Short‐Horizon Return Predictability in International Equity Markets

This study measures the degree of short‐horizon return predictability of 50 international equity markets and examines how its variation is related to the indicators of equity market development. Two multiple‐horizon variance ratio tests are employed to measure the degree of return predictability. We find evidence that return predictability is negatively correlated with publicly available indicators of equity market development. Our cross‐sectional regression analysis shows that the per capita gross domestic product, market turnover, investor protection, and absence of short‐selling restrictions are correlated with cross‐market variations in return predictability.     

Counterparty Risk for Credit Default Swaps: Markov Chain Interacting Intensities Model with Stochastic Intensity

We analyze the counterparty risk for credit default swaps using the Markov chain model of portfolio credit risk of multiple obligors with interacting default intensity processes. The default correlation between the protection seller and underlying entity is modeled by an increment in default intensity upon the occurrence of an external shock event. The arrival of the shock event is a Cox process whose stochastic intensity is assumed to follow an affine diffusion process with jumps. We examine how the correlated default risks between the protection seller and the underlying entity may affect the credit default premium in a credit default swap.     

Market Efficiency and the Returns to Simple Technical Trading Rules: New Evidence from U.S. Equity Market and Chinese Equity Markets

Numerous studies in the finance literature have investigated technical analysis to determine its validity as an investment tool. This study is an attempt to explore whether some forms of technical analysis can predict stock price movement and make excess profits based on certain trading rules in markets with different efficiency level. To avoid using arbitrarily selected 26 trading rules as did by Brock, Lakonishok and LeBaron (1992) and later by Bessembinder and Chan (1998), this paper examines predictive power and profitability of simple trading rules by expanding their universe of 26 rules to 412 rules. In order to find out the relationship between market efficiency and excess return by applying trading rules, we examine excess return over periods in U.S. markets and also compare the excess returns between U.S. market and Chinese markets. Our results found that there is no evidence at all supporting technical forecast power by these trading rules in U.S. equity index after 1975. During the 1990s break-even costs turned to be negative, –0.06%, even failing to beat a buy-holding strategyin U.S. equity market. In comparison, our results provide support for the technical strategies even in the presence of trading cost in Chinese stock markets.     

Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors

Abstract:  This paper presents a tractable structural model whereby controlling equity holders are also among the creditors of the firm. As the firm approaches distress, equity holders can drain the assets of the firm and expropriate other creditors by repaying their credit before bankruptcy. The right of the bankruptcy court to revoke such repayment protects arm's length creditors, reduces the cost of borrowing and induces equity holders to anticipate repayment of their credit. Equity holders decide repayment neither too early nor too late, so as to reduce the risk of repayment revocation by the bankruptcy court. Similar conclusions apply to the preferential repayment of bank loans personally guaranteed by equity holders. The analysis also suggests that callable bearer bonds may be more valuable to equity holders than to other creditors.     

Quality of Corporate Social Responsibility Disclosure and Cost of Equity Capital: Lessons from China

This article explores the relationship between the quality of corporate social responsibility (CSR) disclosure and the cost of equity capital by analyzing the financial data and CSR reports of A-share listed firms in China from 2008 to 2014. The quality of the CSR disclosure is shown to be negatively related to the cost of equity capital of the listed firms. This negative correlation proves to be more prominent among firms of environmentally sensitive industries. Taking the ownership of the listed firms into consideration, it is further confirmed that the negative relationship between the CSR disclosure and the cost of equity capital is of higher significance for state-owned enterprises. Our findings also empirically demonstrate that the quality of CSR disclosure is more negatively related to the cost of equity capital among the large listed firms than the smaller ones.     

Conditional Equity Premium and Aggregate Corporate Investment

We document a strong negative relation between aggregate corporate investment and conditional equity premium estimated from direct stock market risk measures. Consistent with the investment-based asset pricing model, the comovement with conditional equity premium fully accounts for aggregate investment's market return predictive power. Similarly, conditional equity premium is a significant determinant of classic Tobin's q measure, although q has much weaker explanatory power for aggregate investment possibly because of its measurement errors. Moreover, the positive relation between aggregate investment and investor sentiment documented in previous studies reflects the fact that both variables correlate closely with conditional equity premium.     

Interacting default intensity with a hidden Markov process

In this paper we consider a reduced-form intensity-based credit risk model with a hidden Markov state process. A filtering method is proposed for extracting the underlying state given the observation processes. The method can be applied to a wide range of problems. Based on this model, we derive the joint distribution of multiple default times without imposing stringent assumptions on the form of default intensities. Closed-form formulas for the distribution of default times are obtained which are then applied to solve a number of practical problems such as hedging and pricing credit derivatives. The method and numerical algorithms presented can be applicable to various forms of default intensities.     

Institutional shareholder services' proxy voting guidelines and ROE management

We examine the impact of the Institutional Shareholder Services (ISS) proxy voting guidelines on managers' opportunistic reporting behaviours. In February 2015, the ISS introduced a new advisory policy based on firms' return on equity (ROE) and started to issue negative recommendations for top executive election in firms whose past average and most recent ROE are lower than 5%. We find that managers are more likely to achieve the 5% ROE after implementing the policy, and they do so by discretionary activities. Our findings imply that accounting-based guidelines issued by a proxy voting advisor can generate managers' incentives for opportunistic reporting.     

Modeling Drivers and Barriers of Artificial Intelligence Adoption: Insights from a Strategic Management Perspective

Artificial intelligence (AI) in business processes and academic research in AI has significantly increased. However, the adoption of AI in organizational strategy is yet to be explored in extant literature. This study proposes two conceptual frameworks showing hierarchical relationships among the various drivers and barriers to AI adoption in organizational strategy. In a two-step approach, the literature study is first done to identify eight drivers of and nine barriers to AI adoption and validated by academic and industry experts. In the second step, MICMAC (matrice d'impacts croises-multiplication appliqúe a un classment or cross-impact matrix multiplication applied to classification) analysis categorizes the drivers and barriers to AI adoption in organizational strategy. Total interpretive structural modeling (TISM) is developed to understand the complex and hierarchical associations among the drivers and barriers. This is the first attempt to model the drivers and barriers using a methodology like TISM, which provides a comprehensive conceptual framework with hierarchical relationships and relative importance of the drivers and barriers to AI adoption. AI solutions' decision-making ability and accuracy are the most influential drivers that influence other driving factors. Lack of an AI adoption strategy, lack of AI talent, and lack of leadership commitment are the most significant barriers that affect other barriers. Recommendations for senior leadership are discussed to focus on the leading drivers and barriers. Also, the limitations and future research scope are addressed.     

Determinants of risk behaviour: effects of perceived risks and risk attitude on farmer’s adoption of risk management strategies

The importance of risk perception and risk attitude for understanding individual’s risk behaviour are independently well described in literature, but rarely combined in an integrated approach. In this study, we propose a model assuming the choice to implement certain risk management strategies to be directly driven by both perceptions of risks and risk attitude. Other determinants influence the intention to apply different risk strategies mainly indirectly, mediated by risk perception and risk attitude. This conceptual model is empirically tested, using structural equation modelling, for understanding the intention of farmers to implement different common risk management strategies at their farms. Data are gathered in a survey completed by 500 farmers from the Flanders region in Belgium, investigating attitudes towards farming, perceived past exposure to risk, socio-demographic characteristics, farm size, perceptions of the major sources of farm business risk, risk attitudes and the intention to apply common risk management strategies. Our major findings are: (i) perception of major farm business risks have no significant impact on the intention of applying any of the risk strategies under study, (ii) risk attitude does have a significant impact. Therefore, rather than objective risk faced and the subjective interpretation thereof, it is the general risk attitude that influence intended risk strategies to be implemented. A distinction can be made between farmers willing to take risk, who are more inclined to apply ex-ante risk management strategies and risk averse farmers who are less inclined to implement ex-ante risk management strategies but rather cope with the consequences and diminish their effects ex-post when risks have occurred.     

A note on pricing interest rate derivatives when forward LIBOR rates are lognormal

We derive the closed form pricing formulae for contracts written on zero coupon bonds for the lognormal forward LIBOR rates. The method is purely probabilistic in contrast with the earlier results obtained by Miltersen et al. (1997).     

A test of the Ohlson (1995) model: Empirical evidence from Japan

This paper investigates the validity of the Ohlson [Contemp. Account. Res. 11 (1995) 661] information dynamics (Linear Information Model: LIM) and attempts to improve the LIM. The difficulty concerning the empirical tests of the LIM lies in identifying ν_t, which denotes information other than abnormal earnings. Recent papers, such as those of Myers [Account. Rev. 74 (1999) 1], Hand and Landsman [The pricing of dividends in equity valuation. Working paper, University of North Carolina, 1999], and Barth et al. [Accruals, cash flows, and equity values. Working paper (January) (July), Stanford University, 1999], all try to specify ν_t by using various accounting information. Instead of tackling this difficult task, this paper focuses on serial correlation in the error terms caused by omitting the necessary variable ν_t from the regression equation. The results indicate that adjustment for serial correlation leads to an improvement of the LIM.     

Solving the futures challenge - all you need is a 3LA

In this article, the author responds to a number of claims regarding the Integral Operating System, Causal Layered Analysis and the field of Futures. In particular, the author takes aim at those who claim that the reason the futures field has been lacking in influencing change towards more positive world is the result of not having an effective tool kit. To the contrary, the author suggests that the Futures community's failure at changing the existing ‘market driven paradigm’ has more to do with “… an unwillingness to get our hands dirty and to play in the same sandbox as our clients.” To that end the author targets in particular, a piece suggesting that making the Causal Layered Analysis more complex, exclusionary and ‘new and improved’ is the best way to make inroads into the economic liberalism model now in control. In counterpoint the author suggests that not only is this a flawed approach, it is unlikely to assist those with greatest need - the wider Futures Community.