Diversification and Capital Structure: Some International Evidence

This study examines the effects of international and product diversification on capital structure with 232 firms from 30 countries. Results for the full sample show that international diversification is negatively related to financial leverage, but further analyses indicate that this is mainly attributable to US firms. For non-US firms, we fail to find a significant relationship. Results also show that product diversification is positively related to financial leverage, indicating that such diversification allows firms to reduce their risks, thereby enabling firms to carry higher debt levels.     

The Design of an Optimal Area Yield Crop Insurance Contract

This article focuses on the design of a crop insurance contract when the indemnity is based on the aggregate yield of a surrounding geographical area. Coinsurance under a critical yield often provides an efficient sharing of systemic risk. Under a linear relationship between individual yield and aggregate yield, the optimal form depends on the individual beta coefficient, which measures the sensitivity of individual yield to aggregate yield. The optimal hedging position of the producer on the yield options market is to buy put options or call options depending upon whether his beta coefficient is positive or negative.     

The Diversification Discount Puzzle: Evidence for a Transaction-Cost Resolution

The literature on the corporate diversification discount and the relative efficiency of internal versus external capital markets provides mixed results. We argue that transaction-cost economics is useful in understanding this puzzle. According to transaction-cost economics, diversified firms should outperform single segment firms in industries with higher external transaction costs (e.g., emergent industries) and under-perform in industries with low external transaction costs and high agency and other internal costs (e.g., some mature industries). This paper provides evidence supporting these contentions.     

Strategic International Diversification and Monthly Seasonality

To the author's knowledge no other studies have dealt with the effect of international diversification on stock market monthly seasonality. The aim of this study is to investigate this effect in various ways: stock market monthly seasonality is analyzed by incorporating exchange rates and trading costs in international portfolio returns. The variance of the world portfolio is decomposed into six components. Stochastic dominance approach is used to show the robustness of the results. Five trading strategies are compared to help international investors be more informed. All the results show that monthly seasonality is clearly present in an economic sense and robust. Particularly, when exchange rates are incorporated into portfolio returns. January has the highest return and the lowest risk in the world portfolio.     

Risk Exposures and International Diversification: Evidence from iShares

Abstract:   We examine the newly developed international diversification instruments–iShares traded on the American Stock Exchange. Given the fact that iShares can be created and redeemed at will, the daily price of an iShare is expected to be equal to the daily portfolio value of the underlying assets in the home‐country market. Therefore, theoretically, iShare pricing should be influenced by the risk from the iShare's home‐country market and not the risk from the US market, per se . We evaluate the risk exposure of iShare prices to the US market (non‐fundamental effect) as well as the home‐country market (the fundamental effect). We find that most iShare returns are significantly influenced by and sensitive to the US market risk. Moreover, the US market appears to be the key permanent driving factor and the home‐country market is a pronounced transitory driving force for iShare prices. These findings indicate the presence of limits of international arbitrage for iShares. As a result, the international diversification benefits of iShares become questionable.     

Diversification,Fee Income,and Credit Union Risk

Australian credit unions (CUs) have introduced new fee generating activities, increased transaction fees on existing products, and diversified into residential mortgages. Using DeYoung and Roland’s degree of total leverage and other risk measures we find that more diversified CUs have lower risk and return. CUs that increase the revenue share of transaction fees (matched by a lower share of personal loan interest) increase risk and reduce returns while those that increase residential lending revenues reduce both risk and returns. There is also evidence of scale related economies with risk decreasing and returns increasing with CU size.JEL classification: G21Disclaimer: The views and opinions in this paper are those of the authors and do not necessarily reflect those of APRA.     

Optimal growth portfolios reconciling theory and practice

Modern portfolio theory dictates diversification among assets that are not perfectly correlated (that is, asset diversification). Professional investors, on the other hand, contend that one can simply diversify across time (that is, time diversification). The controversy of time diversification versus asset diversification is examined in this article by empirically analyzing the optimum investment strategies for a myopic utility function (the extreme case that supports across asset diversification) under varying degrees of relative risk aversion. While Merton and Samuelson (1974) and Samuelson (1990) show that with a myopic utility function the investment diversification strategy does not change with an increase in the investment horizon, the recommendation of professional investors is also found to hold since for a wide range of relative risk-aversion measures, the optimum portfolio is shown to consist almost entirely of equities.     

Optimal hedging of variance derivatives

We examine the optimal hedging of derivatives written on realised variance, focussing principally on variance swaps (VS) (but, en route, also considering skewness swaps), when the underlying stock price has discontinuous sample paths, i.e. jumps. In general, with jumps in the underlying, the market is incomplete and perfect hedging is not possible. We derive easily implementable formulae which give optimal (or nearly optimal) hedges for VS under very general dynamics for the underlying stock which allow for multiple jump processes and stochastic volatility. We illustrate how, for parameters which are realistic for options on the S&P 500 and Nikkei-225 stock indices, our methodology gives significantly better hedges than the standard log-contract replication approach of Neuberger and Dupire which assumes continuous sample paths. Our analysis seeks to emphasise practical implications for financial institutions trading variance derivatives.     

Institutional Ownership,Diversification, and Riskiness of Bank Holding Companies

We examine the relationship among the level and stability of institutional ownership, diversification, and riskiness of publicly traded bank holding companies. We find that large and stable institutional ownership is associated with a higher (lower) level of geographic, revenue, and nontraditional banking (asset) diversification and lower risk, suggesting that institutional investors are prudent and favor risk‐reducing diversification strategies. The association between institutional ownership level and diversification is more pronounced under deregulation and during the crisis, suggesting a substitution effect between regulation and market discipline, and a greater level of monitoring and/or advising by institutional investors during the crisis, respectively.     

Diversification in euro area stock markets: Country versus industry

The harmonization of fiscal and economic policy within the European Monetary Union (EMU) has had a considerable impact on the economies of member countries. In particular, several studies indicate that the proceeding economic integration among euro area countries has important consequences for the factors driving asset returns in financial markets. However, these studies rely on one specific methodology [Heston, S.L., Rouwenhorst, K.G., 1994. Does industrial structure explain the benefits of international diversification? Journal of Financial Economics 36, 3–27; Heston, S.L., Rouwenhorst, K.G., 1995. Industry and country effects in international stock returns. Journal of Portfolio Management Spring, 53–58], that has recently been criticized as too restrictive. This study adopts a mean–variance approach instead. Using recent euro area stock markets data, we find strong evidence that diversification over industries yields more efficient portfolios than diversification over countries.     

Is Country Diversification better than Industry Diversification?

In this paper, we develop a framework in which one can examine the source of industry and country diversification by examining their underlying return components. We find that the global cash flow factor explains on average 39% of the variation of country cash flows and global discount rates explain 55% of the variation of country discount rates. These are much less than the explanatory power of the two factors over industry cash flow and discount rate variations, which are 72% and 78% respectively. This suggests that global factors are much less important for return components at country level than at the industry level. As a result, both better diversification of expected returns and cash flows across countries determine the larger benefits of country diversification versus industry diversification. Moreover, emerging markets tend to have much smaller co‐movements of both dividends and expected returns with those of the world, suggesting a lower degree of integration with the world goods and financial markets. Our results cast doubt on the prevailing wisdom that country diversification should be replaced by industry diversification.     

资本缓冲与银行风险变动：周期性及多元化的视角

利用上市银行2002-2013年的季度数据,考察资本缓冲调整、宏观经济波动与资产价值变动之间的内在联系.研究发现:上市银行资本缓冲的顺周期性并不显著,但是其风险变动却对宏观经济的波动极为敏感;同时,资本缓冲的调整与上市银行的风险变动具有相关性,在宏观经济变动时,银行会因自身表内资产组合风险的变化而连续调整其资本缓冲.此外,上市银行表内资产的多元化程度较低,收入变动与风险波动的相关性较显著,所以,收入多元化依然是银行减少风险,提高市场竞争力的驱动因素之一.     

Optimal annuitization with imperfect information about insolvency risk

Even the highest‐rated life‐annuity providers have a nonzero probability of becoming insolvent during an annuitant's retirement, and many potential annuitants are unaware of the state guaranty associations (SGAs) which provide insurance against the associated financial consequences. We study the theoretical implications of insolvency risk—real and perceived—for annuitization. Then, using a disciplined calibration of annuitant misperceptions in a standard life cycle model, we show that even the modest perceived risk of default associated with highly‐rated providers can—absent awareness of the SGAs—reduce annuitization and significantly reduce welfare. We further consider the implications of information frictions which prevent retirees from discerning true insolvency risk and we find that these frictions have plausibly large additional quantitative implications for annuitization and welfare. Simulations of our model further suggest that the general lack of awareness of the SGA backstop by potential annuitants can erode a sizable fraction of the potential welfare benefits thereof.     

Optimal Hedging and Valuation of Nontraded Assets

This paper examines a number of valuation problems faced byan expected-utility maximizing investor who, over a given timehorizon, is constrained to hold an asset which cannot be replicatedby dynamic trading and which therefore does not have a uniqueno-arbitrage price. We first derive the private valuation whichthe investor assigns to the nontraded asset in order to determinehis optimal investment in the traded assets. We thereby showthat, as part of this portfolio, the investor hedges the privatevaluation process of the nontraded asset, rather than its marketprice process. We also study the price at which the investorwould be willing to sell the nontraded asset if he were subsequentlyprohibited from trading in it, as well as the amount the investorwould be willing to pay to remove the trading restriction. Allthree values are shown to depend in an intuitive manner on theinvestor’s risk aversion, the residual risk of the nontradedasset unhedged by the traded assets, the difference betweenthe constrained holding and optimal unconstrained holding ofthe asset and the length of the time horizon over which theasset cannot be traded. JEL Classification: G11     

我国商业银行业务多元化对收益和风险的影响

不同于以往研究,文章将15家上市银行按照平均资产规模大小分成大规模银行、中等规模银行、小规模银行采用2000年-2011年的数据建立面板数据模型,分析我国商业银行非利息收入及其组成部分占营业收入比重的变化对银行收益和风险的影响。结果表明,非利息收入占比的提高对银行的收益有正效应,且这种效应在小规模银行中更为明显。非利息收入占比与银行风险的关系总体并不显著,但对大规模银行来说有一定的降低风险效应。手续费及佣金收入占比的提高会增加银行的收益并降低风险。     

Optimal Hedging and Valuation of Nontraded Assets

This paper examines a number of valuation problems faced by an expected-utility-maximizing investor who, over a given time horizon, is constrained to hold an asset which cannot be replicated by dynamic trading and which therefore does not have a unique no-arbitrage price. We first derive the private valuation which the investor assigns to the nontradedasset in order to determine his optimal investment in the traded assets. We thereby show that, as part of this portfolio, the investor hedges the private valuation process of the nontraded asset, rather than its market price process. We also study the price at which the investor would be willing to sell the nontraded asset if he were subsequently prohibited from trading in it, as well as the amount the investor would be willing to pay to removethe trading restriction. All three values are shown to depend in an intuitive manner on the investor's risk aversion, the residual risk of the nontraded asset unhedged by the traded assets, the difference between the constrained holding and optimal unconstrained holding of the asset and the length of the time horizon over which the asset cannot be traded.     

50+ Years of Diversification Announcements

This paper studies announcement returns from 4,764 mergers over 57 years to shed light on several controversies concerning corporate diversification. One prominent view is that diversification destroys value because of agency problems or internal investment distortions, but we find that combined (acquirer plus target) announcement returns are significantly positive for diversifying mergers throughout the period, and no lower than the returns for related mergers. The returns from diversifying acquisitions fell after 1980, and investors rewarded mergers involving financially constrained firms before but not after 1980, consistent with the idea that the value of internal capital markets declined over time.     

Does Diversification Improve the Performance of German Banks? Evidence from Individual Bank Loan Portfolios

Should banks be diversified or focused? Does diversification indeed lead to increased performance and therefore greater safety on the part of banks as traditional portfolio and banking theory would suggest? Recently, Acharya et al. (J Bus, 79:1355–1412, 2006) have found that for Italian banks the answers to these questions depend on the level of risk that a bank has taken. In this paper we investigate whether this result is robust to the choice of the sample and to the calculation of the risk variable. To this end we use a unique data set of the individual bank loan portfolios of 983 German banks for the period from 1996 to 2002 and calculate a Value-at-Risk based risk variable. We then investigate the link between banks’ profitability and their portfolio diversification across different industries, broader economic sectors and geographical regions. We find little evidence of large performance benefits associated with diversification: For the majority of our data, diversification tends to be associated with reductions in bank returns, even after controlling for risk. Only in a few cases (e.g., high-risk banks and industrial diversification) do we find statistically significant positive relationships between diversification and bank returns. Our findings contradict both the empirical findings of Acharya et al. (J Bus, 79:1355–1412, 2006) and the theoretical findings of Winton (Don’t put all your eggs in one basket? Diversification and specialization in lending. Working Paper No. 00-16, University of Minnesota, 1999).