The influence of managerial incentives on the resolution of financial distress

This study investigates the influence of managerial incentives on the resolution of financial distress. Our model predicts that when creditors and equityholders prefer different resolution methods, the likelihood of choosing Chapter 11 over private renegotiation is related to the ownership structure of the distressed firm. Empirical test results using a sample of 81 voluntary Chapter 11 firms and 65 private workout firms support the model’s prediction. We show that managerial ownership is positively related to the incidence of Chapter 11 filing when there is conflict between equityholders and creditors over the choice between Chapter 11 and a private renegotiation. Consistent with prior literature, we also find that the choice of resolution methods depends on the extent of creditor holdout problems and the level of economic distress. We also performed the analysis of a subsequent 5 years of post-distress performance for all sample firms. The majorities of firms that file for Chapter 11 lose their independence and are either acquired or liquidated. However, more than half of firms in private workouts survived as independent firms.

A note on the expectations hypothesis at the founding of the Fed

One of the most influential tests of the expectations hypothesis is Mankiw and Miron [Q. J. Econ. 101 (1986) 211], who found that the spread between the long-term and short-term rates provided predictive power for the short-term rate before the Fed's founding but not after. They suggested that the failure of the expectations hypothesis after the Fed's founding was due to the Fed's practice of smoothing short-term interest rates. We show that their finding that the expectations hypothesis fares better prior to the Fed's founding is due to the fact that the test they employ tends to generate results that are more favorable to the expectations hypothesis during periods when there is extreme volatility in the short-term rate.     

Testing the forward rate unbiasedness hypothesis during the 1920s

This paper reexamines the forward rate unbiasedness hypothesis (FRUH) during the 1920s and it contributes to the literature as follows: first, it utilizes a database that includes currencies not studied before, as well as the 3 month forward rates; second, it applies three different approaches to test for cointegration and it shows that the choice of the technique is not of crucial importance; third, it tests for the temporal stability of the cointegration results; finally, it tests for the existence of the FRUH in the short run, by means of error correction models, whereas previous studies focused on cointegrated vectors only. Our analysis shows that for countries that did not undergo major financial turmoil during that period, there exists more favorable evidence for the FRUH.     

The Inverted-U hypothesis for the effect of uncertainty on investment: Evidence from UK firms

Abstract

This paper offers the first attempt to test the inverted-U hypothesis for the effect of uncertainty on investment, implied by a number of recent theoretical studies, using a panel of UK firms. It is found that the effect of uncertainty on corporate investment is indeed approximated by an inverted-U shaped relationship: at low levels of uncertainty the effect is positive, but it becomes negative at high levels of uncertainty. This result represents the first empirical verification of the hypothesis with respect to UK firms.     

美国联邦存款保险公司：问题银行处置的经验与启示

本轮国际金融危机爆发后,美国大量中小金融机构倒闭,但并未严重冲击美国经济,也未引发社会恐慌,这主要归功于美国联邦存款保险公司（FDIC）灵活高效的处置手段,也再次彰显了有效存款保险制度的重要性。危机中,FDIC创新其问题银行的处置方式和手段。危机后美国金融监管改革立法进一步强化了FDIC的监管职能,这些对于中国推出存款保险制度部具有借鉴意义。     

Evaluation of the adaptive market hypothesis as an evolutionary perspective on market efficiency: Evidence from the Tehran stock exchange

This study evaluates the existence of the adaptive market hypothesis (AMH) as an evolutionary alternative to the efficient market hypothesis (EMH) by applying daily returns on the TEPIX index in the Tehran stock exchange (TSE) in Iran. The data span of daily returns is from 1999 to 2013. In this paper four different tests in the form of two distinguished classes (linear and nonlinear) have been used to study adaptive behavior of returns. The results that were obtained from linear (automatic variance ratio and automatic portmanteau) and nonlinear (generalized spectral and McLeod–Li) tests represent the oscillatory manner of returns about dependency and independency which corresponds with the adaptive market hypothesis.     

网络群体事件处置与舆论引导联动的模式及程序

事件处置与舆论引导联动是网络群体事件应对的基本环节之一。目前对是否需要联动已有诸多论述,但就如何联动以及联动的模式及程序仍存在不同理解。文章认为,其联动的基本模式包含内部和外部联动两个方面内容;联动的基本程序主要体现在三个环节,即：内部联动一外部联动一组织舆论引导。文章最后还就事件处置与舆论引导联动机制的基本要求作了简要阐述。     

VIX futures term structure and the expectations hypothesis

Tests of the expectations hypothesis reveal that the slope of the VIX futures term structure predicts the direction but not the magnitude of the evolution of the short-end of the curve, but predicts neither the direction nor the magnitude of short-term changes in the long-end of the curve. Relative value seeking spread trades, constructed to exploit such violations, deliver excess returns with annualized Sharpe ratios equal or greater than those of volatility-writing strategies deployed by VIX ETN's for a majority of the 32 spread trade combinations tested. I demonstrate that profits from beta-neutral variations of the spread trades, which are not compensation for taking on equity downside risk by design, are propagated by inflows of capital into VIX futures markets, after controlling for factors that measure changes in the availability of hedge fund capital, risk appetite, and momentum. At the heart of profits, and by extension the term structure anomalies, is a disproportionally elevated basis propagated by long VIX demand that enters the futures market through ETN channels.     

Efficient market hypothesis and fraud on the market theory a new perspective for class actions

Following recent judgment of the Supreme Court of US (June 2014), several commentators had declared that “Securities class actions are here to stay” (insidecounsel.com—September 2014, 11). This paper provides a critical perspective on this judgment, which “implicates substantive issues at the intersection of economic theory, financial markets, and securities regulation” (128Harv. L. Rev. 291 2014–2015, 291), and shows that we must be much more careful. This recent judgment is based on the Fraud on the Market Doctrine, which was introduced in 1973 in order to preserve the class action procedure in securities fraud litigation. The characteristic of the Fraud on the Market Doctrine is to have been structured from one of the most popular financial theory: Efficient Market Hypothesis. In this paper, by analysing the implementation of the Efficient Market Hypothesis in Fraud on the Market Theory, we argue that if the Supreme Court had to take position for a second time about the Fraud on the Market Doctrine it is due to the practical difficulties inherited from Efficient Market Hypothesis and that have raised several problems to the US courts, including the Supreme Court. This issue is illustrated by the definition of Efficient Market Hypothesis lawyers used (“most” vs “all”/“fully”). As this paper shows, if “Securities class actions are here to stay”, the opportunity to open such a class action is strongly reduced in the facts.     

The effect of early resolution of uncertainty on the valuation of assets: A dichotomy into market and non-market information

We reconsider how the temporal resolution of uncertainty about the future payoffs from capital assets affects the initial valuation of these assets. Our results regarding valuation indicate that, in an intertemporal CAPM framework, the early resolution of market uncertainty leads to an increase in the value of the market portfolio. The values of individual assets change in direct proportion to their betas. We reconcile the differing conclusions of Ross (1989) and Epstein and Turnbull (1980) regarding the early resolution of what they term idiosyncratic and asset specific information respectively.     

The random-walk hypothesis revisited: new evidence on multiple structural breaks in emerging markets

We examine whether stock prices in 18 emerging markets follow random-walk or mean-reversion processes in the presence of sudden and gradual multiple structural breaks. Our tests endogenously determined the structural shifts and are more powerful than either the traditional random-walk (unit root) tests or the single structural break tests. In all emerging markets, we find strong evidence for multiple structural breaks. When we use single break tests, the random-walk hypothesis is rejected. However, when we use tests of double level shifts in the mean and make due allowance for multiple structural breaks, the results are consistent with the random-walk hypothesis in the vast majority of the sampled markets. The evidence proves robust to using price indexes whether denominated in U.S. dollars, in local currencies or in real terms, and also to using fractional integration tests. Our results contradict some previous studies for emerging markets which restrict structural breaks to only one-time shift.     

The effects of resolution methods and industry stress on the loss on assets from bank failures

In this paper, we examine how the value of failed bank assets differs between two types of FDIC resolution methods: liquidation and private-sector reorganization. Our findings show that private-sector reorganizations do not deliver the expected cost-savings from 1986 to 1991, a period of industry distress. On a univariate basis, the net loss on assets is lower for a private-sector reorganization than for a liquidation in both a period of industry distress and of industry health. However, institutions with higher quality assets and higher franchise values are more likely to be resolved using a private-sector resolution. Once we control for this selection bias, we find that institutions that are resolved during periods of industry distress result in higher resolution costs than liquidation. During periods of industry health, private-sector resolutions are less costly than liquidations. We show that if a bank that failed during the post-crisis period instead failed during the crisis period, its net loss as a percent of assets would have been 3.232 percentage points higher. Given that the average net loss on assets ratio is 21.42 percent during our sample period from 1986 to 2007, the increase in costs is economically significant.     

Capital and resolution policies: The US interbank market

We develop an empirically based simulation study to test two types of policies designed to control systemic risk: preventive policies targeting capital requirements and mitigation policies targeting default resolution. We find that capital buffers reduce both the number of defaults and the resulting losses. The loss reduction benefit increases as the magnitude of adverse shocks becomes higher. We find that a simple branch-breakup resolution strategy reduces the loss borne by the Federal Deposit Insurance Corporation (FDIC). The mitigation effect becomes higher as the fraction of assets resolved through auctions and auction competitiveness increase.     

Options and efficiency: Some experimental evidence

This paper examines the information aggregation role of options when agents possess diverse information about possible asset returns. We construct two identical experimental markets: one with and one without options. We find that options speed the information aggregation process. Asset markets that have parallel option markets aggregate traders' diverse information faster than markets where options trading is not available. Implied ranges were calculated from asset and option prices and compared to the actual ranges. These comparisons suggest that options may provide a means for agents to coordinate beliefs about asset values.     

Investment intensity of currencies and the random walk hypothesis: Cross-currency evidence

This paper studies the cross-currency and temporal variations in the random walk behavior in exchange rates. We characterize currencies with relatively large investment flows as investment intensive and conjecture that the more investment intensive a currency is, the closer its exchange rate adheres to random walk. Using 29 floating bilateral USD exchange rates, we find that the higher the investment intensity, the less likely it is to reject random walk and the smaller the deviation from random walk is. However, the effect of investment intensity is non-monotonic. Application of threshold models shows that after investment intensity reaches the estimated thresholds, the level of investment intensity has no further effect on the deviation from random walk. These findings help reconcile the previous conflicting results on the random walk in exchange rates by focusing on the effect of cross-currency and temporal variations in investment intensity.     

Performance hypothesis testing with the Sharpe ratio: The case of hedge funds

As recent research highlights that the Sharpe ratio has a decision theoretic foundation even in the case of asymmetric or fat-tailed excess returns and thus is adequate even for the evaluation of hedge funds, this note provides the first Sharpe ratio based performance analysis of the hedge fund market. Furthermore, it addresses the important practical question whether the choice of hypothesis test used to statistically compare Sharpe ratios can influence an investor’s hedge fund selection process. Our key findings are as follows: (i) Only a small fraction of hedge funds in our large dataset can significantly outperform passive investments in corresponding hedge fund indices. (ii) Especially in the presence of autocorrelated or skewed excess returns, the traditional test of Jobson and Korkie, 1981, Memmel, 2003 tends to overstate the number of significant outperformers and thus provides potentially misleading information for investors. Decision makers are advised to use the bootstrap test of Ledoit and Wolf (2008) allowing robust and more reliable inference.     

Why are there time-varying comovements in the European stock market?

This paper analyzes the dynamics of pair comovements between different domestic European stock market returns (Spain, France, Germany, Switzerland and the United Kingdom) seeking to check whether there is a unique source of risk driving those dynamics. Once it is shown that the comovements are time-varying, the question is to find whether a global index such as the Euro Stoxx can be considered the main source of risk. To that end we estimate and test for time-varying global pair covariances and for time-varying remaining pair covariances once the effect of the Euro Stoxx is removed. The empirical results are obtained considering locally stationary variables, a family that includes variables with first and second time-varying moments. Under that framework time-varying means and covariances can be estimated using a spline-based procedure and Wald-type statistics can be computed to test for time-variations. A simulation study shows that the role of the mean estimation part is crucial to the good performance of the tests for second moments. The empirical results evidence that all global pair covariances for the European countries analyzed are time-varying, but also that the Euro Stoxx can be considered as the driving source of risk for these time-varying dynamics. This conclusion is very useful for modeling purpose and financial strategies. Finally, we repeat the analysis considering the Nasdaq as an alternative global index and find that it explains only a small part of the dynamics in the European pair comovements.     

The residual market factor,the APT,and mean-variance efficiency

The rapidly increasing volume of both published and unpublished work on the arbitrage pricing theory (APT) of Ross (1976) has given rise to a number of misunderstandings at the interface of theoretical and econometric work. In this article we extend the theoretical structure of our previous work (McElroy and Burmeister, 1985, 1988; Burmeister and McElroy, 1987, 1988) to provide a broad yet rigorous framework both for econometric estimation and for better economic interpretation of new empirical results. We begin with the case where allK factors are observed, and then present the second case ofK−1≡J observed APT factors and one unobserved factor, theresidual market factor introduced in McElroy and Burmeister (1985). The economic interpretations for equivalent specifications of this model are discussed, and we enumerate several immediate payoffs to these specifications. The main new results are concerned with the sometimes intricate relationships among APT models withK factors and APT models withK factors that are constrained to satisfy mean-variance efficiency restrictions. These results are not only of theoretical interest, but more importantly they provide the basis for econometric estimation and testing of nested hypotheses. These econometric issues are discussed in detail.     

The effect of corporate diversification on credit risk: new evidence from European credit default swap spreads

This article investigates the impact of corporate diversification on credit risk. To our best knowledge, this is the first paper to use credit default swap (CDS) spreads instead of bond yield or revalued book values to test the risk‐reduction hypothesis. The analysis relies upon a sample of STOXX^® EUROPE 600 index members and covers the years 2010–2014. After controlling for various CDS‐ and firm‐specific variables, we find that diversification strategies do not significantly lower CDS premiums. Multilevel mediation analysis further shows that information asymmetries overcompensate the risk‐reducing effects resulting from corporate diversification.     

Financial crisis and international supervision: New evidence on the discretionary use of loan loss provisions at Euro Area commercial banks

We examine the discretionary use of loan loss provisions during the recent financial crisis, when Euro Area banks experienced not only a negative effect on the quality of their loans and a reduction in their profitability, but were also subject to a new form of stricter supervision, namely the EBA 2010 and 2011 stress test exercises. Overall, we find support for the only income smoothing hypothesis and we do not observe any difference in listed banks’ behavior when compared to unlisted banks. Banks subject to EBA stress tests had higher incentives to smooth income only for the 2011 EBA exercise, when a larger and more detailed set of information was released. This may suggest an unwilled side effect that accounting setters and banking regulators and supervisors should account for.