Tracking the Evolution of Idiosyncratic Risk and Cross-Sectional Expected Returns for US REITs

This paper adopts the methodology in Bali and Cakici (Journal of Financial & Quantitative Analysis, 43, 29–58, 2008) in tracking the evolution of the relation between equity REITs’ idiosyncratic risk and their cross-sectional expected returns between 1981 and 2010. In addition to the full sample period, we study this relation for (i) January 1981–December 1992, (ii) January 1993–September 2001, (iii) November 2001–August 2008 and (iv) November 2001–December 2010 and produce empirical results for (i) all sample REITs, (ii) REITs with a price greater than $10 or (iii) REITs with a price greater than $5. Each period represents different dynamics (including the Global Financial Crisis) in the life of the REIT industry and leads to a different hypothesis. Further, we present comparative results based on the Fama-French 3- and 4-factor models. Overall, we document a negative relation between idiosyncratic risk and cross-sectional expected returns and demonstrate that this negative relation changes over time. These findings amplify the “idiosyncratic volatility puzzle,” as reported in the recent finance literature. Interestingly, REITs with a price of $5-to-$10 do well in 2009 and 2010. Further, the momentum factor appears to be influential since the first-ever listing of a REIT in the S&P500 Index in early October 2001.     

Alternative profitability measures and cross-section of expected stock returns: international evidence

Review of Quantitative Finance and Accounting - This paper provides an extensive international analysis of the cross-sectional return predictive power of a variety of firm-level profitability...     

Regional Developmental Problems of the Rural Settlements in Bosnia and Herzegovina

The paper considers developmental problems of the rural settlements in Bosnia and Herzegovina, which are results of long-term disparity in the regional development in the period 1991-2012. In this paper it is considered the recent migration from rural to urban areas and the depopulation of the rural areas. The result of these trends reflects the development of the new infrastructure and tertiary activities. In these investigations, statistical data processed and geovisualised in GIS were used. The obtained data indicate extremely unequable regional arrangement of the population in the rural areas and socio-economic development.     

A model-independent measure of aggregate idiosyncratic risk

This paper introduces a model-independent measure of aggregate idiosyncratic risk, which does not require estimation of market betas or correlations and is based on the concept of gain from portfolio diversification. The statistical results and graphical analyses provide strong evidence that there are significant level and trend differences between the average idiosyncratic volatility measures of Campbell et al. [Campbell, J.Y., Lettau, M., Malkiel, B.G., and Xu, Y., 2001, Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk, Journal of Finance 56, 1–43.] and the new methodology. Although both approaches indicate a noticeable increase in the firm-level idiosyncratic risk, the volatility measure of CLMX is greater and has a stronger upward trend than the new idiosyncratic volatility measure. For both measures of idiosyncratic risk, the upward trend is found to be stronger for smaller, lower-priced, and younger firms. The analytical and empirical results show that the significant upward trend in the differences of the two idiosyncratic volatility measures is related to the increase in the cross-sectional dispersion of the volatility of individual stocks.     

Financial Liberalization, Fiscal Prudence and Growth: Panel Evidence from 1980–2003

The main objective of this study is to investigate empirical links between financial liberalization, fiscal prudence and growth. More specifically, the hypothesis of whether financial liberalization coupled with fiscal prudence fosters or hinders growth is examined. We use an unbalanced panel dataset of 75 countries and quinquennial averages from 1980 to 2003. Through fixed effects estimations, we uncover that even though financial liberalization does not affect growth significantly, higher degree of financial liberalization in the presence of higher level of fiscal prudence leads to faster growth.     

Pricing Eurodollar Futures Options with the Heath—Jarrow—Morton Model

This article uses the algorithm developed by Ritchken and Sankarasubramanian (1995) to make comparisons among the Heath—Jarrow—Morton (HJM) models (Heath, Jarrow, & Morton, 1992) with different volatility structures in pricing the Eurodollar futures options. We show that the differences among the HJM models as well as the difference between the HJM models and Black's model can be insignificant when the volatility of the forward rate is relatively small. Moreover, our findings imply that the difference between the American‐style and European‐style options is insignificant for options with a life of less than 1 year. However, the difference can be significant for options with a 1‐year maturity, the difference depending on the exercise price. Finally, our tests indicate that the difference between the forward price and the futures price is insignificant if the volatility parameter is low enough and when the volatility of the spot rate is proportional to the spot rate. A higher volatility parameter can lead to a significant difference between the forward price and the futures price, although its impact on the price of the options will still be trivial. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21: 655–680, 2001     

Financial integration and business cycles in a small open economy

The purpose of this study is to examine a dynamic, stochastic, general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy. The existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy. Moreover, there is uncertainty involved in the production process which leads to collateralized borrowing by firms and, therefore, has to be taken into account in the design of the loan contracts between firms and financial intermediaries. It is shown that increasing financial integration amplifies the effect of a positive, temporary monetary shock on output, consumption, investment, labor demand and loans; whereas it has barely any implication for the impact of a positive, temporary technology shock on the economy.     

The Value of Deposit Insurance in the Presence of Interest Rate and Credit Risk

In this paper we employ the theory of the term structure of interest rates and the pricing of interest contingent contracts to determine the fair value of insurance for depository institutions. The balance sheet of a bank is taken to consist of long and short positions in various fixed income securities. Deposit insurance for the bank is a put option on the value of the assets. The value of deposits, assets, the implied exercise price of the put and the value of the put are all determined simultaneously as part of the same valuation solution. The approach is developed initially for a single‐state term structure. It is extended to incorporate credit risk on bank assets.
The most important policy implication is that for a bank whose assets are longer term than its liabilities and whose borrowers are not excessively leveraged the properly calculated, risk‐adjusted deposit insurance premia are increasing functions of the level of interest rates. Sensitivity analyses also treat such factors as the bank's deposit to asset ratio, duration gap, interest volatility, the volatility of assets backing the bank loans, and the bank's borrowers' debt to equity ratio.