comparison and matching more difficult.
Further, several investment restrictions have to be satisfied by the final
portfolio choice. Finally, the arising portfolio selection process should be
sufficiently transparent in order to incorporate the subjective investor’s
trade-off between the objectives ’optimal portfolio matching’ and ’minimal
portfolio transitbute to its market-completion property. In order to examine
further whether market completion is at play, we decompose the value of the bond
at issue into its straight bond and option values. We determine that the bonds
are overvalued again supporting market completion.
Keywords: announcement effect, index-linked debt, market
completion
JEL Classification: G14, G32
