Can hedge funds time global equity markets? Evidence from emerging markets

This paper examines the ability of global hedge funds to time a particularly volatile asset class — emerging market equities. In particular, we study whether or not these funds can either time emerging markets as a whole, or time their exposures to different regions. Using both pooled and calendar-time approaches, we generally find no evidence of overall timing ability. However, we do find some evidence of period-specific timing ability during the financial crisis and subsequent recovery.     

Are firms from developed markets more international than firms from emerging markets?

Regionalist supporters’ claim that most of the world's largest firms are regional rather than global and that managers should be encouraged to ‘think regional, act local and forget global’ (Rugman and Moore, 2004, p. 67). We apply the matrix of multinationality proposed by Aggarwal et al. (2011) to a sample of the world's 500 largest corporations, the Fortune Global 500. We show that these firms range from purely domestic to regional, trans-regional and entirely global with most lying in the trans-regional and global categories. Our results imply that global strategies are essential to international trade and management in today's business environment. We compare multinationality results by market type (developed versus emerging market), industry, size and age. We find that firms from more advanced economies tend to be older, larger and more multinational than firms from emerging markets. We find no relationship between multinationality and age or multinationality and size, and conclude that developed market firms are not more multinational as a result of size, age or industrial structure.     

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.     

Entrepreneurship and asymmetric information in input markets

Entrepreneurs starting new firms face two sorts of asymmetric information problems. Information about the quality of new investments may be private, leading to adverse selection in credit markets, and entrepreneurs may not observe the quality of workers applying for jobs, resulting in adverse selection in labor markets. We construct a simple model to illustrate some consequences of new firms facing both sorts of asymmetric information. The market equilibrium can involve an excess supply of workers entering the entrepreneurial sector, as well as credit rationing. Equilibrium outcomes mismatch workers to firms, and will generally result in an inefficient number of both entrepreneurs and workers opting for the entrepreneurial sector. Taxes or subsidies on new firms and on wages can improve efficiency, but a second-best optimum can only be achieved if it is optimal to induce an excess supply of workers to enter the entrepreneurial sector.     

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.     

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.     

Assessing financial market integration in Asia – Equity markets

Financial integration has strong implications for financial stability. On the one hand, financial integration among economies helps to improve their capacity to absorb shocks and foster development. On the other hand, intensified financial linkages in a world of increasing capital mobility may also harbour the risk of cross-border financial contagion. This paper provides a survey of high-frequency indicators to monitor the development of equity market integration in Asia. The results show that after slowing down between 2002 and 2006, the equity market integration process picked up again in 2007–08. Nevertheless, the process is not complete and the degrees of integration between mature and emerging equity markets are different. The divergence may be attributed to the difference in the political, economic and institutional aspects across jurisdictions in Asia.     

How does foreign entry affect domestic banking markets?

Using 7900 bank observations from 80 countries for the 1988–1995 period, this paper examines the extent and effect of foreign presence in domestic banking markets. We investigate how net interest margins, overhead, taxes paid, and profitability differ between foreign and domestic banks. We find that foreign banks have higher profits than domestic banks in developing countries, but the opposite is the case for developed countries. Estimation results suggest that an increased presence of foreign banks is associated with a reduction in profitability and margins for domestic banks.     

Are price limits really bad for equity markets?

Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.     

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.     

How loss averse are investors in financial markets?

We investigate loss aversion in financial markets using a typical asset allocation problem. Our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature. Moreover, loss aversion changes depending on market conditions; investors become far more loss averse during bull markets than during bear markets, indicating their more profound disutility for losses when others enjoy gains. Contrary to most previous results, we find that investors are more sensitive to changes in losses than changes in gains.     

Is the January effect still alive in the futures markets?

The January effect concerns the fact that small capitalization stocks have historically outperformed large capitalized stocks in January. We analyze evidence as to whether this anomaly can be exploited in the futures markets as a speculative investment or to add risk-adjusted value to portfolio performance. We find that the January effect is still alive in the futures markets on the Value Line minus S&P 500 spread trade, but that the marginal liquidity of the Value Line stock index futures contract has made it very risky to exploit the effect. Historically from 1982/3 to 2004/5, the trade has been profitable. This anomaly was also exploitable through a Russell 2000 minus S&P 500 spread trade from 1993/4 to 2004/5.

In which financial markets do mutual fund theorems hold true?

The mutual fund theorem (MFT) is considered in a general semimartingale financial market S with a finite time horizon T, where agents maximize expected utility of terminal wealth. The main results are:

Do Big-Four affiliates earn audit fee premiums in emerging markets?

The paper investigates whether Big-Four affiliated (B4A) firms earn audit premiums in an emerging economy context, using Bangladesh as a case. The joint determination of audit and non-audit service fees is also examined using a sample of 122 companies listed in the Dhaka Stock Exchange. Our findings reveal that although the B4A firms do not generally earn a fee premium in Bangladesh, they charge higher audit fees for clients not purchasing non-audit services. This suggests that the B4A firms may actually lower audit fees to attract non-audit services, and cross subsidizes audit fees through non-audit-services fees. The lack of a B4A premium implies that there is lack of quality audit in emerging markets. We also document that audit and non-audit service fees are jointly determined in Bangladesh. Thus, we provide evidence of joint determination of audit and non-audit service fees in an emerging economy context.     

Did crisis alter trading of two major oil futures markets?

The paper analyzes how traders in two major oil futures markets: New York Mercantile Exchange (NYMEX) and Intercontinental Exchange, reacted to the 2008 financial crisis, particularly whether they shifted their trading pattern and whether the relative information role of the two markets changed. Using trade-by-trade data, the paper analyzes several trading characteristics including trading volume, trade size, volatility, bid–ask spread, and relative information share. On average, NYMEX is characterized by greater volume, trade size and slightly greater spread. Before the crisis, NYMEX leads the process of price discovery, and volatility and trade size are significant factors explaining this leadership. However, following the financial crisis of 2008, the leadership role of NYMEX declines and trade size and volatility are no longer significant factors. Contrary to results of most equity market research, bid–ask spread is not a significant factor in information share and causality tests indicate that causality runs from spread to information share before the crisis but the opposite holds during the crisis period.     

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.      

Can markets stimulate rights? On the alienability of legal claims

The alienability of legal claims holds the promise of increasing access to justice and fostering development of law. I develop a principal‐agent framework where litigation funders provide expertise in reducing uncertainty in agents' disutility of production. The model leads to the counterintuitive prediction that litigation funders prefer cases with novel issues, and social surplus is positively correlated with legal uncertainty. Consistent with the model, court backlog, court expenditures, and a slowing in average time to completion are associated with third‐party funding; cases with third‐party funding receive more citations and are reversed less often than comparable cases without such arrangements.