The optimal trading and pricing of securities with asymmetric capital gains taxes and transaction costs

This article explores the optimal trading and pricing of taxablesecurities with asymmetric capital gains taxes and transactioncosts. In the long-term region, investors realize all gainsbelow some critical cutoff level, which we derive analytically.In the short-term region, investors defer all gains and, dependingupon the time remaining in the short-term region, may also defersmall losses. Contrary to common intuition, deferral of short-termlosses can be optimal even without transaction costs. The valueof tax timing is considerably higher under the optimal tradingstrategy than under alternative strategies previously analyzed.The impact of offset rules is also explored.     

Approximation of aggregate and extremal losses within the very heavy tails framework

The loss distribution approach is one of the three advanced measurement approaches to the Pillar I modeling proposed by Basel II in 2001. In this paper, one possible approximation of the aggregate and maximum loss distribution in the extremely low frequency/high severity case is given, i.e. the case of infinite mean of the loss sizes and loss inter-arrival times. In this study, independent but not identically distributed losses are considered. The minimum loss amount is considered increasing over time. A Monte Carlo simulation algorithm is presented and several quantiles are estimated. The same approximation is used for modeling the maximum and aggregate worldwide economy losses caused by very rare and very extreme events such as 9/11, the Russian rouble crisis, and the U.S. subprime mortgage crisis. The model parameters are fit on a data sample of operational losses. The respective aggregate and extremal loss quantiles are calculated.     

Measuring the costs and benefits of regulation: Conceptual issues in securities markets

This paper reviews the economic theory of regulation and surveys the empirical evidence on its application to past and recent changes in U.S. securities regulation. The theory provides multiple potential motives for regulation and cautions the empirical researcher against naïve modeling of the costs and benefits of regulatory change. Moreover, the nature of the regulatory process compounds the standard pitfalls of empirical analysis such as endogeneity and confounding events. Productive empirical techniques include the development of cross-sectional predictions of the effects of regulation as well as the use of unregulated control samples. An important avenue for future research is a more refined estimation of the extent to which regulation has unintended consequences.     

Shared savings, shared risk: first-year potential gains and losses of ACOs

As hospitals prepare for a new world of shared payments under the ACO model, they need to make determinations with respect to four key areas of concern: Integration--whether the organization can realistically deliver all that is required for shared savings. Cost versus benefits--whether the benefits of becoming an ACO exceed the costs. Patient loyalty--whether their patient population is sufficiently loyal to help ensure the organization will succeed as an ACO. Risks versus rewards--which option among ACO models is most financially attractive based on an analysis of the particular data sets.     

A note on refinancing costs,prepayment assumptions,and the value of mortgage-backed securities

This article analyzes the effect and timing of the FHA's streamline refinance program on the value of GNMA 15s. The program announced in March 1989 reduced the refinancing costs for those mortgages of 15 percent and above. The program is expected to reduce the value of GNMA's. The authors find a reduction of .47 to 3.40 points in the value of GNMA 15s during the 3-week to 13-week period following the announcement of the plan. The drop in value translates into a wealth loss for GNMA 15 holders of about $20 million over this time.     

Underwriter reputation and the pricing of securities: Evidence from asset-backed securities

This paper investigates whether and how the underwriter reputation can affect the pricing of securities. Using data on collateralized loan obligations (CLO), asset-backed securities (ABS), and asset-backed medium-term notes (ABN) from 2014 to 2019 in China bond market, we find that the underwriter's reputation has a significantly negative impact on the issuance spread. This effect is more pronounced in the CLO and ABS markets, while that in the ABN market is not significant. Furthermore, we find that the originators play a critical role in determining the issuance spread of securities, as state-owned and listed originator receive a lower initial yield spread. In addition, the number of tranches and the proportion of subordination in a deal also have a stronger effect on the relation between which the underwriters' reputation and securities prices. These results suggest that underwriters play a role in reducing information asymmetry between originators and investors, which is partly corrected via underwriter reputation.     

Communicating production outcomes as gains or losses,operator skill and their effects on safety-related violations in a simulated production context

In this study, violation-producing conditions from an organizational and individual point of view are investigated. In concrete terms, framing effects of production outcome displays in relation to production goals, the risk of a technical accident, as well as person-related variables and their impact on violations are investigated based on the theoretical assumptions of prospect theory and risk-taking. It is assumed that violations are more likely when performance is below the aspiration level associated with an anticipated loss. A 2?×?3 factorial experimental design (n?=?118) was selected in accordance with the ‘Asian Disease’ decision scenario in the form of a computer-simulated task environment Simulation Waste Water Treatment. Participants acted out the role of a production supervisor running a plant. Experimental conditions were (1) the framing of individual performance outcomes in relation to the production goals in terms of losses or gains, and (2) the risk (20, 35, and 5%) with which an accident (a deflagration) might occur through using a corner-cutting procedure. A significant main effect of the framing conditions and no effect of risk conditions or interaction effect emerged. An additional path analysis shows the influence of risky decision-making and acquired skills in terms of knowledge of the safety-related procedure on a violation. In summary, violations are strongly affected by (a) framing effects of production outcomes when the performance is below the aspiration level and (b) person-related variables, in particular risky decision-making and skill. Results strongly emphasize that we found violation-producing conditions over and above what has so far been proposed and give rise to our claim that communicating production outcomes as gains and the increase of skill increases the likelihood of compliance with safety-related procedures.     

Framing the decision to buy long-term care insurance: losses and gains in the context of statistical and narrative evidence

Rational models have difficulty explaining low levels of demand for long-term care insurance. We posit that insurers have framed the need for insurance in a manner that unintentionally promotes risk-seeking behavior (i.e., high probability loss frame), and that alternative frames can better promote willingness to insure. We further posit that emotional frames are more effective than rational risk frames in promoting willingness to pay. Survey evidence supports these hypotheses: emotional narrative frames are associated with greatest willingness to pay, and the high probability loss frame was associated with among the lowest average amounts willing to pay.     

Risk management within the cannabis industry: Building a framework for the cannabis industry

Thirty states and the District of Columbia have legalized the use of cannabis for medicinal and/or recreational use by either formally or informally de‐criminalizing its use. However, cannabis remains a Schedule 1 drug under the Federal Controlled Substances Act (21 U.S.C. Sections 801 through 812), leaving federal law in conflict with the laws of over half of the states. As a result, market participants in legal cannabis businesses face risks due to the industry's unique legal status within the United States. We examine the risks and challenges deemed by the cannabis industry as the top risks facing the industry's continued future growth and its sustainability. In addition to general risks inherent in a nascent industry, a legal cannabis business faces additional risks, such as risks in its banking and finance activity, placement of insurance, payment of taxes, and managing its supply chain. These legal businesses also face true legal risk from the possibility of being shut down by the federal government and seizure of assets and product under the CSA. This paper also examines whether the cannabis industry would benefit from a futures market to mitigate price risk.     

Arbitrage pricing,transaction costs and taxation of capital gains: A study of government bonds with the same maturity date

This paper examines one of the few cases of seemingly redundant securities: sets of three government bonds with the same maturity date. Within the bounds on relative bond prices established by tax-exempt investors in a market with proportional transaction costs, the taxation of capital gains on the basis of realization has a significant impact on relative prices. The empirical evidence supports the tax option effect discussed by Constantinides and Ingersoll, but does not generally support the segmented tax-clientele equilibrium discussed by Schaefer.     

Stock market signals and consequences of securities class actions lawsuits: a microstructure perspective

Review of Quantitative Finance and Accounting - We perform a microstructure analysis of trading activities pre- and post-class period end-dates of securities class action lawsuits. We posit that...     

Optimal dividend policy,debt policy and the level of investment within a multi-period DCF framework

This paper simultaneously analyses optimal dividend, debt and investment policy within a conventional multi-period DCF framework, and takes account of differential personal taxation over both investors and types of income, the effect of dividends and interest on the level of share issues and hence share issue costs, and the effect of dividends and interest on the level of internally-financed investment. Application of the model to three distinct tax regimes reveals that the value benefit from debt is small at best whilst the value benefit from dividends is substantial even in a regime without dividend imputation.     

Public and private enforcement of securities laws: Resource-based evidence

Ascertaining which enforcement mechanisms work to protect investors has been both a focus of recent work in academic finance and an issue for policy-making at international development agencies. According to recent academic work, private enforcement of investor protection via both disclosure and private liability rules goes hand in hand with financial market development, but public enforcement fails to correlate with financial development and, hence, is unlikely to facilitate it. Our results confirm the disclosure result but reverse the results on both liability standards and public enforcement. We use securities regulators’ resources to proxy for regulatory intensity of the securities regulator. When we do, financial depth regularly, significantly, and robustly correlates with stronger public enforcement. In horse races between these resource-based measures of public enforcement intensity and the most common measures of private enforcement, public enforcement is overall as important as disclosure in explaining financial market outcomes around the world and more important than private liability rules. Hence, policymakers who reject public enforcement as useful for financial market development are ignoring the best currently available evidence.     

A framework for the study of expansion options,loan commitments and agency costs

We consider a firm that operates a single plant and has an expansion option to invest in a new plant. This setup leads to two-sided optimal stopping problems. We analyze optimal expansion timing and quantify the value of the loan commitment that the equityholder obtained from the lender and associated agency costs incurred on the lender's side. Moreover, we incorporate construction period for the new plant, which throws another layer of uncertainty into the model: the parties cannot tell price level of the firm's product when the construction completes. This analysis contrasts with the conventional one-sided stopping models in corporate finance literature. We can study expansion options by viewing a firm's existing operation, bankruptcy threat, and financing decisions all together.     

Valuation of human assets in a securities brokerage firm: An empirical study

When a service firm is acquired by another firm there is often a significant premium paid over the acquired firm's book value. Often a substantial portion of this premium is due to the value of the human assets acquired. This paper presents a methodology by which the value of the human assets may be determined separate and distinct from goodwill. This is then applied to a case study in a securities brokerage firm. Finally, an amortization schedule is set forth so the asset can be amortized for tax purposes.     

Estimating the performance attributes of Australian multi-sector managed funds within a dynamic Kalman filter framework

This paper examines the impact of Kalman filtering as a technique for modeling the risk levels of managed funds. Using a sample of Australian Multi-sector trusts we examine selectivity and market timing performance using conventional performance models alongside Kalman filter models that allow beta to vary via a random walk. Further, we consider the stability and asymmetry of these performance measures together with a measure of volatility timing arising from a cubic model of fund performance. We find that the positive selectivity (negative market timing) that stems from the conventional models is not present with the Kalman filter model. The Kalman filter model tends to show neutral performance for both. However, both models confirm a strong tendency toward negative volatility timing.     

The stock market effects of a securities transaction tax: Quasi-experimental evidence from Italy

In the aftermath of the financial crisis, in several countries new levies on the financial sector have been proposed and in some cases implemented. We focus in particular on the recent introduction of a securities transaction tax (STT) in Italy. A peculiarity of the Italian STT is that it only concerns stocks of corporations with a market capitalization above € 500 million. We exploit this feature via a differences-in-differences approach – comparing taxed and non-taxed stocks before and after the introduction of the tax – and via a regression discontinuity design – comparing the performance of stocks just above the threshold with those just below. Focusing on the regulated market, we find that the new tax reduced liquidity, but it left transaction volumes and returns substantially unaffected. There is also evidence – although not conclusive – that the tax increased volatility.     

Real effective exchange rate volatility and growth: A framework to measure advantages of flexibility vs. costs of volatility

By devising a real effective exchange rate (REER) index where bilateral exchange rates are weighted for relative trade shares, we find that the REER volatility (differently from the bilateral exchange rate volatility with the dollar) has significant impact on growth of per capita income after controlling for other variables traditionally considered in conditional convergence estimates. We also find that this (cost of volatility) effect can be reconciled with the concurring negative and significant effect on growth of the adoption of a fixed exchange rate regime (advantage of flexibility effect), where the latter may be also interpreted as the cost of choosing pegged regimes without harmonization of rules and macroeconomic policies with main trading partners. The adoption of an REER volatility measure, instead of a bilateral exchange rate with the dollar, has the advantage of making it possible a joint test for these two effects. This is because, while fixed exchange rate regimes are strongly negatively correlated, and almost collinear, with bilateral exchange rate volatility with the dollar, the correlation is much weaker when considering our REER volatility measure.     

Empirical determinants of the relative yields on taxable and tax-exempt securities

Yields on short-term prime-grade municipals vary through time in relation to after-corporate-tax yields on short-term U.S. Treasury securities. The pattern is not related to the default premium in municipal yields or to the historical ceiling on bank deposit rates (Regulation Q). However, there is a strong link to the default premium in corporate yields and to municipal holdings by large commercial banks. These findings suggest that taxable and tax-exempt markets are linked both by the capital-structure decisions of firms and by the tax-arbitrage activities of banks.