Consequences of Riding Takeover Waves: Australian Evidence

This paper uses Australian data to analyze takeover bid premiums and long‐term abnormal returns for mergers that occur during wave and non‐wave periods. Findings reveal that bid premiums are slightly lower in wave periods, and bidding firms earn normal post‐takeover returns (relative to a portfolio of firms matched on size and survival) if their bids were made in non‐wave periods. However, bidders who announced their takeover bids during wave periods exhibit significant underperformance. For mergers that took place within waves, there is no difference in bid premiums nor is there a difference in the long‐run returns of bidders involved during the first half and second half of the waves. We find that none of prominent theories of merger waves (managerial, misvaluation, and neoclassical) can fully account for Australian takeover waves and their effects. Instead, our results suggest that Banal‐Estanol et al.'s screening theory of merger activity, by combining the misvaluation and neoclassical theories, may provide a better explanation.     

Optimal Futures Hedging Under Multichain Markov Regime Switching

Most of the existing Markov regime switching GARCH‐hedging models assume a common switching dynamic for spot and futures returns. In this study, we release this assumption and suggest a multichain Markov regime switching GARCH (MCSG) model for estimating state‐dependent time‐varying minimum variance hedge ratios. Empirical results from commodity futures hedging show that MCSG creates hedging gains, compared with single‐state‐variable regime‐switching GARCH models. Moreover, we find an average of 24% cross‐regime probability, indicating the importance of modeling cross‐regime dynamic in developing optimal futures hedging strategies. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 34:173–202, 2014     

Switching Between the Banking and Metals and Mining Sectors of Australia*

Using the Australian banking and metals and mining industries as the categories in the Barberis and Shleifer model, this study demonstrates switching in the Australian stock market. Switching occurs when investors move into an industry by selling off stocks of an alternate industry, thus causing negative lagged cross‐correlation between those industries. Our results, based on daily returns, suggest that category‐level investor sentiment may drive observed switching patterns in the Australian stock market and not fundamental risk factors. Our results also show that switching does not necessarily only occur between value and growth stocks or large‐cap and small‐cap stocks.     

A random coefficient autoregressive Markov regime switching model for dynamic futures hedging

The random coefficient autoregressive Markov regime switching model (RCARRS) for estimating optimal hedge ratios, which generalizes the random coefficient autoregressive (RCAR) and Markov regime switching (MRS) models, is introduced. RCARRS, RCAR, MRS, BEKK‐GARCH, CC‐GARCH, and OLS are compared with the use of aluminum and lead futures data. RCARRS outperforms all models out‐of‐sample for lead and is second only to BEKK‐GARCH for aluminum in terms of variancereduction point estimates. White's data‐snooping reality check null hypothesis of no superiority is rejected for BEKK‐GARCH and RCARRS for aluminum, but not for lead. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:103–129, 2006     

Cross-Border Mergers & Acquisitions Policy in Service Markets

We provide facts showing that in service markets: (i) restrictions on foreign direct investment (FDI) are under reform, (ii) cross-border Mergers & Acquisitions dominate as the entry mode of FDI, and (iii) there is often a high market concentration. Based on these facts, we present a model for analyzing cross-border merger and acquisition policy in liberalized service markets taking into account efficiency and market power effects. Our findings suggest that a merger policy, but not a discriminatory policy towards foreigners, seems warranted. Moreover, policies ensuring competition for domestic target firms seem warranted. In this vein, harmonization of the EU takeover regulations may particularly benefit assets owners in countries with many target firms.     

The Causes and Consequences of Accelerated Stock Repurchases

We examine the choice between accelerated share repurchase (ASR) and open market repurchase (OMR) as repurchase mechanisms between 2004 and 2007. For a sample of ASRs and OMRs that actually buy shares in the announcement quarter, we find that ASR firms have lower market‐to‐book ratios, less cash, but greater managerial entrenchment. Prior to repurchase, ASR firms are subject to significantly more takeover rumors than OMR firms are, and this, along with entrenchment and undervaluation, affects the choice to use ASRs. ASR firms experience positive average abnormal returns both before and after the announcement. Moreover, the latent takeover probability is significantly lower for both ASR and OMR firms (when compared with pre‐announcement levels), but the reduction for ASR firms is more pronounced. Our results suggest that repurchases, and especially ASRs, indeed make a firm a less attractive prospect for takeover.     

Value at risk and conditional extreme value theory via markov regime switching models

This study develops a new conditional extreme value theory‐based (EVT) model that incorporates the Markov regime switching process to forecast extreme risks in the stock markets. The study combines the Markov switching ARCH (SWARCH) model (which uses different sets of parameters for various states to cope with the structural changes for measuring the time‐varying volatility of the return distribution) with the EVT to model the tail distribution of the SWARCH processed residuals. The model is compared with unconditional EVT and conditional EVT‐GARCH models to estimate the extreme losses in three leading stock indices: S&P 500 Index, Hang Seng Index and Hang Seng China Enterprise Index. The study found that the EVT‐SWARCH model outperformed both the GARCH and SWARCH models in capturing the non‐normality and in providing accurate value‐at‐risk forecasts in the in‐sample and out‐sample tests. The EVTSWARCH model, which exhibits the features of measuring the volatility of a heteroscedastic financial return series and coping with the non‐normality owing to structural changes, can be an alternative measure of the tail risk. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:155–181, 2008     

基于非对称GARCH的铜期货市场风险度量研究

针对金融时间序列普遍存在自相关性、杠杆效应、尖峰厚尾等典型事实,运用基于杠杆效应的GARCH模型,构建铜期货市场收益序列具有典型事实的动态风险测度模型：VaR-AR（m）-EGARCH（p,q）和VaR—AR（m）-TGARCH（p,q）,再通过上海期货交易所（SHFE）铜期货对所建模型进行实证分析,并运用Back—testing中的LRT（Likelihood Ratio Test）方法,对铜期货市场风险测度模型准确性和可靠性进行实证检验。实证结果表明,基于非对称GARCH的铜期货市场动态风险度量模型,能够有效捕获铜期货市场的典型事实,同时还能够准确测度具有杠杆效应的铜期货市场的动态风险,也能加强对金融市场动态风险预测能力。     

PRICING AND SEMIMARTINGALE REPRESENTATIONS OF VULNERABLE CONTINGENT CLAIMS IN REGIME‐SWITCHING MARKETS

Using a suitable change of probability measure, we obtain a Poisson series representation for the arbitrage‐free price process of vulnerable contingent claims in a regime‐switching market driven by an underlying continuous‐time Markov process. As a result of this representation, along with a short‐time asymptotic expansion of the claim's price process, we develop an efficient novel method for pricing claims whose payoffs may depend on the full path of the underlying Markov chain. The proposed approach is applied to price not only simple European claims such as defaultable bonds, but also a new type of path‐dependent claims that we term self‐decomposable, as well as the important class of vulnerable call and put options on a stock. We provide a detailed error analysis and illustrate the accuracy and computational complexity of our method on several market traded instruments, such as defaultable bond prices, barrier options, and vulnerable call options. Using again our Poisson series representation, we show differentiability in time of the predefault price function of European vulnerable claims, which enables us to rigorously deduce Feynman‐Ka? representations for the predefault pricing function and new semimartingale representations for the price process of the vulnerable claim under both risk‐neutral and objective probability measures.     

基于灰色马尔可夫模型的市场需求预测

结合灰色GM(1,1)预测模型和马尔可夫预测模型的优点,建立了灰色马尔可夫GM(1,1)预测模型,以市场需求预测为实例,证明灰色马尔可夫预测模型对于随机波动性较大的市场需求的数据列的预测具有一定的准确性和应用性。     

A Markov regime‐switching ARMA approach for hedging stock indices

This study considers the hedging effectiveness of applying the N‐state Markov regime‐switching autoregressive moving‐average (MRS‐ARMA) model to the S&P‐500 and FTSE‐100 markets. The distinguishingfeature of this study is to incorporate the observations of serially correlated stockreturns into the hedging analysis. To resolve the problem of N^T possible routes induced by the presence of MA parameters associated with the algorithm of Hamilton JD ( 1989 ) and a sample of size T, we propose an algorithm by combining the ideas of Hamilton JD ( 1989 ) and Gray SF ( 1996 ). We find that the hedging performances of the three proposed MRS‐MA(1) strategies herein are superior to their corresponding MRS counterparts considered in Alizadeh A and Nomikos N ( 2004 ) over the out‐of‐sample periods, even when we realistically track the transaction costs generated from rebalancing the hedged portfolios. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:165–191, 2011     

The Tunisian stock market index volatility: Long memory vs. switching regime

This paper investigates the dilemma of long memory versus a switching regime for the Tunisian stock market index volatility. Precisely, different specifications of the Fractionally Integrated GARCH (FIGARCH) model of Baillie et al. (1996) and Switching ARCH (SWARCH) model of Hamilton and Susmel (1994) have been estimated under both Gaussian and Student error distributions.The empirical results show that the Student FIGARCH(1,d,1) specification outperforms the Markov switching ARCH model. In addition, the empirical results indicate that the long memory behavior observed in the Tunisian stock price (TUNINDEX) volatility is a true behavior and is not spuriously created by changes in regimes.     

An Antitakeover Amendment for Stakeholders?

The non-financial effects (NFE) antitakeover amendment addresses the duties of company directors and management when faced with a possible takeover bid. The NFE amendment either permits or requires managers to consider the interests of the company's stakeholders during takeover bids. Other types of antitakeover devices have been viewed as protecting either stockholder or management interests. The NFE amendment would appear to protect a broad spectrum of interests including those of company employees, creditors, and the community in which the company operates. Positive market returns to the adoption of NFE amendments provide some evidence that investors approve. The percent of both management and institutional ownership are positively related to the market reaction to the NFE amendment adoption. To the extent that institutional ownership proxies for the broad spectrum of stakeholder interest, NFE devices, unlike some other amendments that have been studied, appear to be in the interests of more than a single interest group.     

Internal Restructuring and Firm Survival

We examine the impact of two common methods of internal restructuring, layoffs and divestitures on the survival of a sample of UK firms. Using a Poisson regression model, we find that divestitures improve survival likelihood by reducing the probability and speed of market exit via takeover or bankruptcy, whereas layoffs increase the probability and speed of market exit via bankruptcy. Surprisingly, classifying firms into financially distressed and healthy groups, we find that distressed firms are less likely to restructure. Furthermore, while divestitures improve survival likelihood in both groups, layoff firms are less likely to survive, irrespective of whether they are distressed or healthy. Our findings are consistent with event studies that examine the market reaction to layoffs and divestiture decisions, and so provide some support for the view that the market correctly values the consequences of these restructuring actions on firm survival. The results are robust to several econometric and modeling issues, including controlling for potential self‐selection bias.     

What explains default risk premium during the financial crisis? Evidence from Japan

As is well documented, subprime mortgage markets carried significant default risk. This paper investigates the relationship between default risk premium, stock market conditions and macroeconomic variables during the financial crisis. Using iTraxx Japan Credit Default Swap (CDS) index spreads covering the period from March 2006 to November 2009, we employ a time-varying dynamic factor model with Markov regime switching to generate regime probabilities for default risk. We analyze the sensitivity of default risk premium changes to stock market conditions and macroeconomic variables by using two-state Markov switching models: a crisis regime sparked by rising loan defaults in the sub-prime mortgage market, and a non-crisis regime. We found strong evidence that the relationship between default risk premium changes, stock market and macroeconomic variables is regime-dependent. Our results suggest that during periods of crisis, CDS indices behave as a higher-risk indicator and become more sensitive to stock market conditions and macroeconomic variables. This paper examines the effects of the financial crisis in explaining the default risk premium. Understanding the determinants of default risk premium is important for financial analysts, economic policy makers and credit risk management.     

Kraft's acquisition of Cadbury: Was it an amicable transatlantic merger or a hostile takeover?

This case‐based research evaluates and discusses Kraft's 2009–2010 acquisition of the UK‐based Cadbury, which turned into a bitter fight and a hostile takeover. As both firms have a rich history and distinct brand identities, the merger came to the attention of the global media and public on both sides of the Atlantic. Drawing on the merger's lengthy negotiations and the two companies' distinctive corporate cultures, this article analyzes the merger and its chaotic negotiations and developments. The merger was opposed in the United Kingdom because of Kraft's harsh approach of targeting an iconic British brand that had been in business for over 150 years. Eventually, both companies did compromise in an amicable manner and concluded a friendly tie‐up. The postmerger period reveals that Kraft's acquisition was a part of its future reorganization and expansion in global markets. This case‐based research also provides academic and practical implications for international business managers as well as multinational corporations.     

Option pricing under Markov‐switching GARCH processes

This study proposes an N ‐state Markov‐switching general autoregressive conditionally heteroskedastic (MS‐GARCH) option model and develops a new lattice algorithm to price derivatives under this framework. The MS‐GARCH option model allows volatility dynamics switching between different GARCH processes with a hidden Markov chain, thus exhibiting high flexibility in capturing the dynamics of financial variables. To measure the pricing performance of the MS‐GARCH lattice algorithm, we investigate the convergence of European option prices produced on the new lattice to their true values as conducted by the simulation. These results are very satisfactory. The empirical evidence also suggests that the MS‐GARCH model performs well in fitting the data in‐sample and one‐week‐ahead out‐of‐sample prediction. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:444–464, 2010     

Regime switching in the reactions of stock markets in Saudi Arabia to oil price variations

The study revisits the stock–oil nexus by examining the reactions of equity markets to oil price shocks at national and sectoral levels for Saudi Arabia in a time‐varying framework by employing the Markov switching EGARCH model developed by Henry (2009, Journal of Banking and Finance, 33, 405). Based on weekly data, the findings reveal that the behaviour of all stock markets switches between an expansion regime and a recession regime, with more persistence for the expansion state. Additionally, influential international events associated with stock market drops are clearly identified in the recession regime. Furthermore, there is evidence of asymmetric reactions of the equity index returns and the probabilities of transition from one state to another to oil price variations, with heterogeneous impacts across sectors and regimes. The stock markets are more sensitive to oil price decreases than to oil price increases. Although the evidence of relatively slight differences in some findings across weekdays, the study allows investors and policymakers to understand well the interactions of stock sector markets vis‐à‐vis the world oil market in a regime‐switching framework, in order to make the right decision as regards portfolio diversification and regulation of the stock markets.     

Digitalisierung: neue Aufgreifkriterien der Fusionskontrolle in der 9. GWB-Novelle

The Ninth amendment of the German Competition Act introduces new merger control thresholds. These thresholds are designed to close an enforcement gap that is especially found in parts of the digital economy. As the takeover of Facebook and WhatsApp revealed, traditional turnover-based thresholds are inapplicable to business models prevalent in some parts of the digital economy. The amendment addresses these limitations and specifically introduces a transaction value-based threshold that will enable the Federal Competition Authority to carry out merger control in certain mergers with high transaction values and low turnovers.     

Sources of variation in holding returns for fed funds futures contracts

This study relates predictable gains from positions in fed funds futures contracts to violations of the expectations hypothesis of the term structure of interest rates. Although evidence for predictable gains from positions in short‐horizon contracts is mixed, we find that gains in longer horizon contracts can be well described using Markov‐switching models, with predictability associated with particular episodes in which economic activity was weak and variability in the returns to these contracts was quite high. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:205–229, 2011