NEGATIVE CORRELATION BETWEEN STOCK AND FUTURES RETURNS: AN UNEXPLOITED HEDGING OPPORTUNITY?

The negative correlation between equity and commodity futures returns is widely perceived by investors as an unexploited hedging opportunity. A Lucas (1982) asset‐pricing model is adapted to analyse the fundamentals driving equity and commodity futures returns. Using the model we argue that such a negative correlation could arise as an equilibrium relationship which reflects traders' perceptions about the shocks driving the fundamentals such as energy and consumables, and does not necessarily indicate any hedging opportunity.     

What factors drive individual misperceptions of the returns to schooling in Tanzania? Some lessons for education policy

Evidence on educational returns and the factors that determine the demand for schooling in developing countries is extremely scarce. Building on previous studies that show individuals underestimating the returns to schooling, we use two surveys from Tanzania to estimate both the actual and perceived schooling returns and subsequently examine what factors drive individual misperceptions regarding actual returns. Using OLS and instrumental variable methods, we find that each additional year of schooling in Tanzania increases earnings, on average, by 9 to 11%. We find that on average individuals underestimate returns to schooling by 74 to 79% and three factors are associated with these misperceptions: income, asset, poverty and educational attainment. Shedding light on what factors relate to individual beliefs about educational returns can inform policy on how to structure effective interventions in order to correct individual misperceptions.     

Location factors of international R&D activities: an econometric approach

A model is developed of the relation between adoption of an innovation by firms and firm size. Decision making is represented as a group assessment of the perceived ratio between expected returns after succesful introduction, and the risk that implementation will fail or will last too long to makc adoption worth while. In view of differences in thc assessment of uncertainty and corresponding demands on the perceived return-to-risk ratio, among influencers of decisions in the firm, decision making is taken as stochastic, with a probability of adoption related to (objective) net benefits, and probability of non-adoption related to risk. The model gives a new way of looking at the fact that small firms lag behind in the adoption of new technology. In contrast with previous models proposed by David and Davies the explanation has nothing to do with there being some critical size below which adoption is not profitable. The present model explains the adoption lag for smaller firms as the result of expected returns being proportional to size while risk of failed implementation is independent of size. The model is tested and estimated empirically on data for the adoption of computers in small scale retailing, in the Netherlands.     

Information and College Access: Evidence from a Randomized Field Experiment*

High‐school students from disadvantaged high schools in Toronto were invited to take two surveys, about three weeks apart. Half of the students taking the first survey were also shown a three‐minute video about the benefits of post‐secondary education (PSE) and were invited to try out a financial‐aid calculator. Most students’ perceived returns to PSE were high, even among those not expecting to continue. Those exposed to the video, especially those initially unsure about their own educational attainment, reported significantly higher expected returns and lower concerns about costs, and expressed a greater likelihood of PSE attainment.     

A role for preferred stock in the financing decision of a public utility

Summary We have shown that preferred stock has a unique role in the financing of public utility capital expenditures, particulary when returns allowed by regulatory commissions are perceived to be inadequate. From the firm's perspective there is no tax advantage for debt because the commission effectively passes the tax savings through the consumers. If allowed returns on common stock are inadequate and the firm has exhausted its perceived debt capacity, then preferred stock becomes the optimal financing instrument. The regulatory commissions compute the costs of debt and preferred stock so that companies can expect returns to cover payments on debt and preferred stock if the assets being financed are necessary and will be included in the rate base. During extremely bad years when revenues are much less than expected, the companies can delay or miss preferred stock dividends without running the risk of default. The data on new capital sources for the electric and gas utilities indicate that these companies made adjustments which are consistent with the implications of our model, but they did not follow the extreme policy of using only debt and preferred stock when market-to-book ratios for common stock were below one. Regulators have, on occasions, used capital structures for rate-making that differ from actual capital structures, and a utility might be penalized for using an extreme capital structure policy. The main emphasis of regulatory review of capital structure, however, has been on the debt component. One strategy would be to use a debt level that satisfies the regulatory commission and then adjust equity between preferred stock and common stock to maximize value for common stockholders.     

Investing against the wind: contagion during the recent financial crisis

This article examines the effect of Warren Buffett’s investment in Goldman Sachs on 24 September 2008, during the subprime mortgage crisis. Although this event is arguably perceived to be the biggest expression of confidence in the financial market during the crisis, by conducting event studies, we do not find the major counterparties of Goldman Sachs displayed positive abnormal returns. Moreover, the abnormal return is not significantly related to the counterparty connection. We have similar findings on these financial institutions’ default probabilities using credit default swap.     

RISK PERCEPTION AND EQUITY RETURNS: EVIDENCE FROM THE SPX AND VIX

We use the semi‐nonparametric (SNP) model to study the relationship between the innovation of the Volatility Index (VIX) and the expected S&P 500 Index (SPX) returns. We estimate the one‐step‐ahead contemporaneous relation subject to leverage GARCH effect. Results agree with a body of newly established literature arguing non‐linearity, and asymmetries. In addition, the risk‐return behaviour depends on the signs as well as magnitudes of the perceived risk. We conclude that influence of fear or exuberance on the conditional market return is non‐monotonic and hump‐shaped. Very deep fear does not necessarily mean huge losses, instead, the loss may not be as bad as fears of normal levels. Results pass the robustness tests.     

Foreign ownership and the credibility of national rating agencies: Evidence from Korea

By analyzing bond price reactions to rating changes in Korea, this study adds a new angle to the existing literature on Global Rating Agencies (GRAs, i.e. Moody’s, S&P’s, Fitch) with higher reputation/independence vs. National Rating Agencies (NRAs) with more in-depth local knowledge. Faced with substantial regulatory burdens, GRAs have chosen to operate indirectly in the Korean domestic market by acquiring local NRAs. In our event study, cumulative abnormal returns following downgrades by a wholly domestically owned NRA tend to dominate those from downgrades by two affiliates of GRAs. This casts doubt on the additional information value of reputation capital acquired through GRA ownership as perceived by emerging markets.     

亚洲金融区域主义的政治逻辑

本文探讨了"合法性"与"权力"在金融区域主义方面的因果效应。当前以G7为主导的全球体制中合法性的明显缺失和国家间权力格局的变化影响了东亚的政策决策。东亚国家寻求"抗衡性"的战略,也即在保持着与以G7为中心的全球金融体制合作关系的情况下,通过发展自身的区域性制度(或其他潜在方案)以避免对前者的过度依赖。上述观察意味着,除非现存全球金融体制解决了合法性问题,并且当前(有利于东亚的)权力转移发生逆转,亚洲新兴经济体不会将应对国际金融问题的全部希望寄于全球性的解决方案。     

中国封闭式基金价格报酬过度波动的经验分析

本文研究了中国封闭式基金价格报酬与净资产报酬的数据特征及其影响关系 ,主要的结果是 :( 1 )中国封闭式基金的价格报酬相对于基金的净资产报酬一方面存在过度波动 ,另一方面又存在反映不足 ;( 2 )通过检验表明 ,投资者情绪风险对价格报酬过度波动具有显著的影响 ,而Fama的三因素风险因子对价格报酬的过度波动几乎没有解释力 ;( 3 )封闭基金价格报酬的过度波动表明 :由于投资者行为使基金股票价格相对于基金净值存在额外的系统风险 ,封闭式基金折价正是对这种系统风险的一种补偿。     

Niche Entry as a Route to Mainstream Innovation: Learning from the Phosphoric Acid Fuel Cell in Stationary Power

The paper charts the efforts to establish a successful niche position for the phosphoric acid fuel cell (PAFC) in stationary power generation, as a precursor to wider technological system and regime change. Market entry depends on matching price/performance characteristics to a niche, and improving performance through increasing returns, the most important and immediate of which are ‘learning effects’. The paper identifies five types of learning effect: (i) migrating the technology to other niches and into the mainstream; (ii) opening the way for other technologies that may have greater scope for migration; (iii) transferring learning within the pioneering company to other technologies or products; (iv) transferring experience to others in the industry; and (v) enabling users to learn. Although PAFC may be perceived as a failure in some respects, a wider perspective suggests it has made a positive and useful contribution to learning.     

Niche Entry as a Route to Mainstream Innovation: Learning from the Phosphoric Acid Fuel Cell in Stationary Power

The paper charts the efforts to establish a successful niche position for the phosphoric acid fuel cell (PAFC) in stationary power generation, as a precursor to wider technological system and regime change. Market entry depends on matching price/performance characteristics to a niche, and improving performance through increasing returns, the most important and immediate of which are 'learning effects'. The paper identifies five types of learning effect: (i) migrating the technology to other niches and into the mainstream; (ii) opening the way for other technologies that may have greater scope for migration; (iii) transferring learning within the pioneering company to other technologies or products; (iv) transferring experience to others in the industry; and (v) enabling users to learn. Although PAFC may be perceived as a failure in some respects, a wider perspective suggests it has made a positive and useful contribution to learning.     

STOCKS AND DEPRECIATION OF HUMAN CAPITAL: NEW EVIDENCE FROM A PRESENT-VALUE PERSPECTIVE

Responding to a perceived growing interest in human wealth estimates, this paper offers a framework for measuring the aggregate stock of human capital and then implements the procedure for the United States male population age 14 to 75. Unlike previous estimates of human wealth that are based upon historical or resource costs, these estimates measure the capital stock as the discounted resent-value of expected lifetime returns. In the estimation, returns are equated with earnings data from the 1970 U.S. Census 15 percent Public Use Sample for out-of-school males, adjusted for employment and survival probabilities, adjusted for an assumed exogenous growth in future earnings, and discounted at 7.5 percent.
We provide cross-sectional estimates of individual stocks of human capital by age and educational attainment, as well as expected lifetime wealth profiles for individuals by level of education. These individual profiles can be used to obtain direct estimates of age-specific depreciation which suggest human capital is subject to significant and prolonged appreciation before nearly straight-line depreciation begins around middle age. This finding is all the more significant since resource-cost estimates of human capital which must assume a depreciation pattern to obtain stocks have always imposed a much faster rate much sooner.
Finally, an aggregate estimate of the stock of human capital for all males is supplied and its sensitivity to the choice of the discount rate, tax laws, and expected exogenous growth is analyzed. This seemingly-conservative stock estimate is then compared to a much lower resource-cost estimate offered recently by John Kendrick. A discount rate over 20 percent would be needed to equate the two measures. In trying to reconcile the two figures, we raise some new questions about the validity of both approaches for human capital accounting.     

How are gold returns related to stock or bond returns in the U.S. market? Evidence from the past 10-year gold market

Although the gold market over the past decade has been soaring relative to its prior history, there have been few studies on the relationship between the gold market and other major financial markets based on the past decade of data. To re-investigate how the gold market interacts with the stock market and the bond market, we re-visit economic and financial characteristics of gold using the past 10-year data in terms of co-integration, causality, predictive power, and extreme returns. We find that while gold returns are not co-integrated with stock returns and bond returns, gold returns have a unidirectional causality with both of them. Also, we discover that gold returns have some predictive power on subsequent short-term stock returns. Under extreme market scenarios, it turns out that gold returns tend to deteriorate more simultaneously with bond returns than stock returns. This means that gold can better serve as a safe haven for stock in a relative sense during temporary market downturns.     

Co-movement of the Chinese and U.S. aggregate stock returns

This article studies the co-movement of the levels, as well as of the volatilities, of the Chinese and U.S. aggregate stock returns in 1995–2014, focusing on the impact of the liberalization of Chinese stock market from 2005. The volatilities of the two returns appear to have started to co-move in 2006. To understand the co-movement, we use the GARCH BEKK method. The result suggests that before 2006, the evolution of the U.S. returns had a tendency to affect the Chinese returns in level and volatility. However, after 2006, the two returns affected each other in a more complex way.     

Mergers in the Electric Utility Industry in a Deregulatory Environment

We document that the merger announcement returns are positive and significant for targets of acquiring electric utility industry firms, but are not as algebraically large as target returns documented in non-regulated industry merger announcements. Additionally, electric utility acquirer firms earn significant negative announcement returns when acquiring an electric utility. We find announcement returns for acquirers vary significantly based upon the timing of the merger announcement, with mergers announced after the Energy Policy Act of 1992 generating negative returns for acquirers. We also find a significant difference in the percentage change in aggregate entity value around the announcement date for diversifying mergers as compared to non-diversifying mergers, with diversifying merger announcements resulting in a decrease in aggregate entity value.     

Determinants of the systematic risk of electric utilities: theory and estimation

Investors' perceptions of the risk of holding the common stocks of electric utilities are analysed on the assumption that risk depends on the covariance of shareholder returns with the market. The analysis explicitly relates risk to the sales and cost structures, growth, and regulatory environment of each electric utility. The model accounts for the effects of regulatory lag during periods of cost inflation. The model is estimated using a pooled cross-section, time-series sample of 95 electric utilities for the period 1965 to 1977. Estimates indicate that sales,cost structure and growth dominate investors' assessment of the systematic risk of individual firms. Surprisingly, differences in regulatory treatment experienced by firms have a relatively small effect on perceived systematic risk.     

Interval portfolio selection models within the framework of uncertainty theory

The expected returns for securities are traditionally estimated as crisp values. Since the improper values may bring on an unsuccessful investment decision, portfolio experts generally prefer offering interval estimations for expected returns rather than crisp ones. The portfolio selection problem with interval expected returns is widely studied recently. In this paper, by considering the security returns with interval expected returns as uncertain variables, a mean-semiabsolute deviation model is proposed within the framework of uncertainty theory, which is a crisp nonlinear programming model and can be well solved by the classical optimization algorithms. In order to illustrate the method, some numerical experiments are given and solved.     

Wages, Experience and Seniority

In this paper we study the sources of wage growth. We identify the contribution to such growth of general, sector specific and firm specific human capital. Our results are interpretable within the context of a model where the returns to human capital may be heterogeneous and where firms may offer different combinations of entry level wages and firm specific human capital development. We allow for the possibility that wages are match specific and that workers move jobs as a result of identifying a better match. To estimate the average returns to experience, sector tenure and firm specific tenure within this context, we develop an identification strategy which relies on the use of firm closures. Our data source is a new and unique administrative data-set for Germany that includes complete work histories as well as individual characteristics. We find positive returns to experience and firm tenure for skilled workers. The returns to experience for unskilled workers are small and insignificant after 2 years of experience. Their returns to sector tenure are also zero. However, their returns to firm tenure are substantial.     

How do investors respond to Green Company Awards in China?

We find that firms winning Green Company Awards in China from 2008 to 2011 experienced on average insignificant and in some cases significantly negative effects on shareholder value. Various robustness checks suggest that these findings are not driven by the inefficiency of the Chinese stock market or a lack of perceived credibility of the award. In addition, we find important variation in the responses across firms: shareholders of firms in low-pollution industries and firms with primarily private ownership responded more negatively to award announcements. Furthermore, the peers of winning firms showed higher announcement returns than the award winners. Our results suggest that a key benefit of corporate environmentalism in China comes through building stronger relationships with government, and that otherwise the market generally discourages firms from environmental leadership.