Post-acquisition performance in the short and long run. Evidence from the Copenhagen Stock Exchange 1993–1997

The paper investigates the short-run price adjustment around acquisition announcements and the long-run upward bias of cross-sectional average buy-and-hold returns. The geometric Brownian motion model is applied to decompose the cross-sectional average long-run returns into transformed mean and volatility components. The decomposition improves the interpretation of security performance. The methodology is demonstrated on the security performance of bidding firms listed on the Copenhagen Stock Exchange. The most surprising finding is that the long-run abnormal return after three years is not significantly different from zero. This implies that the bidding firms do not under-perform relative to the market. This result stands in contrast to findings in other studies and it may reflect that earlier studies do not adjust correctly for the volatility component. These current findings indicate that the market efficiency hypothesis is intact in the long run. It is only in the very short run, a few days around acquisition announcements, that the market makes a significant adjustment to uphold the efficiency hypothesis.     

The volume–volatility relationship and the opening of the Korean stock market to foreign investors after the financial turmoil in 1997

This paper investigates the stock volatility–volume relation in the Korean market for the period 1995–2001. Previous research examined the impact of liberalization on the Korean stock market up to the period before the financial turmoil in 1997 although the crucial measures of the liberalization were introduced after the crisis under the International Monetary Fund program. One of the major features of the reformation was the financial opening to foreign investors. In this study the ‘total’ trading volume is separated into the domestic investors’ and the foreign investors’ volume. By doing this the information used by two different groups of traders can be separated. Further, in addition to the absolute value of the returns and their squares we use the conditional volatility from a GARCH-type model as an alternative measure of stock volatility. The following observations, among other things, are noted about the volume–volatility causal relationship. First, for the entire period there is a strong bidirectional feedback between volume and volatility. In most cases this causal relationship is robust to the measures of volume and volatility used. Second, volatility is related only to ‘domestic’ volume before the crisis whereas after the crisis a bidirectional feedback relation between ‘foreign’ volume and volatility begins to exist. In other words, ‘foreign’ volume tends to have more information about volatility in recent years, which suggests the increased importance of ‘foreign’ volume as an information variable.      

An empirical analysis of communication flow,strategy and stakeholders' participation in the risk communication literature 1988–2000

Risk communication during the years has shown its vitality and has proved its importance as a field of research. This article provides a brief record of the development of risk communication in the environmental and technological domain by examining some of the trends resulting from the analysis of the theoretical and empirical literature in the field, as it is available through scientific journals. In total, 349 peer‐reviewed articles published between 1988 and 2000 and listed in the ISI Web of Science databases were analyzed. The theoretical perspective that we use is that of control mutuality, which emphasizes the interaction between the parties in the risk decision‐making process and their mutual influence, rather than simply unidirectional control of one stakeholder over the other. It echoes the democratic perspective, but also considers the rationality of the technical standpoint.

The results indicate that over the whole period there is an increase in published articles on risk communication. As expected, we found a gradual decrease in the articles referring to a one‐way flow of risk communication and an increase of those concerned with two‐way communication. We also observed a gradual increase in the articles referring to stakeholder participation in risk decisions in the last period. No differences were found with respect to risk communication strategy.     

Changes in bonus contracts in the post-Sarbanes–Oxley era

We examine whether the relation between earnings and bonuses changes after Sarbanes–Oxley. Theory predicts that, as the financial reporting system reduces the discretion allowed managers, firms will put more weight on earnings in compensation contracts to encourage effort. However, the increased risk imposed by Sarbanes–Oxley on executives may cause firms to temper this contracting outcome. We examine and find support for the joint hypothesis that the implementation of Sarbanes–Oxley and related reforms led to a decrease in earnings management and that firms responded by placing more weight on earnings in bonus contracts. We find no evidence that firms changed compensation contracts to compensate executives for assuming more risk.     

Statistical arbitrage in the Black–Scholes framework

In this study, we prove the existence of statistical arbitrage opportunities in the Black–Scholes framework by considering trading strategies that consist of borrowing at the risk-free rate and taking a long position in the stock until it hits a deterministic barrier level. We derive analytical formulas for the expected value, variance and probability of loss for the discounted cumulative trading profits. The statistical arbitrage condition is derived in the Black–Scholes framework, which imposes a constraint on the Sharpe ratio of the stock. Furthermore, we verify our theoretical results via extensive Monte Carlo simulations.     

Regime switches in the risk–return trade-off

This paper deals with the estimation of the risk–return trade-off. We use a MIDAS model for the conditional variance and allow for possible switches in the risk–return relation through a Markov-switching specification. We find strong evidence for regime changes in the risk–return relation. This finding is robust to a large range of specifications. In the first regime characterized by low ex-post returns and high volatility, the risk–return relation is reversed, whereas the intuitive positive risk–return trade-off holds in the second regime. The first regime is interpreted as a “flight-to-quality” regime.     

The Basle Accord of 1988 and the International Credit Crunch of 1989–1992

The 1989–1992 credit crunch is investigated by studying changes in balance-sheet accounts and the systematic risk of banks from five countries. Banks in Canada, the United Kingdom, and the United States experienced an asset reallocation from loans to securities and an increase in systematic risk. Out of four hypotheses studied, only the higher regulatory scrutiny hypothesis is supported in all three countries, although each hypothesis is supported in at least one country. Additional findings are that the Basle Accord may have given Canadian, British, and German banks a competitive advantage over U.S. banks; it may have failed to reduce the risk of international banks; and, for U.S. banks, no straightforward relationship is found between attaining balance-sheet target ratios and reducing bank systematic risk.     

Mortality experience of life annuitants insured with thirteen Swedish offices during the period 1900–1924.

Abstract

To the Scandinavian Life Insurance Congress in Oslo 1926 an investigation into the mortality of annnitants was presented by thirteen Swedish Life Insurance Companies1 The investigation was executed by a committee consisting of Harald Cramér, Reinh. Palmqvist and Iwar Sjögren.      

A learning market-maker in the Glosten–Milgrom model

This paper develops a model of a learning market-maker by extending the Glosten–Milgrom model of dealer markets. The market-maker tracks the changing true value of a stock in settings with informed traders (with noisy signals) and liquidity traders, and sets bid and ask prices based on its estimate of the true value. We empirically evaluate the performance of the market-maker in markets with different parameter values to demonstrate the effectiveness of the algorithm, and then use the algorithm to derive properties of price processes in simulated markets. When the true value is governed by a jump process, there is a two regime behaviour marked by significant heterogeneity of information and large spreads immediately following a price jump, which is quickly resolved by the market-maker, leading to a rapid return to homogeneity of information and small spreads. We also discuss the similarities and differences between our model and real stock market data in terms of distributional and time series properties of returns.     

Differences in the strengths of evidence matters in risk–risk trade-offs

Making decisions between alternatives are challenging when there is weak or unreliable knowledge about the risks and benefits of the alternatives. This requires a trade-off between risks (and benefits). Here, we comment on a recent paper on risk–risk trade-offs and highlight the difficulties of making such trade-offs when the available evidence is of different strength. One current example of a risk–risk trade-off under weak evidence is the restriction and reevaluation of the risks of neonicotinoid insecticides to bees conducted by the European Food Safety Authority (EFSA). We argue that a risk–risk trade-off is essential in this context. Although considerable research efforts have been focused at determining the risks of neonicotinoids to bees, the evidence base is still limited. However, focus on strengthening evidence on impacts of one substance may lead policy-makers and public to believe that its substitutes are less harmful, when in fact evidence is weak on the impacts of these substitutes as well. We argue that a broader management of uncertainty is needed and that the difference in uncertainty underlying evidence of risk for different alternatives needs to be communicated to policy-makers. We suggest that this can be done, for example, using measures of uncertainty, which take into account strength in evidence, and combine these with principles to guide decision-making.     

Dodd–Frank and risk in the financial services industry

We present evidence that discretionary risk taking by financial institutions has declined following the passage of Dodd–Frank. The largest institutions experience the greatest reduction in risk consistent with the legislation’s objective of reducing systemic risk and an ultimate goal of ending the too-big-to-fail doctrine. Analysis of a sample of banks, the most highly regulated financial institutions, reveals that banks exhibiting characteristics consistent with riskier business strategies prior to Dodd–Frank experience the greatest risk reduction. Further, banks that alter their business practices by increasing their capital ratios and reducing their level of non-performing loans following the law’s passage are shown to experience the greatest reduction in risk. Our results point to the efficacy of Dodd–Frank in reducing risk in the financial system.     

The risk–return relations in the Singapore stock market

This paper examines the risk–return relations in the Singapore stock market for the period April 1986 to December 1998. Though beta is significantly related to realized returns, the explanatory power is low. Adding other stock characteristics such as skewness and kurtosis provides limited incremental benefits. However, when a conditional framework based on up and down markets is introduced, the explanatory power increases more than 100 times and there is a significant positive (negative) relation between beta and returns when the market excess returns are positive (negative). The same relation applies when unsystematic risk, total risk and kurtosis are added separately to the beta–return relation during up and down markets with increased explanatory power. Our results indicate that other stock characteristics in addition to beta are also important in pricing risky assets and investors do not hold diversified portfolios. Our results are also checked and compared with another conditional model with time-varying betas conditional on a set of economic variables.     

The Evolution of the Tax Structure of a Reforming Transitional Economy: Hungary 1988–98

The paper analyses the revenue-raising, distributional and incentive effects of the personal tax system in Hungary from the start of the transitional tax reforms of 1988 to 1998, and shows that the tax structure has converged to an almost linear form similar to the more heavily taxed EU countries. The 1998 pension reform has reversed a trend increase in average and marginal tax rates but marginal rates still appear too high for a country wishing to encourage growth and employment creation.     

Smooth transition patterns in the realized stock–bond correlation

This paper explores the time variation in the stock–bond correlation using high-frequency data. Gradual transitions between regimes of negative and positive stock–bond correlation are well accommodated by the smooth transition regression (STR) model. We find that the regimes are systematically related to movements in financial and to a minor extent macroeconomic transition variables. In particular, the most informative transition variables are the short rate, the yield spread, and the VIX volatility index. Importantly, both in-sample and out-of-sample evaluation criteria show that multiple transition variable STR specifications considerably outperform single transition variable STR models. Our results are robust to different forecast horizons.     

On dividends in the phase–type dual risk model

The dual risk model assumes that the surplus of a company decreases at a constant rate over time, and grows by means of upward jumps which occur at random times with random sizes. In the present work, we study the dual risk renewal model when the waiting times are phase-type distributed. Using the roots of the fundamental and the generalized Lundberg’s equations, we get expressions for the ruin probability and the Laplace transform of the time of ruin for an arbitrary single gain distribution. Then, we address the calculation of expected discounted future dividends particularly when the individual common gains follow a phase-type distribution. We further show that the optimal dividend barrier does not depend on the initial reserve. As far as the roots of the Lundberg equations and the time of ruin are concerned, we address the existing formulae in the corresponding Sparre-Andersen insurance risk model for the first hitting time, and we generalize them to cover also the situations where we have multiple roots. We do that working a new approach and technique, approach we also use for working the dividends, unlike others, it can be also applied for every situation.     

Is Monetary Cooperation Among the Four Regions Across the Taiwan Strait Feasible?

Drawing on the optimum currency area (OCA) and exchange rate theories, we use an extended OCA index approach to assess the feasibility of regional monetary cooperation in the four regions across the Taiwan Strait (FRTS). In addition to more common variables, such as differences in economic structure, inflation rates, and interest rates, we find that the asymmetric shock in money supply is an important factor affecting the comprehensive cost of regional monetary cooperation among the FRTS. We conclude that regional monetary cooperation among the FRTS is feasible according to empirical analysis of OCA indexes between the FRTS and a comparison of the OCA indexes between the FRTS and the European Union (EU).     

The roles of contextual moderation and personality in relation to the knowledge–risk link in the workplace

While hypothesized, a consistent association between knowledge about a hazard and the estimation of risk associated with that hazard has not been found. Risk communication is premised on the fact that knowledge about a hazard (information) will change people's perceptions of risk and behaviour. In this review methodological and theoretical factors that might account for this lack of consistent association are explored. In this context issues to do with the measurement and assessment of hazard knowledge, knowledge calibration, and the role of context as a moderator are explored. It is argued that contextual factors moderate the knowledge–risk link, with this link being stronger in less controllable, ambiguous contexts. Further this review asks: How can messages be framed (using prospect theory) so as to be more effective in the work place? It is argued that messages framed as gains should be more useful for prevention behaviours (e.g. wearing ear guards) and messages framed as losses should be more effective for detection behaviours (using radiation meters). Finally, the role of personality (e.g. need for cognition, typical intellectual engagement, and self-esteem) in relation to knowledge about a hazard, message framing and risk perception is discussed.     

Explaining the intra-day variation in the bid–ask spread in competitive dealership markets – A research note

There are many possible explanations for variation in the inside bid–ask spread during the trading day, including informed trading, price inelastic market demand, price discovery, statistical artefact and market concentration. Each of these explanations is examined for consistency with respect to both the inside and average bid–ask spread, observed both inside and outside the mandatory quote period in the London Stock Exchange.