Narrow Results

We employ an asset pricing framework with varying estimation lengths to show that there has been an increasing degree of integration between Asian and international stock markets, but very little with Japan. This finding is consistent with prior studies and highlights the impact of recent regulatory and economic reform undertaken throughout the region. Our results show that instability in the asset variance structure underpins the observed varying degrees of financial market integration. In particular, modeling integration using shorter estimation periods helps explain the time varying nature of financial market integration and the benefits that may accrue to international and domestic investors.

This paper represents a contribution to the empirical literature on systematic risk at a sectoral level in an emerging market, the Mexican Stock Market, incorporating all the available information of the different asset quoted prices for the beta calculation. We estimate the fuzzy beta coefficients for individual stocks as well as for sectoral indices comparing the results with OLS beta coefficients. Then, we contrast if the fuzzy estimations verify two hypothesis of the traditional portfolio theory, specifically those related to the influence of the number of stocks and the length of estimation period over beta stability. The methodology used to calculate the fuzzy beta coefficients is the fuzzy linear regression. The results suggest that, in the Mexican Stock Market, hypotheses of the portfolio theory are also verified when the return of the portfolio is considered as an uncertain data.

This paper analyzes the short- and long-term effects of the September 11, 2001 terrorist attacks on a comprehensive sample of stock market indices from 33 industrial and emerging economies. From a finance-theoretic point of view, we employ the international capital asset pricing model (ICAPM) to analyze the incidence of the 9/11 event. Consistent with expectations, we document statistically negative short-term stock market reactions to the 9/11 event for 28 countries. More importantly, we find increases in the level of systematic risk for 10 stock markets which attest to the presence of negative permanent effects emanating for the 9/11 event. However, a great many capital markets (including the US, Canada, Japan, China, Russia, and the largest European economies) did not experience statistically significant increases in systematic risk in the post-9/11 period. The decisiveness of the evidence clearly points in the direction of resilience and flexibility of the world capital markets.

This paper uses a unique data set of more than 1000 synthetic Collateralized Debt Obligations (CDOs) deals to describe typical structures, their pricing and performance with the aim of identifying the factors behind the spectacular collapse of this important segment of structured credit market in late 2008. The data suggests that mark-to-market losses on many synthetic CDO tranches were much more significant than in case of simpler, lower-rated products despite the former experiencing little or no impairment of the notional. The losses were driven instead by the concentration of relatively limited number of defaults in a short period of time, suggesting that pre-crisis pricing must have seriously underestimated such risk of default clustering. In view of the post-crisis pick-up in synthetic CDO issuance, the paper attempts to heed this lesson and offer a simple factor model of default correlation in the spirit of Marshall–Olkin that is naturally suited to capturing the temporal dimension of default dependencies that have been crucial for synthetic CDOs investors. The model allows building a rich dependence structure capable of consistently fitting standardized iTraxx and CDX index tranches, which makes it ideal for pricing bespoke CDOs.

This study examines a risk/return mismatch of the MSCI China Index, which has offered investors low returns and high volatility, yet remains a favorite within the global investors' portfolio. The paper suggests several insights, both from behavioral and traditional finance perspectives, to explain this mismatch. An international risk decomposition model is applied to separate the total risk of China's index return into global systematic risks, regional systematic risks and country specific risks. It suggests the index's lower than average systematic risk might be one of the explanations for its risk/return mismatch. The study also finds that the China Index's systematic risks, both global and regional, have been increasing, but more so at the global level.

The main purpose of this paper is to investigate empirically whether corporate diversification reduces the risk of the diversifying firm. We investigate this issue using a sample of diversifying acquisitions and various risk measures. We find that corporate diversification tends to decrease the risk of some firms but increase the risk of many others. On average corporate diversification does not lower firm risk. These findings call into question the notion that corporate diversification strictly reduces firm risk.

This paper presents empirical evidence on the effects of environmental regulation announcements on corporate performance in China when performance is proxied by stock returns. While some results indicate the effectiveness of environmental regulation, others point to the opposite. The perverse results are explained in terms of the lack of enforcement of environmental regulation, which is attributed to legislative shortcomings, poorly designed policy instruments, an unsupportive work environment for environmental regulators, a pro-growth political and social environment, and a cultural predisposition to harmony and consensus-building among those involved in the process.

Beta is considered an important measure of systematic risk which is arguably present in an emerging market. Daily data for 2200 Australian listed firms is collected for the January 2007–December 2016 period. Various portfolios are considered. Days with announcements (the a-day) related to crucial macroeconomic news are allocated into the group which is separated from the n-day (nonannouncement days) group. Findings indicate that beta is negatively related to daily expected excess returns in the announcement days in comparison with the nonannouncement days. It is the claim of this paper that portfolio formations do matter when empirical studies on asset pricing are conducted.

Investors and professional money managers typically categorize assets into different styles to facilitate portfolio management and capital allocations. As market participants move funds among assets of different styles based on their relative performance, correlated trading generates return comovement and style momentum, and affects risk premia. This paper reviews existing literature on style investing, and presents new evidence in a large bond market. The paper shows that style is an important factor that helps explain return comovement, momentum and risk premia in a bond market traditionally dominated by institutional and long-term investors thought to be less behaviorally biased.

Information provided by the US Department of Homeland Security regarding potential terrorist attacks significantly affects US Treasury securities markets. When the government announces heightened terror alert levels, investors' perceptions of risk increase and investors purchase 1-month and 1-year Treasury bills and 3-year, 5-year, 7-year, and 10-year US Treasuries in a "flight-to-quality" episode. Partial anticipation of increased threat level announcements is stronger than the anticipation of announcements regarding the federal funds rate during the 10 days prior to an announcement.

Based on a sample of 59 European listed banks, we employ an event study analysis to investigate the impact of the European Banking Authority (EBA) stress tests on systematic risk measured by market betas. We further investigate the drivers of systematic risk taking into account bank-specific variables, which include credit quality, accounting policies, bank loan loss provisions (LLPs) and capital ratios, along with supervisory assessments of bank vulnerability to stressed scenarios. Finally, we assess the impact of credit quality and capital adequacy variables on the systematic risk associated with growth opportunities.

Our results suggest that stress tests act as a credible anchor to market expectations leading betas to decline. The effect is more pronounced for banks involved in multiple stress tests over time. Our second finding shows a significant and positive impact of Tier 1 capital ratios on betas, i.e., higher capitalization levels contribute to reducing the exposure to systematic risk. Moreover, market betas are responsive to bank vulnerability to stress scenario, in particular, regarding asset riskiness. Finally, betas of growth opportunities are affected by provisioning policies in the sense that conservative provisioning policies impair the ability to invest in growing assets.

This study examines the relative systematic risks of 10 industries in China and ASEAN-3, including Malaysia, Singapore, and Thailand. We use four different approaches (ordinary least squares, least absolute deviations, MM-estimator and Theil–Sen estimator) and the weekly data from 2004 to 2016 to determine the sectoral systematic risk. The data are also divided into four sub-periods: the pre-crisis, crisis, post-crisis and normal periods. We find that the rankings of systematic risk, and the risk–return framework, for 10 industries vary from one country to another. The pairwise correlation analysis shows that significant correlation of sectoral ranks between estimation methods is found in China and Thailand, but not in Malaysia and Singapore. However, no correlations of industry rankings between China and ASEAN-3 countries for all the estimation methods for the full research periods and sub-periods are found. The sub-periods analysis also suggests that the rankings of systematic risk for industries in four countries across different economic periods are unstable.

In this paper, we explore the impact of International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) adoption on the French listed firms’ pricing in terms of performance, systematic risk aversion, idiosyncratic and systematic risks from 2001 to 2008. Unlike previous studies, we adopt a risk decomposition into systematic and idiosyncratic components to study the IAS/IFRS adoption effect. A modified market model (MMM) is used to allow time-varying variance on the one hand, and parameters changing over periods on the other hand. Our findings show that IFRS adoption reduces idiosyncratic risk, leads to a vanish in systematic risk, increases the systematic risk aversion, and improves the speed of information adjustment. We underscore the role of IFRS in enhancing the stocks’ informational efficiency. Our results help investors in their investment decisions as well as accounting professionals and market makers in the design of relevant accounting and financial policies.

In this chapter, we first investigate how measurement errors can affect the estimators of CAPM, such as α_j and β_j. Then, we derive Plim$\widehat{\text{b}}$ assuming R_m and R_b are measured with error. Finally, we develop an alternative hypothesis testing procedure for the CAPM.

This chapter uses the concepts of basic portfolio analysis and dominance principle to derive the CAPM. A graphical approach is first utilized to derive the CAPM, after which a mathematical approach to the derivation is developed that illustrates how the market model can be used to decompose total risk into two components. This is followed by a discussion of the importance of beta in security analysis and further exploration of the determination and forecasting of beta. The discussion closes with the applications and implications of the CAPM, and the appendix offers empirical evidence of the risk–return relationship.

In this chapter, we define both market beta and accounting beta, and how they are determined by different accounting and economic information. Then, we forecast both market beta and accounting beta. Finally, we propose a composite method to forecast beta.

Investors and professional money managers typically categorize assets into different styles to facilitate portfolio management and capital allocations. As these market participants move funds among assets of different styles based on their relative performance, correlated trading generates return co-movement and style momentum. This chapter reviews existing theories on style investing and important findings. In particular, it presents new evidence in a large bond market and demonstrates that behavioral finance theory can help explain return co-movement and momentum in the bond market traditionally dominated by institutional and long-term investors who are thought to be less behaviorally biased.

This chapter uses the concepts of basic portfolio analysis and the dominance principle to derive the CAPM. A graphical approach is first utilized to derive the CAPM, after which a mathematical approach to the derivation is developed that illustrates how the market model can be used to decompose total risk into two components. This is followed by a discussion of the importance of beta in security analysis and further exploration of the determination and the forecasting of beta. The discussion closes with the applications and implications of the CAPM, and the appendix offers empirical evidence of the risk–return relationship.

In this chapter, we define both market beta and accounting beta and how they are determined by different accounting and economic information. Then, we forecast both market beta and accounting beta. Finally, we propose a composite method to forecast beta.

The following sections are included:

• INTRODUCTION

• FOUR KEY ELEMENTS OF A DECISION

• DECISIONS BASED ON EXTREME VALUES
  • Maximin Criterion
  • Minimax Regret Criterion

• EXPECTED MONETARY VALUE AND UTILITY ANALYSIS
  • The Expected Monetary Value Criterion
  • Utility Analysis

• BAYES STRATEGIES
  • Bayesian Approach in Forecasting Interest Rates

• DECISION TREES AND EXPECTED MONETARY VALUES
  • A Decision Tree for Testing a Drilling Site
  • A Decision Tree for Capital Budgeting
  • Utilizing Sample Information to Improve the Determination of Pricing Policy⁴

• MEAN AND VARIANCE TRADE-OFF ANALYSIS
  • The Mean–Variance Rule and the Dominance Principle
  • The Capital Market Line
  • The Capital Asset Pricing Model

• THE MEAN AND VARIANCE METHOD FOR CAPITAL BUDGETING DECISIONS
  • Statistical Distribution of Cash Flow

• Summary

• Appendix 21A Using the Spreadsheet in Decision-Tree Analysis

• Appendix 21B Graphical Derivation of the Capital Market Line

• Appendix 21C Present Value and Net Present Value
  • Present Value
  • Net Present Value

• Appendix 21D Derivation of Standard Deviation for NPV

• Questions and Problems

• Project V Project for Selected Topics in Statistical Analysis

In this chapter, we look at how estimation is performed on an important finance valuation model to address the problem of risk pricing and also to apply the model to evaluate investment performances.

A key foundation of finance is the tradeoff between risk and return. Assets returning higher ex-ante (or conditional expected) return should also bear higher ex-ante risk, and vice versa. Finance theory and models seek to establish the exact relationship between this return and risk. One of the earliest finance models is the Sharpe-Lintner capital asset pricing model (CAPM) that links expected return to only systematic risk. The unsystematic or residual risk can be diversified away and is, therefore, not priced. Systematic risk in the form of market risk is priced. For any asset, this market risk is reflected in the sensitivity of the asset return to the market factor movement. Higher sensitivity implies a higher beta or systematic risk. When we refer to risk, it is usually quantified in terms of standard deviation instead of variance since the former is expressed in terms of the same unit as the underlying variable. We shall begin our study of CAPM with the statistical market model.