The comovement of US and German bond markets

We use a vector-autoregression, with parameter estimates corrected for small-sample bias, to decompose US and German unexpected bond returns into three ‘news’ components: news about future inflation, news about future real interest rates, and news about future excess bond returns (term premia). We then cross-country correlate these news components to see which component is responsible for the high degree of comovement of US and German bond markets. For the period 1975-2003 we find that inflation news is the main driving force behind this comovement. When news is coming to the US market that future US inflation will increase, there is a tendency that German inflation will also increase. This is regarded bad news for the bond market in both countries whereby bond prices are bid down leading to immediate negative return innovations and changing expectations of future excess bond returns. Thus, comovement in expected future inflation is the main reason for bond market comovement.     

Volume and skewness in international equity markets

We examine the relation between trading volume and skewness in 11 international stock markets using daily and monthly data from January 1980 to August 2004. We construct single equation and VAR models of the relation between the first three moments of market returns and trading volumes. Our results show hitherto unrecognised channels of influence, and support the investor heterogeneity approach to explaining return asymmetries.     

When arm's length is too far: Relationship banking over the credit cycle

We conduct face-to-face interviews with bank chief executive officers to classify 397 banks across 21 countries as relationship or transaction lenders. We then use the geographic coordinates of these banks’ branches and of 14,100 businesses to analyze how the lending techniques of banks near firms are related to credit constraints at two contrasting points of the credit cycle. We find that while relationship lending is not associated with credit constraints during a credit boom, it alleviates such constraints during a downturn. This positive role of relationship lending is stronger for small and opaque firms and in regions with a more severe economic downturn. Moreover, relationship lending mitigates the impact of a downturn on firm growth and does not constitute evergreening of loans.     

A note on Chui,Gai and Haldane’s “Sovereign liquidity crisis: Analytics and implications for public policy”

This note corrects the welfare calculations in Chui, Gai and Haldane’s paper on sovereign liquidity crisis [Chui, M., Gai, P., Haldane, A.G., 2002. Sovereign liquidity crisis: Analytics and implications for public policy. Journal of Banking and Finance 26, 519–544]. We show that the exact formula not only dramatically reduces the computed welfare consequences from 66% of ex-ante expected output to roughly 13%, but also changes the direction of some reported comparative static results. In addition, we clarify the difference between fundamentals-driven and belief-driven welfare costs and extend some of the sensitivity calculations.     

Volatility‐Spillover Effects in European Bond Markets

Volatility spillover from the US and aggregate European bond markets into individual European bond markets using a GARCH volatility‐spillover model is analysed. Strong statistical evidence of volatility spillover from the US and aggregate European bond markets is found. For EMU countries, the US volatility‐spillover effects are rather weak (in economic terms) whereas the European volatility‐spillover effects are strong. The bond markets of EMU countries have become much more integrated after the introduction of the euro, and in recent years they have become close to being perfectly integrated. The main driver of the integration appears to be convergence in interest rates.     

Applying developed‐country regulation in emerging markets: an analysis of Thai insider trading

This paper undertakes an out‐of‐sample test of developed‐country insider trading regulation in an emerging market environment (Thailand), where severe information asymmetry, lax enforcement and poor pricing efficiency are endemic. Thai insider trading regulation, which mimics developed market rules, fails on all three measures of success. Insiders trade with impunity during a regulated trading ban. Their trading performance outperforms other investors at all times, and they continue to exploit their privileged position with respect to information flow. Our study suggests it is inappropriate for emerging market regulators to adopt developed market regulation without first considering the unique characteristics of their own environment.     

Idiosyncratic volatility and cross‐sectional stock returns in Southeast Asian stock markets

We examine the role of idiosyncratic risk in five ASEAN markets of Malaysia, Singapore, Thailand, Indonesia, and the Philippines. Our research was motivated by the findings of Ang et al. (2006, 2009) of a ‘puzzling’ negative relation between idiosyncratic volatility and 1‐month ahead stock returns in developed markets and the suggestion of the ubiquity of these results in other markets. In contrast, we find no evidence of an idiosyncratic volatility puzzle in these Asian stock markets; instead, we document a positive relationship between idiosyncratic volatility and returns in Malaysia, Singapore, Thailand, and Indonesia and no relationship in the Philippines. The idiosyncratic volatility trading strategy could result in significant trading profits in Malaysia, Singapore, Thailand, and to some extent in Indonesia. Our study underscores the fact that generalizing empirical results obtained in developed stock markets to new and emerging markets could potentially be misleading.     

IPOs and IFRS in European exchange-regulated markets: A research note

This research note aims to enrich our understanding of reporting incentives of firms listed in European exchange-regulated markets. Many initial public offerings (IPOs) in Europe are within exchange-regulated markets where firms are allowed to choose between local GAAP and IFRS. Therefore, this research note describes the regulatory environment and investigates the choice to voluntarily adopt IFRS within European exchange-regulated markets. Overall, less than 20% of the firms voluntarily adopt IFRS and voluntary IFRS adoption upon IPO is positively associated with firm size, foreign firms, stocks offered to institutional investors prior to the IPO, and a future migration to an EU-regulated market.     

The financing and growth of firms in China and India: Evidence from capital markets

This paper studies the extent to which firms in China and India use capital markets to obtain financing and grow. Using new data on domestic and international capital raising and firm performance, it finds that financial market activity has expanded less since the 1990s than aggregate figures suggest. Relatively few firms raise capital and even fewer attract most of the financing. Moreover, firms that issue equity or bonds are different and behave differently from other publicly listed firms. Among other things, they are typically larger and grow faster. The differences between users and nonusers exist before the capital raising, are associated with the probability of raising capital, and become more pronounced afterward. The size distribution of issuing firms shifts more over time than the distribution of those that do not issue, suggesting little convergence in size among listed firms.     

The Core,Periphery, and Beyond: Stock Market Comovements among EU and Non‐EU Countries

Using linear and nonlinear correlations, copulas, quantile dependence and lower tail dependence, we find that (1) equity markets of the advanced European Union (EU) countries comove more closely with each other than with the peripheral economies, (2) comovements with non‐EU countries are lower, (3) relative comovement structure before, during, and after the global financial crisis has been very stable, and (4) the level of comovements remained virtually the same between the crisis and post‐crisis periods. Our results are robust to controlling for Fama‐French, U.S. and global risk factors, as well as monetary policy, market interest rates, exchange rates, and uncertainty.     

Cross‐Border Bank M&As and Risk: Evidence from the Bond Market

The impact of cross‐border bank M&As on bank risk remains an open question. Though geographically diversifying bank M&As have the potential to reduce the risk of bank insolvency, they also have the potential to increase that risk due to the increase in risk‐taking incentives by bank managers and stockholders following these transactions. This paper empirically investigates whether cross‐border bank M&As increase or decrease the risk of acquiring banks as captured by changes in acquirers' yield spreads. This paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following M&A announcements. The study finds that bondholders, in general, perceive cross‐border bank M&As as risk‐increasing activities, unlike domestic bank mergers. Specifically, on average, yield spreads increase by 4.13 basis points following the announcement of cross‐border M&As. This study also finds that these yield spreads are significantly affected by the differences in investor‐protection and deposit insurance environments between the transacting countries. However, the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads. The overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks' reserve positions.     

Investors’ preference towards risk: evidence from the Taiwan stock and stock index futures markets

We apply the stochastic dominance (SD) tests proposed by Linton et al. (2005) and Davidson and Duclos (2000) for risk averters and risk seekers to examine investors’ preferences with respect to the Taiwan stock index and its corresponding index futures. We find that there is no first‐order SD relationship between Taiwan spot and futures. However, for second‐ and third‐order SD, we find that spot dominates futures for risk averters whereas futures dominates spot for risk seekers. The implication is that to maximize their expected utilities, risk averters prefer to buy stocks, whereas risk seekers prefer long index futures.     

Incentive‐compatible contracts in merger negotiations: The role of acquirer idiosyncratic stock return volatility

We show that the acquiring firm's idiosyncratic stock return volatility (sigma) is an important determinant of the selection and perceived valuation effects of earnouts in Mergers and Acquisitions (M&As). Earnout‐based M&As are more often announced by high‐sigma acquirers (nearly 40% of all earnout‐based M&As), yet the documented higher risk‐adjusted returns accrued to acquirers in earnout‐based M&As, relative to M&As settled in cash, stock or mixed payments (the earnout effect), appear in deals announced by low‐sigma acquirers (nearly 20% of all earnout‐based M&As). High‐sigma acquirers employing earnouts appear to break even, or even experience losses, relative to their counterparts employing single up‐front payments. These results are confirmed based on a quasi‐experimental design through which the earnout effect is measured in isolation. We argue that in M&As announced by high‐sigma acquirers, the earnout effect is potentially elusive due to the presence of an acquirer‐specific information revelation effect, resulting from the heightened extent of information asymmetry between (small) acquirers’ managers and outside investors. On the contrary, the use of earnouts in M&As announced by low‐sigma (large) acquirers, whereby the acquirer‐specific information revelation effect is likely negligible, sends a strong signal for value creation that also prevents investors from inducing a size‐related discount.     

Trend‐Following Trading Strategies in U.S. Stocks: A Revisit

We show that previous findings regarding the profitability of trend‐following trading rules over intermediate horizons in futures markets also extend to individual U.S. stocks. Portfolios formed using technical indicators such as moving average or channel ratios, without employing cross‐sectional rankings of any kind, tend to perform about as well as the more commonly examined momentum strategies. The profitability of these strategies appears significant, both statistically and economically, through 2007, but evidence of profitability vanishes after 2007. Market‐state dependence, while clearly present, does not explain the post‐2007 reduction in returns to these strategies.     

A New Variance Ratio Test of Random Walk in Emerging Markets: A Revisit

Using a nonparametric variance ratio (VR) test, we revisit the empirical validity of the random walk hypothesis in eight emerging markets in the Middle East and North Africa (MENA). After correcting for measurement biases caused by thin and infrequent trading prevalent in nascent and small stock markets, we cannot reject the random walk hypothesis for the MENA markets. We conclude that a nonparametric VR test is appropriate for emerging stock markets, and argue that our findings can reconcile previously contradictory results regarding the efficiency of MENA markets.     

Institutional Differences and International Private Debt Markets: A Test Using Mandatory IFRS Adoption

Institutional differences between countries result in additional information risks between borrowers and lenders in cross‐border private loans. This study examines the effect of these information risks on the structure of optimal debt contracts in international (cross‐border) versus domestic private debt markets. Using mandatory IFRS adoption as an indicator for institutional changes that reduced differences between countries, I compare attributes of international versus domestic loans before and after IFRS adoption. I find that, in the pre‐IFRS period, international loans are associated with a higher credit spread, a weaker relationship between the bank and the borrower, a more diffuse loan syndicate, and less reliance on accounting‐based covenants than domestic loans. These results are consistent with incremental information risks in international debt markets that make it more costly for lenders to screen and monitor borrower credit quality, resulting in a more arm's‐length relationship between borrowers and lenders. Many of these associations attenuate after IFRS adoption, suggesting that the pre‐IFRS differences in contract terms are driven by incremental information risks related to institutional differences between countries. My findings imply that incremental information risks result in a different optimal contract in international debt contracts compared to domestic debt contracts.     

Regime Shifts in Price‐Dividend Ratios and Expected Stock Returns: A Present‐Value Approach

We incorporate regime shifts in the mean of price‐dividend ratios into the present value model of van Binsbergen and Koijen (2010) who propose a latent variable approach to modeling expected returns and dividend growth rates. We find that accounting for regime shifts results in much lower persistence of expected returns and higher volatility of expected returns, and thus higher in‐sample predictability, when compared to the results from the van Binsbergen and Koijen (2010) model. We also show that the main source of the increase in the mean of price‐dividend ratios in the mid‐1990s is a decrease in the mean of expected returns.     

Dressed to merge — small fits fine: M&A success in the fashion and accessories industry

In this paper we examine the value implications of 192 M&A transactions in the fashion and leather accessories industry during the period from 1994 to 2009. Contrary to general cross-country evidence we find highly significant, positive abnormal returns to acquiring shareholders. Cross-sectional analysis further reveals that the key value drivers are diversifying fashion M&A transactions for smaller, profitable companies that reduce idiosyncratic risk whereas deals executed by large companies that act as frequent acquirers do not, on average, significantly enhance shareholder wealth.     

A Tale of Two Anomalies: Higher Returns of Low‐Risk Stocks and Return Seasonality

Prior studies have shown that low beta and low volatility stocks earn higher average returns than high beta and high volatility stocks, contradicting the prediction of the capital asset pricing model and the fundamental relationship between risk and return. In this paper, we demonstrate that this phenomenon is driven by the seasonality of stock returns. We show that the risk‐return tradeoff does hold in the nonsummer months, and that switching to a portfolio of low‐risk stocks in summer outperforms—both in terms of absolute and in risk‐adjusted returns—buy and hold strategies as well as the Sell in May strategy of switching to treasury bills in summer.