Asymmetric information in securitization: An empirical assessment

Asymmetric information in securitization deals is analyzed based on a unique dataset comprising a million mortgages, both securitized and not, and using a methodology, previously applied to insurance data, that looks at the correlation between risk transfer and default probability. The main finding is that, for given observable characteristics, securitized mortgages have a lower default probability than non-securitized ones. We show that this finding is consistent with banks caring about their reputation for not selling lemons.     

International day-of-the-week effects: An empirical examination of iShares

Ample evidence suggests that day-of-the-week patterns exist in US and foreign equity returns. We extend the evidence on the day-of-the-week effect in equity returns by examining the return patterns of iShares for 17 countries and Standard and Poor's Depository Receipts (SPDRs) to establish whether previously observed predictabilities in equity returns are reflected in iShares' returns. We utilize a split sample to examine return patterns and develop trading rules using the initial subsample. We then test those trading rules out of sample. Empirical results reveal that iShares exhibit day-of-the-week return patterns that can be exploited by informed traders.     

An empirical assessment of reinsurance risk

We analyse the effect of failing reinsurance cover on the stability of Dutch insurers. As insurers often reinsure themselves with other (re)insurers, a firm's loss could spread contagiously through the sector. Using a unique and confidential data set on reinsurance exposures, we gain insight into the reinsurance market structure and perform a scenario analysis to measure contagion risks. Considering entities on a standalone basis, we find no evidence of systemic risk in the Netherlands, even if multiple reinsurance companies fail simultaneously. At group level our analysis points to the contagion risk of in-house reinsurance structures, given that such in-house reinsurance parties are generally not higher capitalised than other group members.     

Spreading the sin: An empirical assessment from corporate takeovers

An acquisition of a company involved in socially undesirable activities can have important value implications. On the one hand, stocks in sin industries can be undervalued, and positive wealth effects might be created through risk sharing and a halo effect. On the other hand, acquiring sin stocks could increase litigation risk and the chance of product boycotts, and could hurt relations with employees and other stakeholders. Moreover, many investors avoid investments in sin stocks by applying negative screening. This article empirically establishes that shareholders of acquirer firms on average discount sin acquisitions. The negative wealth effects are stronger in countries with a greater focus on corporate social responsibility and for deals that are more likely to receive public attention. The article concludes that the costs of “sin” are considerable.     

Regional integration of the East Asian stock markets: An empirical assessment

The aim of this paper is to study the dynamics of regional financial integration in East Asia over the 1990:01–2012:08 period. To this end, we use the international capital asset pricing model (ICAPM) to assess the evolution of financial market integration through time and evaluate their risk premia. We also construct an Asian currency basket in order to obtain a reference currency in this area. Our empirical analysis is based on the multivariate GARCH-DCC approach with time-varying correlations. Our results show that the East Asian stock markets were partially segmented (except for Japan) within their region until approximately 2008. However, the last years are characterized by an upward trend in the regional integration of stock markets. Our findings also show that the risk premium related to regional stock markets is significant for all countries.     

An empirical assessment of commercial web-based professor evaluation services

We examined the validity of data found on a popular web-based, user-created commercial professor evaluation service, RateMyProfessors.com (RMP), in business school settings. We compared publicly available RMP data for two business schools with official faculty evaluations unavailable to the public. We find that students rate professors significantly lower on RMP than on official university evaluations. However, we also find that the rankings of official university evaluations and RMP are significantly correlated (p < .001), with correlation values high enough to provide useful data to students.     

An empirical assessment of the residual income valuation model

This paper provides an empirical assessment of the residual income valuation model proposed in Ohlson (Ohlson, J.A., 1995. Earnings, book values and dividends in security valuation. Contemporary Accounting Research 11, 661–687). We point out that existing empirical research relying on Ohlson's model is similar to past research relying explicitly on the dividend-discounting model. We establish that the key original empirical implications of Ohlson's model stem from the information dynamics that link current information to future residual income. Our empirical results generally support Ohlson's information dynamics. However, we find that our empirical implementation of Ohlson's model provides only minor improvements over existing attempts to implement the dividend-discounting model by capitalizing short-term earnings' forecasts in perpetuity.     

Forbearance: An empirical analysis

Several recent articles have analyzed conditions under which allowing capital-deficient banks to continue to operate may be optimal policy. This article examines the performance of banks admitted into the FDIC's Capital Forbearance Program between 1986 and 1989 and finds that, for the majority of these banks, there was no substantial improvement in their capital ratios. We use a logit regression analysis to attempt to identify those banks whose financial condition improved with forbearance and find that banks which did improve are not clearly identifiable from pre-forbearance financial data. Instead, the banks which improved did so due to infusions of new capital, extraordinary income, and improvements in the local economies, factors which are not easily identifiable ex ante by regulators. The conclusion is that, while some grants of forbearance may result in large saving to the FDIC, in the majority of cases granting forbearance to troubled banks is unlikely to reduce the expected loss to the deposit insurer.University of HoustonUniversity of HoustonCooperative Bank of Taiwan, Taipei, Taiwan     

Secondary currency: An empirical analysis

Many cases exist of multiple currency usage throughout history. As two leading examples, secondary currencies were widespread during both the Great Depression in the United States and the 2002 recession in Argentina. What are the determinants of multiple currency usage and what is the effect on economic activity? Both issues are empirically addressed using individual-level surveys collected by the authors in Argentina during 2002 and 2003. The evidence supports the theoretically predicted determinants of secondary currency acceptability put forth in monetary theory. In particular, findings show that the acceptability of the secondary currency increases when the supply of national currency is low, the relative transaction cost of the secondary currency is low, and the individual trading technologies are less effective. Moreover the acceptability of the secondary currency has real effects on economic activity. Among those who use the secondary currency the monthly income gain is more than 15% of the average Argentine's monthly income. Excluding trades of used goods, this amounts to a 0.6% increase in GDP.     

An empirical assessment of the Feltham-Ohlson models considering the sign of abnormal earnings

This paper provides an empirical assessment of the Feltham-Ohlson models, distinguishing between firms with positive and negative abnormal earnings. Abnormal earnings persistence and conservatism parameters differ for these two groups; this implies different earnings prediction models and valuation functions for both profit-making and loss-making firms. The analysis refers to the period 1991-1999 and uses a sample of Spanish firms quoted on the Madrid S.E. The results suggest that our contextual approach is more useful than the non-contextual one to predict future abnormal earnings and explain current prices. Although the Ohlson (1995) model is accurate in forecasting future abnormal earnings and stock prices, the results improve when firms with negative abnormal earnings are valued using a temporary model and firms with positive abnormal earnings using a more permanent one. The Feltham and Ohlson (1995) model generates the lowest forecast errors in the prediction of positive abnormal earnings, but it produces the least accurate results in forecasting prices.     

Privatization and globalization: An empirical analysis

This paper examines the link between globalization-measured by foreign direct investment (FDI) and foreign portfolio investment (FPI) – and privatization of state-owned enterprises, in a multi-country sample that focuses on developing countries. We hypothesize that privatization has an effect on FDI/FPI as the process of fostering private sector participation is often accompanied by liberalization reforms, and by allocations of substantial shares of newly privatized firms to foreign investors. Similarly, we expect FDI/FPI to foster privatization efforts as new capital inflows, technology and managerial skills that accompany FDI/FPI make the environment more prone to competition, providing governments with incentives to privatize inefficient firms that need to be turned around. This relation is assessed in two ways, first in a dynamic panel using a generalized method of moments approach, and second through panel causality tests. We find a bi-directional positive relation between privatization proceeds and globalization, particularly in the case of FDI.     

Dividend reinvestment plans: An empirical analysis

This study examines the effect of initiating discount and no discount dividend reinvestment plans on shareholder wealth. The results show a negative response to DRP announcements, which is significantly smaller than that found in studies of new equity offerings. These results are consistent with the Scholes and Wolfson (1989) hypothesis that managers in need of equity capital use DRPs to mitigate the adverse stock price effects of new equity issue announcements. Furthermore, there is a significant difference in the price response of discount and no discount DRPs for industrial firms. This result is supportive of the signaling potential of discount DRPs. Supportive evidence is also found in the analysis of firm characteristics for industrial firms.     

Nonlinear market liquidity: An empirical examination

We offer novel indicators of market-wide liquidity. Previous literature uses averages of individual liquidity indicators to track the evolution of market-wide liquidity. Instead, we focus on the tails of the market liquidity distribution. First, we construct aggregate liquidity indicators using low and high quantiles of six liquidity measures (total volume, number of trades, effective spread, realized spread, price impact and lambda). Our results show that market conditions have an asymmetric impact on the tails of the liquidity distribution. In the second part of the study, we test for nonlinearity of the effects of market determinants on market liquidity.     

X-efficiency in Australian banking: An empirical investigation

This paper empirically investigates the x-efficiency (technical and allocative) in Australian banks. A non-parametric method of Data Envelopment Analysis (DEA) has been used to arrive at the efficiency scores. Banks in this sample were found to have low levels of overall efficiency compared with the banks in the European countries and in the US. The results indicate that, as a source of overall inefficiency, the technical component was more important than the allocative component. Thus, the inefficiency in Australian banks can be attributed to wasting of inputs (technical inefficiency) rather than choosing the incorrect input combinations (allocative inefficiency). Domestic banks were found to be more efficient than foreign owned banks. The study has important implications such as guiding the government policy regarding deregulation and mergers. Since the study pinpoints the sources of inefficiency, it would also help banks with strategic planning.     

Sourcing of internal auditing: An empirical study

This paper studies the factors associated with organizations’ internal audit sourcing decisions, building from a previous study by Widener and Selto (henceforth W&S) [Widener, S.K., Selto, F.H., 1999. Management control systems and boundaries of the firm: why do firms outsource internal audit activities? J. Manage. Account. Res. 11, 45–73]. In their study, W&S used Transaction Cost Economics (TCE) to explain the governance of internal auditing. Our study seeks to replicate their results, using newly collected data from 66 companies headquartered in the Netherlands. Our findings are supportive of W&S. Like W&S, we find asset specificity and frequency (both individually and in interaction) to be significantly associated with sourcing decisions. These findings are robust against different model specifications, and they hold across variously defined samples. We conclude that the W&S results are reproducible in different conditions, enhancing the credibility of the TCE-based explanation of organizations’ internal audit sourcing practices.     

Order flow and volatility: An empirical investigation

We study the relationship between order flow and volatility. To this end we develop a comprehensive framework that simultaneously controls for the effects of macro announcements and order flow on prices and the effect of macro announcements on volatility. Using high-frequency 30-year U.S. Treasury bond futures data, we find a statistically and economically significant relationship between the absolute value of order flow and volatility. Moreover, this relationship is robust, inter alia, to a number of factors including the introduction of liquidity effects, use of data measured over a different frequency, and market conditions.     

Multiscaling and rough volatility: An empirical investigation

Pricing derivatives goes back to the acclaimed Black and Scholes model. However, such a modelling approach is known not to be able to reproduce some of the financial stylised facts, including the dynamics of volatility. In the mathematical finance community, it has therefore emerged a new paradigm, named rough volatility modelling, that represents the volatility dynamics of financial assets as a fractional Brownian motion with Hurst exponent very small, which indeed produces rough paths. At the same time, prices’ time series have been shown to be multiscaling, characterised by different Hurst scaling exponents. This paper assesses the interplay, if present, between price multiscaling and volatility roughness, defined as the (low) Hurst exponent of the volatility process. In particular, we perform extensive simulation experiments by using one of the leading rough volatility models present in the literature, the rough Bergomi model. A real data analysis is also conducted to test if the rough volatility model reproduces the same relationship. We find that the model can reproduce multiscaling features of the prices’ time series when a low value of the Hurst exponent is used, but it fails to reproduce what the real data says. Indeed, we find that the dependency between prices’ multiscaling and the Hurst exponent of the volatility process is diametrically opposite to what we find in real data, namely a negative interplay between the two.     

Ratings-based credit risk modelling: An empirical analysis

Banks have recently developed new techniques for gauging the credit risk associated with portfolios of illiquid and defaultable instruments. These techniques could revolutionise banks' management of credit risk and could in the longer term serve as a more risk-sensitive basis for calculating regulatory capital on banks' loan books than in Basel 2, the new regulatory capital framework. In this paper we implement a popular credit risk model that exploits the information in credit ratings to determine a portfolio's value-at-risk. Using price data on large eurobond portfolios, we assess, on an out-of-sample basis, how well the model tracks the risks it is supposed to measure.