Do foreigners facilitate information transmission in emerging markets?

Using the degree of accessibility of foreign investors to emerging stock markets, or investibility, as a proxy for the extent of foreign investments, we assess whether investibility has a significant influence on the diffusion of global market information across stocks in emerging markets. We show that greater investibility reduces price delay to global market information. We also find that returns of highly investible stocks lead those of noninvestible stocks because they incorporate global information more quickly. These results are consistent with the idea that financial liberalization in the form of greater investibility yields informationally more efficient stock prices in emerging markets.     

Risk aversion and the dynamics of optimal liquidation strategies in illiquid markets

We consider the infinite-horizon optimal portfolio liquidation problem for a von Neumann–Morgenstern investor in the liquidity model of Almgren (Appl. Math. Finance 10:1–18, 2003). Using a stochastic control approach, we characterize the value function and the optimal strategy as classical solutions of nonlinear parabolic partial differential equations. We furthermore analyze the sensitivities of the value function and the optimal strategy with respect to the various model parameters. In particular, we find that the optimal strategy is aggressive or passive in-the-money, respectively, if and only if the utility function displays increasing or decreasing risk aversion. Surprisingly, only few further monotonicity relations exist with respect to the other parameters. We point out in particular that the speed by which the remaining asset position is sold can be decreasing in the size of the position but increasing in the liquidity price impact.      

Stock markets’ bubbles burst and volatility spillovers in agricultural commodity markets

Our paper focuses on commodity financialization and the gradual integration between commodity and financial markets, investigating to what extent shocks in stock markets impact commodity price volatility, and the persistency of the phenomenon. To this end, we estimate Volatility Impulse Response Function from stock markets to agricultural commodity markets over a symmetric window before and after two of the most important bubble bursts since the new millennium, the 2000 dot.com bubble and the 2008 financial crises. Results highlight that volatility spillover increased significantly after the 2008 financial crises, signalling a rising interconnection between financial and agricultural commodity markets.     

Extracting information or resource? The Hotelling rule revisited under asymmetric information

A concessionaire has private information on the initial stock of resource. A “virtual Hotelling rule” describes how the resource price evolves over time and how extraction costs are compounded with information costs along the optimal extraction path. Fields which are heterogeneous in terms of their initial stocks follow different extraction paths. Resource might be left unexploited in the long run as a way to foster incentives. The optimal contract may sometimes be implemented through royalties and license fees. With a market of concessionaires, asymmetric information leads to a “virtual Herfindahl principle” and to another form of heterogeneity across active concessionaires.     

MDP algorithms for portfolio optimization problems in pure jump markets

We consider the problem of maximizing the expected utility of the terminal wealth of a portfolio in a continuous-time pure jump market with general utility function. This leads to an optimal control problem for piecewise deterministic Markov processes. Using an embedding procedure we solve the problem by looking at a discrete-time contracting Markov decision process. Our aim is to show that this point of view has a number of advantages, in particular as far as computational aspects are concerned. We characterize the value function as the unique fixed point of the dynamic programming operator and prove the existence of optimal portfolios. Moreover, we show that value iteration as well as Howard’s policy improvement algorithm works. Finally, we give error bounds when the utility function is approximated and when we discretize the state space. A numerical example is presented and our approach is compared to the approximating Markov chain method.      

Symmetry and duality in Lévy markets

The aim of this paper is to introduce the notion of symmetry in a Lévy market. This notion appears as a particular case of a general known relation between prices of put and call options, of both the European and the American type, which is also reviewed in the paper, and that we call put–call duality. Symmetric Lévy markets have the distinctive feature of producing symmetric smile curves, in the log of strike/futures prices.

Put–call duality is obtained as a consequence of a change of the risk neutral probability measure through Girsanov's theorem, when considering the discounted and reinvested stock price as the numeraire. Symmetry is defined when a certain law before and after the change of measure through Girsanov's theorem coincides. A parameter characterizing the departure from symmetry is introduced, and a necessary and sufficient condition for symmetry to hold is obtained, in terms of the jump measure of the Lévy process, answering a question raised by Carr and Chesney (American put call symmetry, preprint, 1996 Carr, P and Chesney, M. 1996. American put call symmetry. preprint [Google Scholar]). Some empirical evidence is shown, supporting that, in general, markets are not symmetric.     

Developed markets’ business cycle dynamics and time-variation in emerging markets’ asset returns

This paper empirically studies the predictability of emerging markets’ stock returns by business cycle variables and the role of developed markets’ business cycle dynamics in this respect. The evidence shows that the link between business cycles and future stock market returns among emerging markets is considerably weaker than among developed markets. By contrast, I find strong evidence of stock return predictability by the respective country’s dividend-price ratio. This latter finding could reflect that variation in dividend-price ratios potentially reflects both the temporary impact of “hot money” inflows on emerging markets’ asset prices and rational expectations of future returns.     

How do policy and information shocks impact co-movements of China’s T-bond and stock markets?

We investigate the impacts of policy and information shocks on the correlation of China’s T-bond and stock returns, using originally the asymmetric dynamic conditional correlation (DCC) model that allows for the coexistence of opposite-signed asymmetries. The co-movements of China’s capital markets react to large macroeconomic policy shocks as evidenced by structural breaks in the correlation following the drastic 2004 macroeconomic austerity. We show that the T-bond market and the bond–stock correlations bear more of the brunt of the macroeconomic contractions. We also find that the bond–stock correlations respond more strongly to joint negative than joint positive shocks, implying that investors tend to move both the T-bond and stock prices in the same direction when the two asset classes have been hit concurrently by bad news, but tend to shift funds from one asset class to the other when hit concurrently by good news. However, the stock–stock correlation is found to increase for joint positive shocks, indicating that investors tend to herd more for joint bullish than joint bearish stock markets in Shanghai and Shenzhen.     

Do auditing standards improve the accounting disclosure and information environment of public companies? Evidence from the emerging markets in China

In this paper, we investigate the impact of the implementation of a set of new auditing standards in 1996 on the information environment in the emerging markets in China. Because the implementation of such standards can increase the quality and/or quantity of accounting disclosures, it can be conceptualized as an improvement in the information environment of public companies. We investigate the improvement in accounting disclosure and information environment from both the market perspective and the accounting perspective. First, consistent with the information economics literature (e.g., [Holthausen, R., & Verrecchia, R., (1990). The effect of informedness and consensus on price and volume behavior. The Accounting Review, 65, 191–208]), we find that companies experience a significant increase in trading volume and price volatility subsequent to the implementation of the standards. Second, consistent with the literature on earnings management (e.g., [Chen, C. W. K., & Yuan, H. Q., (2004). Earnings management and capital resource allocation: evidence from China's accounting-based regulation of right issue. The Accounting Review, 79, 645–665, Jian, M., & Wong, T. J., (2004). Earnings management and tunneling through related party transactions: evidence from Chinese corporate groups. Working Paper, Nanyang Technological University and Hong Kong University of Science and Technology]), we find a decrease in earnings management and, hence, an increase in quality of earnings. Finally, we find a decrease in the synchronicity of stock prices and, hence, an increase in the quality of firm-specific information available to investors, which is consistent with the literature on price synchronicity (e.g., [Morck, R., Yeung, B., & Yu, W., (2000). The information content of stock markets: why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58, 215–260]). Our results have significant implications for standard setters, regulators, researchers, managers, and investors in general and those in the emerging markets in particular.     

Do firms underreport information on cyber-attacks? Evidence from capital markets

Firms should disclose information on material cyber-attacks. However, because managers have incentives to withhold negative information, and investors cannot discover most cyber-attacks independently, firms may underreport them. Using data on cyber-attacks that firms voluntarily disclosed, and those that were withheld and later discovered by sources outside the firm, we estimate the extent to which firms withhold information on cyber-attacks. We find withheld cyber-attacks are associated with a decline of approximately 3.6% in equity values in the month the attack is discovered, and disclosed attacks with a substantially lower decline of 0.7%. The evidence is consistent with managers not disclosing negative information below a certain threshold and withholding information on the more severe attacks. Using the market reactions to withheld and disclosed attacks, we estimate that managers disclose information on cyber-attacks when investors already suspect a high likelihood (40%) of an attack.     

Asymptotic arbitrage and numéraire portfolios in large financial markets

This paper deals with the notion of a large financial market and the concepts of asymptotic arbitrage and strong asymptotic arbitrage (both of the first kind) introduced in Probab. Theory Appl. 39, 222–229 (1994) and in Finance Stoch. 2, 143–172 (1998). We show that the arbitrage properties of a large market are completely determined by the asymptotic behavior of the sequence of the numéraire portfolios related to small markets. The obtained criteria can be expressed in terms of contiguity, entire separation, and Hellinger integrals, provided that these notions are extended to sub-probability measures. As examples, we consider market models on finite probability spaces, semimartingale models, and diffusion models. We also examine a discrete-time infinite horizon market model with one log-normal stock. This work was supported by Southern Federal University, grant No. 26 “Mathematical Finance” and by RFBR, grant 07-01-00520.     

U.S. takeovers in foreign markets: Do they impact emerging and developed markets differently?

We investigate the effect that U.S. acquisitions of targets in emerging and developed countries have on the targets' rivals by measuring their stock price reaction to the acquisition announcement. On average, emerging market rivals react positively to these acquisitions while the reaction in developed markets is insignificant. In developed markets, the main factors explaining the reaction of rival firms are individual rival characteristics such as rival size, efficiency, growth opportunities, and leverage. In contrast, in emerging markets, country, industry, and acquisition characteristics such as economic development, shareholder protection, and the target's public status, industry, and percent acquired, play a more important role.     

Bank credit risk and credit information sharing in Africa: Does credit information sharing institutions and context matter?

The study examines credit information sharing through private credit bureaus and public credit registries and their effect on bank credit risk in low and high income countries in Africa. The study covers periods between 2006 and 2012 with 548 bank observations in Africa. Employing a Prais-Winsten panel data estimation, the study established that credit information sharing whether through private credit bureaus or public credit registries reduces bank credit risk in both low and high income countries and Africa as a whole. Further analyses reveal that credit information shared through public credit registries was only negatively and significantly related to bank credit risk when all countries that share credit information through public credit registries are observed as one unit but had no significant effect in low or high income countries. On the contrary, credit information shared through private credit bureaus reported a negative and significant effect on credit risk in low and high income countries as well as all countries that shared information through private credit bureaus. This suggests that credit information shared through private credit bureaus are more robust in dealing with bank credit risk regardless of a banks’ income bracket. Hence, countries that do not share credit information should do so especially through private credit bureaus so as to help reduce bank credit risk regardless of the income bracket differences. Again, governments in Africa must enact laws that expand the coverage and scope of credit information shared so as to enhance the effectiveness of information sharing.     

On the prediction of financial distress in developed and emerging markets: Does the choice of accounting and market information matter? A comparison of UK and Indian Firms

We examine differences in price delay for a sample of real estate investment trust (REIT) and non-REIT matched pairs. Results suggest an economically and statistically higher level of price delay for REIT securities, which implies heightened frictions that increase the time needed for new information to be impounded into the prices of REIT shares. The primary drivers for the observed delay differential include differences in idiosyncratic volatility, market risk, and the number of days traded. Within-REIT determinants of delay confirm findings for the pooled sample of matched pairs. Importantly, we infer find that REIT investors are not compensated for restricted information flow, as excess returns are unrelated to the price delay.     

FDI determination and corporate tax competition in a volatile world

This paper investigates the impact of economic and political volatility on corporate tax rates on a large dataset of countries over the 1983–2003 period. Estimation of a dynamic tax rate equation supports the hypothesis that economic volatility negatively affects statutory corporate tax rates, while political volatility has no significant effect. In order to identify the channels through which volatility works, we estimate a structural model allowing for simultaneous determination of corporate tax rates and FDI inflows, and find that economic volatility affects the corporate tax setting process through its impact on FDI inflows.     

Venture capital investment practices in Europe and the United States

This article focuses on the investment practices and contract behavior of venture capitalists in relation to their portfolio companies. Using a unique self-collected data set, we provide new evidence on the venture capital industry in Europe and the United States. Important differences are identified between the two, particularly with respect to the use of convertible securities, replacement of former management, stage financing, deal syndication, and duration of exit stage. The most striking difference involves the use of convertible securities, which are used far less often in Europe than in the United States. These differences suggest that European venture capitalists engage in less monitoring and thus adopt a more hands-off approach to their portfolio companies as compared to US venture capitalists.

Can advanced markets help diversify risks in frontier stock markets? Evidence from Gulf Arab stock markets

This study examines global diversification benefits from the perspective of local investors in the frontier markets in the Gulf Cooperation Council using two diversification measures: the correlation index and return dispersion. The findings suggest a strong link between market volatility and both diversification measures in all markets, with the exception of Bahrain, indicating that investors in these frontier markets will face significant challenges achieving desired levels of diversification using domestic stocks only. However, I also find that significant amount of market risk in these countries can be eliminated by supplementing domestic portfolios with positions in advanced markets. Finally, I show that risk minimization strategies using foreign traded assets also lead to favorable risk adjusted returns for investors in these markets, stressing the potential benefits of financial liberalization in developing markets.     

An applied analysis of ACE and CBIT reforms in the EU

We assess the quantitative impact of two reforms to corporation tax, which would eliminate the differential treatment of debt and equity: the allowance for corporate equity (ACE) and the comprehensive business income tax (CBIT). We explore the impact of these reforms on various decision margins, using an applied general equilibrium model for the EU calibrated with recent empirical estimates of elasticities. The results suggest that, if governments adjust statutory corporate tax rates to balance their budget, profit shifting and discrete location render CBIT more attractive for most individual European countries. European coordination makes a joint ACE more, and a joint CBIT less efficient. A combination of ACE and CBIT is always welfare improving.     

Retail investor information demand – speculating and investing in structured products

We study the impact of retail investor information demand on trading in bank-issued investment and leverage structured products, which are specifically designed for retail investors. Stock-specific information demand positively predicts speculative trading activity. Furthermore, we find a positive relationship between market-wide information demand and order aggressiveness and order uncertainty for speculating and investing activity. Whereas information supply is associated with speculative long positions, information demand does not induce investors to be predominantly long or short. Finally, we do not find retail investor information demand to contribute to an upward price pressure on security prices. In contrast, information supply exerts negative price pressure. Overall, retail investor trading in individual stocks is much more strongly influenced by market-wide information demand instead of firm-specific information demand. This implies a low informational efficiency of retail investor speculation and investing activity.     

The lead–lag relationship between the spot and futures markets in China

Based on daily and one-minute high-frequency returns, this paper examines the lead–lag dependence between the CSI 300 index spot and futures markets from 2010 to 2014. A nonparametric and non-linear method based on the thermal optimal path method is adopted. Empirical results of the daily data indicate that the lead–lag relationship between the two markets is within one day but this relationship is volatile since neither of the two possible situations (the futures leads or lags behind the spot market) takes a dominant place. Our results using the high-frequency data demonstrate that there is a price discovery in the Chinese futures market: the intraday one-minute futures return leads the cash return by 0–5 min regardless of the price trend of the market.