MARGIN TRADING: A RISK-RETURN ANALYSIS

This paper attempts to present an integrated valuation analysis of investment options involving margin trading. The analysis is based on valuation theories such as Modigliani and Miller's capital structure model, the capital asset pricing model and the option pricing model. It is shown (i) that in margin trading, the return on equity is given by the return on investment plus a risk premium which increases proportionally with the margin-trading rate; (ii) that both the total risk (variance) and systematic risk (beta) of the return on equity increases proportionally with those associated with the return on investment; and (iii) that, when the option pricing model is applied to the case of margin trading, a more precise valuation formula can be employed.     

Buyout Transactions in the German‐speaking Region: Determinants of Abnormal Performance and Unlevered Returns

This is one of the first comprehensive studies of drivers of private equity performance in the German‐speaking region known as the DACH, made up of Germany, Austria, and Switzerland. It contributes three things to private equity research: First, it explains how operational value drivers affect operational performance (operational alpha) and unlevered rates of return. Second, it whether the same relationships hold across different kinds of private equity business models (those with either organic or inorganic growth strategies; or whether PE investments are small‐cap or mid‐to‐large‐cap). Third, it distinguished between the periods before and after the global financial crisis of 2008. The authors found that (1) annualised benchmark‐adjusted EBITDA margin growth (i.e. improvement in EBITDA margin) is the most significant determinant in abnormal operational performance and unlevered returns, regardless of the business model; (2) private equity firms executing a buy‐and‐build strategy generate lower unlevered returns than those executing an organic growth strategy when the benchmark company is clearly outperformed, most likely because of limited PE managerial resources; (3) mid‐to‐large‐cap private equity firms generate higher unlevered returns and operational alphas than small‐cap private equity firms when the benchmark company is clearly outperformed, because, we believe, larger companies have a higher fixed cost leverage than smaller ones; and we have found that (4) buyout transactions exited during or after the financial crisis yield higher operational alphas but lower unlevered returns compared to buyout transactions exited before the crisis, when the portfolio company underperforms its benchmark company.     

A model of the monetary sector with and without binding capital requirements

Bank equity is exogenous in the standard deposit-and-loan-expansion multiplier model, so that model is inappropriate for analyzing the interaction between monetary and bank regulatory policies. This paper examines the effect of a binding capital requirement on the loan expansion process. We evaluate how the conflict between the monetary and regulatory authorities evolves when bank equity adjusts to a binding capital requirement. We find that capital requirements are not innocuous for monetary policy. Nevertheless, the monetary authority can assert control over the loan expansion process in the long run, although multiplier values will differ considerably from those in the standard multiplier model.     

An Equilibrium Model of Asset Trading with Sequential Information Arrival

In an effort to better understand the dynamic market price adjustment process, this paper develops a model which describes the impact of new information on a financial market. The primary emphasis is on the price change-volume relationship in the presence of a margin requirement. We find that the margin requirement significantly affects the relation of price change to volume. Furthermore, this relationship is shown to be affected by the number of investors in the market, the degree of information dissemination, differences in interpretation of information and the implicit cost of the margin requirement.     

The impact of inflation on ROE,growth and stock prices

Using the constant growth dividend discount model (DDM), it can be shown that the critical factor which determines whether common stocks will be able to be an inflation hedge is the growth rate of dividends. In turn, the growth of dividends is mainly impacted by the aggregate return on equity (ROE). Using the DuPont formula, it is clear that the main variable that drives the aggregate ROE in an inflationary environment is the profit margin.Following from this background, this article updates and extends an earlier analysis that involves an analysis of ROE and its components for the 40-year period 1956–1995. The analysis demonstrates that the aggregate ROE is currently at about the same level as in the 1960's, but the components have changed, that is, there has been a decline in total asset turnover and profit margin, but a significant increase in financial leverage that has compensated for the declines in turnover and profit margin. It is further shown that there have been periods of high and low inflation since 1956, and the negative impact of inflation of the implied growth rate is confirmed, which helps explain why investigators find consistent empirical results that common stocks are poor inflation hedges.     

Equity fund ownership and the cross-regional diversification of household risk

We explore the link between portfolio home bias and consumption risk sharing among Italian regions using household-level information on consumption, income and portfolio holdings. Since equity funds are typically diversified at the national or international level, we use data on equity fund ownership to proxy for regional home bias. Cross-regional patterns of equity fund ownership are qualitatively consistent with simple portfolio theory: regions with more asymmetric business cycles are more diversified because they have higher fund participation rates (the extensive margin of diversification) and higher average holdings of equity funds (diversification’s intensive margin). Also, fund holdings increase with the exposure of non-tradable income components (such as labor or entrepreneurial income) to regional shocks. Finally, interregional consumption risk sharing increases with fund holdings and this effect seems strongest when participation is widespread. Increased equity market participation could substantially improve interregional risk sharing.     

Impact of corporate performance on stock price predictions in the UAE markets: Neuro-fuzzy model

Predicting stock price remains one of the challenges for investors' investment strategies. This study helps with accurate prediction and the main factors affecting variations in stock prices. It applies an adaptive neuro-fuzzy model on 58 listed firms from both the Abu Dhabi Securities Exchange and the Dubai Financial Market for the period 2014–2018 to estimate the predictive power of corporate performance measures and their significance. After examining four performance predictors—return on asset (ROA), return on equity (ROE), earning per share (EPS), and profit margin (PM)—the study finds that ROE is the most significant predictor and ROA is the least. EPS is the most influential profitability measure and PM the least.     

The Coevolution of the Real and Financial Sectors in the Growth Process

The role of debt and equity changes over time and with the levelof development. What are these changes, and why should theysystematically occur across different countries and time periods?This article characterizes financial innovation as a dynamicprocess that both influences and is influenced by the developmentof the real sector. It focuses on the emergence and developmentof equity markets, using a model that allows for growth andfor capital accumulation that is financed externally througha combination of debt and equity. As an economy develops, theaggregate ratio of debt to equity will generally fall; yet,debt and equity remain complementary sources for the financingof capital investments. The results suggest how various governmentpolicy actions might affect capital accumulation and equitymarket activity.     

Controlling shareholder share pledging and the cost of equity capital: Evidence from China

We propose and test the incentive view—that the margin call pressure and ownership-control discrepancy associated with insider share pledging increase investors’ perceived risk, and thus also the cost of equity capital, in an emerging market. Using a controlling shareholder share pledging sample for Chinese listed firms, we find that firms with share pledging have a cost of equity capital that is 23.7 basis points higher than firms without share pledging. Further, share pledging increases the cost of equity capital through the information risks and agency conflicts channels. Cross-sectional analyses show that share pledging has a stronger effect on the cost of equity capital in non-state-owned enterprises, firms without monitoring of multiple large shareholders, firms with controlling shareholders assuming the position of chairperson, and firms with a weak institutional environment. In addition, using the global financial crisis and the outbreak of the coronavirus (COVID-19) as quasi-natural experiments, we disentangle the potential confounding effect of firm fundamentals and show that share pledging is positively associated with the cost of equity capital. Overall, the results are consistent with our incentive view that share pledging increases the cost of equity capital in an emerging market.     

How to Design a Contingent Convertible Debt Requirement That Helps Solve Our Too‐Big‐to‐Fail Problem*

As bank regulatory reform tries to come to grips with the lessons of the financial crisis, several experts have proposed that some form of contingent convertible debt (CoCo) requirement be added to the prudential regulatory toolkit. In this article, the authors show how properly designed CoCos can be used not just to absorb losses, but more importantly to encourage banks to recognize losses and replace lost equity in a timely way, as well as to manage risk more effectively. Their proposed CoCos requirement strengthens management's incentives to promptly replace lost capital and enhance risk management by imposing major costs on the managers and existing shareholders of banks that fail to do so. Key elements of the proposal are that conversion of the CoCos into equity would be (1) triggered at a high trigger ratio of equity to assets (long before the bank is near an insolvency point), (2) determined by a market trigger (using a 90‐day moving average market equity ratio) rather than by supervisory discretion, and (3) significantly dilutive to shareholders. The only clear way for bank managements to avoid such dilution would be to issue equity into the market. Under most circumstances—barring an extremely rapid plunge of a bank's financial condition—management should be able and eager to replace lost capital in a timely way; as a result, dilutive conversions should almost never occur. Banks would face strong incentives to maintain high ratios of true economic capital relative to risky assets, and to manage their risks effectively. This implies that “too‐big‐to‐fail” financial institutions would not be permitted to approach the point of insolvency; they would face strong incentives to recapitalize long before that point. And if they should fail to issue new equity in a timely manner, the CoCos conversion would provide an alternative means of recapitalizing banks well before they reach the brink of insolvency. Thus, a CoCos requirement would go a long way to resolving the “too‐big‐to‐fail” problem. Such a CoCos requirement would not only increase the effectiveness of regulation, but also reduce its cost. It would be less costly for banks to raise CoCos than equity, reflecting both the lower adverseselection costs of CoCos issuance and the potential tax advantages of debt. And precisely because of the low probability of CoCo conversion, the Cocos would be issued at relatively modest (if any) discounts to otherwise comparable but straight subordinated debt. Thus requiring a mix of equity and appropriately designed CoCos would be less costly to banks, and would entail less of a reduction in the supply of loans than would a much higher book equity requirement alone.     

Measuring Compliance with the Golden Rule

The golden rule of public finance is based upon the notin that intergenerational equity requires that the cost of public expenditures be spread over time in a manner that reflects the intertemporal distribution of the benefits generated by those expenditures. This is often translated into a rule that the budget be structurally balanced in accrual accounting terms. This article considers the form of accrual accounting that is most suited to the task of measuring the consistency of fiscal policy with the golden rule. It recommends a combination of the real capital maintenance approach (also known as ‘current purchasing power accounting’) and annuity depreciation. Such an approach differs from ‘current cost accounting’, which has dominated public sector models of accrual accounting in recent years. The meaning of balance-sheet measures is also considered, and it is concluded that the golden rule is more appropriately expressed as an accrual balanced budget requirement than as a requirement for the maintenance of constant net worth. JEL classification: H6, M40.     

Banking and interest rates in monetary policy analysis: A quantitative exploration

The paper reconsiders the role of money and banking in monetary policy analysis by including a banking sector and money in an optimizing model otherwise of a standard type. The model is implemented quantitatively, with a calibration based on US data. It is reasonably successful in providing an endogenous explanation for substantial steady-state differentials between the interbank policy rate and (i) the collateralized loan rate, (ii) the uncollateralized loan rate, (iii) the T-bill rate, (iv) the net marginal product of capital, and (v) a pure intertemporal rate. We find a differential of over 3% p.a. between (iii) and (iv), thereby contributing to resolution of the equity premium puzzle. Dynamic impulse response functions imply pro- or counter-cyclical movements in an external finance premium that can be of quantitative significance. In addition, they suggest that a central bank that fails to recognize the distinction between interbank and other short rates could miss its appropriate settings by as much as 4% p.a. Also, shocks to banking productivity or collateral effectiveness call for large responses in the policy rate.     

International equity diversification and shortfall risk

International equity diversification benefits Canadian investors very substantially by reducing shortfall risk, as shown by results of a model that minimizes the risk of shortfall from a desired consumption level for a retired investor with an unknown date of death and stochastic investment returns. It does not benefit American investors materially. The United States equity market is a large proportion of the international equity market that is available to individual investors, and United States returns are highly correlated with other markets.     

我国证券投资基金投资风格实证研究

本文利用我国公开披露的证券投资基金收益率数据,对关于投资风格分析的夏普模型在我国的适用性进行验证分析,得出该模型对我国证券投资基金进行投资风格分析是有效的,是观察、判断管理人投资风格及其变化的一个良好工具的结论,并概括出我国证券投资基金的投资风格特点。     

Extending the Basel II approach to estimate capital requirements for equity investments

Under the Basel II banking regulatory capital regime the capital requirements for credit exposures are calculated using the Asymptotic Single Risk Factor (ASRF) approach. The capital requirement is taken to be the contribution of an exposure to the unexpected loss on the bank’s diversified portfolio. Here we extend this approach to calculate capital requirements for equity investments. We show that in the case when asset values have a normal distribution an analytical formula for the unexpected loss contribution may be developed. We show that the capital requirements for equity investments are quite different to those of credit exposures, since equity investments can suffer substantial loss of value even when the underlying company has not defaulted.     

电力行业上市公司的财务杠杆效应分析——基于2006-2009年的经验数据

我国上市公司的资本结构普遍不合理,并没有充分发挥债务融资的财务杠杆效应。本文以我国电力行业四家上市公司作为实证样本,基于其财务杠杆效应的利用现状,通过多元回归分析揭示了净资产收益率与负债权益比、债务利息率、息税前利润率等影响因素的相关性及显著性,从而为电力行业上市公司财务杠杆效应的有效利用提供理论指导与实务借鉴。     

On the Good News in Equity Carve-Outs

The announcement of the sale of equity in a wholly owned subsidiary of a corporation is received by the market as good news about the value of the existing equity in the parent corporation. This is in stark contrast to announcements of other forms of public equity financing. We show that the apparent inconsistency between the market response to equity carve-out announcements and other forms of equity financing can be easily understood in the Myers and Majluf (1984) framework. It is shown that firms that resort to an equity carve-out will be firms that, on average, are being undervalued by the market.     

Institutional investment and the changing role of public equity markets: International evidence

Using country-level data, we study the relation between institutionalization of capital and various measures of reliance on public equity markets. For developed and developing countries, assets under institutional management (mutual funds, pension funds, and insurance companies) are negatively related to the number of listed companies, market capitalization, and trading volume. The negative relationships are estimated on the margin, as other factors such as GDP have countervailing positive partial effects and are generally stronger for more highly developed countries. Results indicate that as direct ownership of equity by retail investors is displaced by investing through institutions, financial systems become less public-market-centric.     

On the determinants of bank interest margins under credit and interest rate risks

This paper explores the determinants of optimal bank interest margins based on a simple firm-theoretical model under multiple sources of uncertainty and risk aversion. The model demonstrates how cost, regulation, credit risk and interest rate risk conditions jointly determine the optimal bank interest margin decision. We find that the bank interest margin is positively related to the bank's market power, to the operating costs, to the degree of credit risk, and to the degree of interest rate risk. An increase in the bank's equity capital has a negative effect on the spread when the bank faces little interest rate risk. The effect of rising interbank market rate on the spread is ambiguous and depends on the net position of the bank in the interbank market. Our findings provide alternative explanations for the empirical evidence concerning bank spread behavior.     

中国寿险业最低偿付能力额度要求研究

分析我国现行寿险业偿付能力额度标准理论,探讨现行标准的审慎性,并根据修正后的寿险业偿付能力额度的理论模型,采用中国寿险保险市场的历史数据进行了实证分析.