Currency hedging for single-currency equity portfolios: Does cross-asset risk matter?

Foreign investors who are fully invested in a single-currency domestic equity portfolio are exposed to domestic equity risk, but also to currency risk. The standard approach to hedging the currency risk optimally is to estimate a single optimal hedge ratio, but this approach hedges only exchange rate risk, not cross-asset risk. We provide an alternative approach that estimates two optimal hedge ratios to adjust the currency exposures—one associated with the domestic currency and one associated with the foreign currency—and hedges both exchange rate risk and cross-asset risk. This alternative approach can significantly reduce risk.     

Do spot food commodity and oil prices predict futures prices?

Review of Quantitative Finance and Accounting - Futures prices reflect the price that both the buyer and the seller agree will be the price of a commodity upon delivery. Therefore, these prices...     

Can commodity futures be profitably traded with quantitative market timing strategies?

Quantitative market timing strategies are not consistently profitable when applied to 15 major commodity futures series. We conduct the most comprehensive study of quantitative trading rules in this market setting to date. We consider over 7000 rules, employ two alternative bootstrapping methodologies, account for data-snooping bias, and consider different time periods. We cannot rule out the possibility that trading rules compliment some other trading strategy or that some traders may have success using a specific rule on its own, but we do conclusively show that none of these rules beat the market any more than expected given random data variation.     

Hedging,selective hedging,or speculation? Evidence of the use of derivatives by Brazilian firms during the financial crisis

This paper analyse the use of foreign exchange derivatives by non-financial publicly traded Brazilian companies from 2007 to 2009. Using balance-sheet data on firms’ positions in derivatives and their foreign exchange exposure, the paper verifies the existence of three groups of derivative users: hedgers, selective hedgers – companies that significantly changed the volume of derivatives used during this period, but used them in line with their currency exposure – and active speculators – companies that adopted positions that would have been inadvisable had the aim been to hedge their currency exposure. Selective hedgers and speculators have one similarity: both tried to obtain gains through the continuous process of domestic currency appreciation. Confirming the optimal hedging literature, the paper shows that several firm characteristics are able to explain the use of derivatives and hedging by firms but market timing in the derivative markets is explained solely by firms’ foreign exposure, corporate governance and the macroeconomic environment.     

Do private equity owners increase risk of financial distress and bankruptcy?

In this study, we investigate financial distress risks of European companies around the buyout event in the period between 2000 and 2008. In addition, we analyze whether buyout companies go bankrupt more often than comparable non-buyout companies. Our results suggest that private equity investors select companies which are less financially distressed than comparable non-buyout companies and that the distress risk increases after the buyout. Despite this increase, private equity-backed companies do not suffer from higher bankruptcy rates than comparable non-buyout companies. In fact, when companies are backed by experienced private equity funds, their bankruptcy rates are even lower. These findings indicate that experienced investors are better able to manage distress risks than their inexperienced counterparts.     

Do economic statistics contain information to predict stock indexes futures prices and returns? Evidence from Asian equity futures markets

This research examines the impact of local and international market factors on the pricing of stock indexes futures in East Asian countries. The purpose of this paper is to present a study of the significant factors that determine the major stock indexes futures’ prices of Hong Kong, Malaysia, Singapore, South Korea and Taiwan. This study first investigates the relationships between Hang Seng Index Futures, KLCI Futures, SiMSCI Futures, KOSPI Futures, Taiwan Exchange Index Futures and local interest rates, dividend yields, local exchange rates, overnight S&P500 index and a newly constructed index, Asian Tigers Malaysia Index (ATMI). 11 years historical data of stock indexes futures and the economic statistics are studied; 10 years in-sample data are used for testing and developing the pricing models, and 1 year out-of-sample data is used for the purpose of verifying the predicted values of the stock indexes futures. Using simple linear regressions, local interest rates, dividend yields, exchange rates, overnight S&P500 and ATMI are found to have significant impact on these futures contracts. In this research, the next period close is predicted using simple linear regression and non-linear artificial neural network (ANN). An examination of the prediction results using nonlinear autoregressive ANN with exogenous inputs (NARX) shows significant abnormal returns above the passive threshold buy and hold market returns and also above the profits of simple linear regression (SLR). The empirical evidence of this research suggests that economic statistics contain information which can be extracted using a hybrid SLR and NARX trading model to predict futures prices with some degree of confidence for a year forward. This justifies further research and development of pricing models using fundamentally significant economic determinants to predict futures prices.

     

Does increased hedging lead to decreased price efficiency? The case of VIX ETPs and VIX futures

We examine the impact of the introduction of VIX exchange‐traded products (ETPs) on the information content and pricing efficiency of VIX futures. We document that trades in VIX futures have become less informative and that pricing errors exhibit more persistence after the introduction of VIX ETPs. In addition, we observe that the price process of the VIX futures has become noisier over time. These findings suggest that the introduction of the VIX ETPs had a prominent effect on the properties and dynamics of the VIX futures.     

What do equity issuances signal? A study of equity issuances in the UK before and during the financial crisis

The financial crisis provides an ideal setting to study how quality signalling by firms, and information asymmetries, might explain the stock price reactions around seasoned equity offerings. The heightened information asymmetry levels during the GFC should have increased the importance of issuance quality and information asymmetries in explaining announcement returns. However, we document new and, in some cases, surprising findings, using a sample of 700 UK seasoned equity offerings between 2003 and 2012: (1) Contrary to expectations, announcement returns during the crisis were driven less by signalling and asymmetric information effects and more by macroeconomic conditions and general uncertainty. (2) In constrained capital markets, firms that were able to move more quickly to raise significant amounts of capital, made the capital-raising environment more challenging for firms that followed, such that the latter had to incur additional costs. (3) Contrary to the traditional view that the low book-to-market ratios may proxy for overvaluation and thus lower announcement returns, we found a negative relationship during the crisis period. The latter is consistent with the view that book-to-market ratios may also proxy for a distressed firm effect which may have dominated the conventional ‘market timing’ effect during the GFC. (4) Announcement returns were strongly positive for many firms at the peak of the crisis, possibly because the market was relieved to see that equity issues might potentially save firms from insolvency; an equity issuance could, in such circumstances, be a positive signal, even though equity issues are conventionally seen as negative signals. Overall, our paper documents fresh and surprising results about equity capital-raising during the GFC, and also offers insights for corporate finance that are of interest beyond the current crisis.     

Which form of hedging matters — Operational or financial? Evidence from the US oil and gas sector

We examine the extent and impact of operational and financial hedging on commodity price risk in US oil and gas companies. We find significant exposure to underlying commodity movements. Using a combination of hand collected and publicly available data we examine the impact of hedging strategies. We find no evidence that operational hedging, defined here as multinationality, is effective. In contrast, we find that financial hedging is significant and impactful. Sub-period analysis shows that the effectiveness of financial hedging diminishes when commodity price volatility is high.     

Does the truth rest with the minority? Divergent views on nonfinancial firms' financial investments from the private equity market

We investigate how the seasoned equity market evaluates nonfinancial firms that recently bought wealth management products (WMPs). Using a sample of Chinese firms, we find that the stock market reacts less positively to private equity placements (PEPs) by firms that recently purchased WMPs (i.e., quasi-deposits) than to those that did not. Further analysis suggests that compared with retail investors, sophisticated (i.e., institutional and high-net-worth) investors pay a higher price for the shares of these WMP-buying firms. After PEPs, we find that the long-term operating performance and firm value of WMP-buying firms are higher than those of non-buying firms. Overall, the findings suggest that: (i) engaging in shadow banking activities (buying WMPs) does not mean a firm is distracted, and (ii) sophisticated investors are less concerned than retail investors about a firm's shadow banking activities.     

Is financial reporting shaped by equity markets or by debt markets? An international study of timeliness and conservatism

We hypothesize debt markets—not equity markets—are the primary influence on “association” metrics studied since Ball and Brown (1968 J Account Res 6:159–178). Debt markets demand high scores on timeliness, conservatism and Lev’s (1989 J Account Res 27(supplement):153–192) R ², because debt covenants utilize reported numbers. Equity markets do not rate financial reporting consistently with these metrics, because (among other things) they control for the total information incorporated in prices. Single-country studies shed little light on debt versus equity influences, in part because within-country firms operate under a homogeneous reporting regime. International data are consistent with our hypothesis. This is a fundamental issue in accounting.     

Home equity lines of credit and the unemployment rate: Have unemployed consumers borrowed themselves into the next financial crisis?

Some economists argue the recent recovery has been so meager because many consumers have lost their main source of income and maxed-out their home-equity borrowings. Further, banks that were able to make consumer loans did so with less security because home prices fell so dramatically. This paper argues that at least part of that recovery story is purely anecdotal and, in fact, incorrect. In spite of the precipitous decline in home prices, the original price increases were so large that many homeowners still have/had adequate equity in their homes to borrow. The paper presents evidence that the average quarterly increase in aggregate home equity line of credit (HELOC) lending after housing prices began their decline is, statistically, no different than the average quarterly increase in HELOC lending before housing prices began their downward trend. The evidence also suggests that increased HELOC lending during the recession is not correlated with higher unemployment.     

Do commodity markets catch a cold from stock markets? Modelling uncertainty spillovers using Google search trends and wavelet coherence

We investigate stock market uncertainty spillovers to commodity markets using wavelet coherence and a general stock market-related Google search trends (GST)-based index to proxy for uncertainty. GST reflect stock market uncertainty over short-, medium- and long-term horizons. Periods of association between GST and the VIX, a widely used proxy for stock market uncertainty, coincide with economic, financial, and geopolitical events. The association between the VIX and GST has grown over time. In line with economic psychology, this implies that during times of heightened uncertainty investors increasingly search for stock market-related information. Our analysis further reveals that some commodities are more susceptible to uncertainty spillovers from stock markets, notably energy commodities. We demonstrate how GST may be used to isolate the impact of specific events and show that COVID-19 had a disproportionate impact on commodity price volatility. We also find that energy, livestock and precious metals are increasingly integrated with stock markets. Spillover analysis repeated using the VIX produces similar results and reflects information that is also reflected in GST, confirming an uncertainty narrative. The use of wavelet analysis and GST to proxy for general and event specific uncertainty offers an alternative perspective to traditional econometric approaches and may be of interest to econometricians, analysts, investors and researchers.     

Are credit default swaps still a sideshow? How information flow between equity and CDS markets has changed since the financial crisis

We examine the information flow between equity and credit default swap (CDS) markets using firm-level returns data before and after the global financial crisis. Before the crisis, the information flow was unidirectional, with equity returns leading CDS returns. While equity returns continue to lead CDS returns after the crisis, we find that the speed of adjustment of the CDS market to equity markets has increased during this period. We also find evidence of a bidirectional flow of information between these markets, with equity returns responding to credit protection returns in the postcrisis period. The quicker response of CDS spreads to equity returns during the postcrisis period primarily occurs among entities with lower credit ratings. In contrast, the response of equity returns to lagged CDS returns during the postcrisis period is observed among firms across different credit rating categories; however, the magnitude of the response is higher among those with lower credit ratings.     

How to lengthen,deepen and broaden customer–firm relationships with online financial services?

This study aims to examine the influence of online relationship marketing on consolidating online customer–firm relationships. Through developing an empirical model, this research explores the links between online relationship bonds (financial, social and structural bond), online relationship satisfaction and commitment, and online relationship length, depth and breadth with the online financial services. Data from 686 online customers of a security corporation indicates that online relationship bonds influence online relationship satisfaction and commitment, except for the link between financial bond and relationship commitment. Results also identify that online relationship satisfaction influences relationship length and depth, whereas online relationship commitment has a positive impact on relationship length, depth and breadth. In sum, this study concludes that financial bond is the most important attribute in enhancing online relationship length, whereas structural bond contributes a lot to online relationship depth and breadth.     

Is better banking performance associated with financial inclusion and mandated CSR expenditure in a developing country?

Motivated by legislation mandating CSR expenditure to improve social equality and economic development in India, we examine the association of CSR expenditure and financial inclusion with the performance of banking firms in the period after introduction of the legislation. We study whether mandated CSR expenditure and/or financial inclusion measures are associated with better financial performance, using both accounting and stock market measures of performance, for Indian banks during 2015–2017. Our results demonstrate that level of CSR expenditure and degree of financial inclusion is not associated with banks’ financial performance when performance is measured in accounting terms. However, a significant negative association is found when performance is measured by stock market return. These results suggest that the current design of the legislation is unlikely to achieve its purpose. This is the first study to present clear evidence on the associations of mandatory CSR spending and firm‐level financial inclusion with accounting‐based and market‐based bank performance.     

Do controlling shareholders collude with their related large shareholders? Evidence of equity pledges and shareholding increases from China

The key for controlling shareholders to prevent the risk of equity pledge is to increase the stock price, and the large shareholders' shareholding increases have the effect of increasing the stock price. Using the data of Chinese A-share firms from 2007 to 2019, this paper examines the relationship between the controlling shareholders' equity pledges and their related large shareholders' shareholding increases. We find that when the controlling shareholders pledge equity, their related large shareholders are more likely to increase their shareholdings. By analyzing the necessity, ability and motivation of related large shareholders to provide help, we find that shareholding increases of related large shareholders are behaviors of helping controlling shareholders to mitigate the risk of equity pledge. Based on the analysis of external acquisition threats, stability heterogeneity of control rights and exogenous impact of Vanke Equity Competition, it is shown that the controlling shareholders pledging equity promote their related large shareholders to increase their shareholdings for the purpose of preventing the risk of control transfer. In further analysis, we find that the shareholding increases of related large shareholders have the practical effect of improving the stock price and preventing pledge risks. This paper proves that the controlling shareholders pledging equity collude with their related large shareholders, which is reflected in the fact that the shareholding increases of the related large shareholders have become a means for controlling shareholders to prevent the risk of equity pledge.     

Does bitcoin co-move and share risk with Sukuk and world and regional Islamic stock markets? Evidence using a time-frequency approach

This paper examines the co-movements between Bitcoin (BTC) and the Dow Jones World Stock Market Index, regional Islamic stock markets, and Sukuk markets. We apply cross wavelet transform and wavelet coherence analysis with a wavelet-based measure of value at risk. The co-movement is stronger and in the same direction at lower frequencies, suggesting the benefits from diversification with BTC are relatively less for long-term investors compared to short-term investors. Co-movement in the opposite direction at high frequencies implies better benefits of hedging in the short run through diversification in BTC and Islamic equity markets. Robustness tests show that the correlations increase as we increase from an investment horizon of two days to one of 64 days. The frequency-domain causality test shows significant causality flow from BTC to the Islamic market of Asia-Pacific, Japan, and Sukuk markets in the short term. Additionally, BTC is found to lead Asia-Pacific Islamic stock markets in the long term. Finally, we note that the benefits of portfolio diversification with BTC and Islamic assets vary across time and frequencies.     

Does beta react to market conditions? Estimates of ‘bull’ and ‘bear’ betas using a nonlinear market model with an endogenous threshold parameter

The authors use a logistic smooth transition market (LSTM) model to investigate whether ‘bull’ and ‘bear’ market betas for Australian industry portfolios returns differ. The LSTM model allows the data to determine a threshold parameter that differentiates between ‘bull’ and ‘bear’ states, and it also allows for smooth transition between these two states. Their results indicate that ‘bull’ and ‘bear’ betas are significantly different for most industries, and that up-market risk is not always lower than down-market risk. LSTM models indicate that the transition between ‘bull’ and ‘bear’ states is abrupt, supporting a dual-beta market modelling framework.