Asset Pricing

This paper attempts to assess the economic significance and implications of collateralization in different financial markets, which is essentially a matter of theoretical justification and empirical verification. We present a comprehensive theoretical framework that allows for collateralization adhering to bankruptcy laws. As such, the model can back out differences in asset prices due to collateralized counterparty risk. This framework is very useful for pricing outstanding defaultable financial contracts. By using a unique data set, we are able to achieve a clean decomposition of prices into their credit risk factors. We find empirical evidence that counterparty risk is not overly important in credit-related spreads. Only the joint effects of collateralization and credit risk can sufficiently explain unsecured credit costs. This finding suggests that failure to properly account for collateralization may result in significant mispricing of financial contracts. We also analyze the difference between cleared and OTC markets. Key words: unilateral/bilateral collateralization, partial/full/over collateralization, asset pricing, plumbing of the financial system, swap premium spread, OTC/cleared/listed financial markets. JEL Classification:

The trading app Robinhood maintains a list of the 100 stocks most widely held by its users. Using a novel dataset of stock popularity with Robinhood user, I focus on new securities that enter the list. I document the strong effect that salience of new Top 100 listing events has on the attention of Robinhood users, who are between 5 to 7 times likelier to buy these newly listed securities. The resulting demand causes a dramatic, though short-term price increase. A strategy that buys stocks a day after listing and sells them two days later, obtains a return of 458% over the period studied, compared with 24% generated by the market. This effect is mostly observed in smaller stocks, and is not accompanied by market-wide trading. Since retail investors tend to consume information available exclusively within their app or web site of choice, these apps wield increasingly more influence on how investors make trading decisions, even through means as simple as a list. As FinTech reduces trading costs and attracts users, this power can reach beyond the app's ecosystem to the market itself, to directly affecting asset prices. JEL classification: G11, G12, G14, G41.

This paper presents a formal derivation of general expressions for Ke and WACC in perpetuities with constant growth, which do not make any assumption on what the proper discount rate is to be applied to the firm’s tax shield, and are complemented with numerical examples of its application. Furthermore, because the most widely known approaches to market valuation of firm and equity make either an implicit or explicit assumption on the value the mentioned rate should take expressions for the value of the equivalent rate on each one of those cases are presented. In addition, a formula for the calculation of the impact on the firm and equity value of a variation on the discount rate for tax shield is proposed, which yields exact results for changes of any size.

Every year since 1991, the Central Government of India has been successfully disinvesting its PSEs from various sectors. The recent announcement to strategically disinvest some of the better performing PSEs like Life Insurance Corporation of India Ltd., Air India and so on is indeed shocking. This seriously questions the intension of the government towards the declared objectives of the disinvestment strategy in 1991. There are severe apprehensions on selling-off the PSEs at a lower price and the utilization of disinvestment proceeds for filling the revenue deficits of the Central Government. This paper discusses the idea of disinvestment in India and the debates associated with it. The paper also critically analyses the disinvestment proceeds in India as a tool to tackle mounting fiscal deficits after the initiation of the New Economic Policies in 1991.

The present paper tries to establish the impact of various macroeconomic variables on the performance of the Islamic stock market for India. Compatible with the Efficient Market Hypothesis (EMH), a number of macroeconomic variables have been documented to impact the performance of the stock market. The Arbitrage Pricing Theory (APT) laid the theoretical basis for the relationship between stock returns and macroeconomic variables which has been later on empirically tested by a large number of studies. We have used the Ordinary Least Square (OLS) Regression to study the impact of macroeconomic variables including inflation, industrial production, exchange rate, interest rates and money supply on the Islamic stock returns. The various diagnostic tests including the Breusch-Godfray Serial Correlation Lagrange Multiplier (LM) test, the Breusch-Pagan-Godfray test and the Jarque-Berra test have been used to check whether the residuals of OLS are pure white noise. The findings of our study suggest that exchange rate and interest rates have a significant impact on the Islamic stock market. The implications of the study are that exchange rates and interest rates should be controlled so as to improve the performance of the Islamic stock market in India.

The monthly factor premium time series for the three factors (market, size and value) in the Fama-French three factor model in India are found to be stationary for period April 01, 1991 till March 31, 2015. The stationarity behavior for the time series is inferred from a visual examination as well as by use of the Augmented Dickey Fuller test (Said & Dickey, 1984; Said, 1991; Fuller, 2009), the Phillips-Perron test (Philips & Perron, 1987) and the KPSS test (Kwiatkowski et al., 1992). Thus. it can be inferred that the investors’ return expectations from the overall market have not changed in spite of tremendous developments in the Indian economy and the transformations in the Indian stock market during the study period. It could also be noted that the Granger causality tests involving the market risk premium, size and value premium showed that size premium Granger causes value premium. This implies that at least a part of variation in stock returns due to value could possibly be explained by size.

The present study adds to the sparse published Australian literature on the size effect, the book to market (BM) effect and the ability of the Fama French three factor model to account for these effects and to improve on the asset pricing ability of the Capital Asset Pricing Model (CAPM). The present study extends the 1981–1991 period examined by Halliwell, Heaney and Sawicki (1999) a further 10 years to 2000 and addresses several limitations and findings of that research. In contrast to Halliwell, Heaney and Sawicki the current study finds the three factor model provides significantly improved explanatory power over the CAPM, and evidence that the BM factor plays a role in asset pricing.

The study is Identify and describe the characteristic features of the art marketplace, determine organizational functions and key stages of the development of international art market. Particular attention payed to the economic and legal aspects, Defined the specific features of the approach to the articles of the Uniform Commercial Code of the United States. In priority shown aspects of legal regulations of the New York General Business Law, which is focused on relationships of art market parties. Established interrelationships between economy and art in a row with the large-scale volumes and forms of the art market. This study additionally raises questions about the pricing of contemporary art in the art market. The article reveals the problems of unregulated art market, the lack of transparency in prices, as well as in transactions. Discussion keep on the issue of circulation of forgeries in the art market, that leads to pay more attention for the authenticity. The article examines trends in the US’s art market, it’s investments potential and contribution to the country’s economy through private and public income, which leads to the leader position at the international arena of art industry.

Investment opportunities remain vast within the Botswana economy and investors seek to make wise choices about their investments hence would require help selecting the most profitable from the options presented to them. Recent studies have showed their own view of unit trusts and the stock market and how to benefit from them but none has touched on the long term investment especially generally for Botswana. This dissertation aims to evaluate a structure of investing both unit trusts and into the stock market using the unique earnings capabilities of the respective asset classes. Current literature has outlined that the unit trust industry is one of the fastest growing in the finance sector and their competitive edge lies with their diversification thereby minimising risk and creating room for wealth creation while on the other hand the stock market bears a number of systematic risks for different types of stock available. With higher risks are an expectation of higher returns hence risk takers would benefit vastly. The researcher adopted an abductive approach for a pragmatist philosophy so say that there are a number of ways to interpret one picture hence being open minded about investment ventures available for inclusion in one’s portfolio. Instruments such as questionnaires were used to collect data and analysis for which done though statistical software’s; archival research analysis which was quantitative was through the assistance of Microsoft excel. The data was collected from a sample of investors whom a good number of which are of have a University degree in Finance hence have sound knowledge on the dynamics of investing. The study found that BIHL from the sample of listed companies outperformed the others and is the most profitable stock on the stock exchange; BIFM and Stanlib have profitable portfolios which investors should venture into and are the money market and balanced prudential fund respectively. The study has also found that a number of investors would like to invest in the future and are certain about investing their money in a company than keeping it in a bank, only a fair number of the participants seem aware of fund managers available in the country hence this research would like to bridge the gap of lack of sufficient information. The concluding decisions emphasised henceforth was that indeed stock and unit trusts are profitable in the short, medium and long term thus the recommendation is to invest in both starting with unit trusts then the stock market given that capital is adequate.  The limitation of the study though is the assumption of adequate capital which is not always so and lack of a third party to corroborate the prospected portfolio for Batswana investors.

This study investigates whether a Fama-French five-factor asset pricing model can explain average returns in the Nordic markets. Further, this study compares the fivefactor asset pricing model’s performance to that of a CAPM and Fama-French threefactor model. The study rejects all models’ descriptions of average returns on the sample. All models perform well in explaining the average returns of portfolios sorted on size and book-to-market ratio, and portfolios sorted on size and investment. However, the models have large difficulties in explaining the average returns of portfolios sorted on size and profitability. While the five-factor model provides a more mean-variance efficient portfolio from its explanatory variables, it fails to improve the intercepts produced in regressions on three factors. Moreover, this study provides more evidence of a disappearing size effect and finds that small stocks in the Nordic markets generally have lower market betas than big stocks.

Book Review: Talking Prices by Olav Velthuis

TABLE OF CONTENTS:
I. Introduction
II. Juxtaposition of art and commerce: the trichotomy of the avant-garde galleries, conservative dealers and auction houses
III. Money as the building block of relationships between artists, dealers and collectors
IV. Pricing works of art: bending rationality and twisting the economic principles
V. Social fabric of the art market
VI. Conclusion

MORE INFO on: angelversetti.com
Angel Versetti

This paper examines the performance of cryptocurrencies issued in initial coin offerings (ICOs) over a three-year period after the initial exchange listing. Average (median) ICO underpricing amounts to 15% (3%), even though 4 out of 10 ICOs destroy value on the first trading day. Liquidity, market capitalization, and high-low price ratios predict returns. Long-run buy-and-hold returns are positive for the mean and negative for the median. For holding periods between one and twenty-four months, the median ICO depreciates by 30%. Evidently, there is substantial positive skewness in the cryptocurrency market. Further, a size effect emerges from the data as an empirical regularity: Large ICOs are more often overpriced and underperform in the long run. JEL classification: G24, G32, K22, L26.

In this paper we present an alternative approach to equity trading that is based on cointegration. If there are long-run equilibria among financial assets, a cointegration-based trading strategy can exploit profitable opportunities by capturing mean-reverting short-run deviations. We conduct an in-depth analysis of the factors that affect the optimal portfolio construction and we study the impact of these parameters on the portfolio performance. Under certain parameter specifications, an efficient tracking portfolio is able to produce similar patterns in terms of returns and volatility with the market. Enhancing this simple equity indexing application allows for the construction of market-neutral strategies. We find that a successful long-short strategy of two cointegration portfolios can yield an annualized return of more than 8%, outperforming the benchmark and also demonstrating insignificant correlation with the market. Even though some cointegration-based pairs-trading strategies can consistently generate significant cumulative profits, yet they do not seem to converge to risk-less arbitrages, and thus the hypothesis of market eciency cannot be rejected.

This thesis presents a tool for backtesting algorithmic trading strategies for cryptocurrencies. The tool, called quantbacktest, provides a convenient way to automatically run comparisons of multi-dimensional parameter spaces for algorithmic trading strategies. The tool supports any algorithmic strategy to be simulated and any parameter spaces to be tested and optimized with minimal adjustments. Also, arbitrary trading frequencies can be tested, from intraday to long-term strategies. Many standard return metrics, risk metrics, and robustness test functionalities come out-of-the-box in CSV format and as diagrams. Users can provide signals and price data via CSV or Excel files. Signal processing does not require a technical (code-level) understanding of the backtesting tool on behalf of the user.

This paper will discuss the current research in building models of conditional variances using the Autoregressive Conditional Heteroskedastic (ARCH) and Generalized ARCH (GARCH) formulations. The discussion will be motivated by a simple asset pricing theory which is ...

This article reviews how climate change could be considered an additional source of market risk. I discuss the types of data needed to analyse the climate risk drivers that shape the dynamics of the equity market. I present empirical evidence at both the macro and micro-level, analysing whether and to what extent the equity market prices climate change and related risks. Top-down and bottom-up approaches are compared to understand which climate risk is more likely to affect the cross-section of stock returns, both within and across sectors. Emphasis is also placed on investors' beliefs about climate change risks, and the related asset pricing implications are analysed. I conclude by illustrating further directions for both empirical and theoretical research in the field of climate finance.

Ever since the derivation of The Capital Asset Pricing Model (CAPM), a large number of studies have been dedicated to investigating and assessing its validity and performance. These studies have significantly impacted the field of financial economics, with some empirical studies supporting the model, while others disputing and opposing the model. This paper provides a comprehensive review of the CAPM, with the first part discussing the theory, as well as the main literature on the continuing academic debate of its validity.  The second part is empirical, paying particular attention to testing validity by estimating Beta for 12 selected companies on the London Stock Exchange (LSE) over the period 2001-2010, and comparing it to actual Beta results by a paired sample t-test, regression analysis, Pearson correlation and a Kruskal-Wallis test.

Research results show that the CAPM is almost completely valid in the LSE, with 11 out of 12 of the companies showing no significant differences between the estimated Betas and the actual beta, hence providing evidence in support of the model. The overall result demonstrates the CAPM is valid in the LSE.

This paper provides a survey of the microstructure literature relating to the Easley and O’Hara (1992) model and discusses the implications of adding event uncertainty to the standard sequential trade model of Glosten and Milgrom (1985). I simulate the structural model of Easley and O’Hara (1992) and estimate its parameters using trade data from 1995 for six different stocks listed on the New York Stock Exchange (NYSE) using the methodology developed by Easley et al (1997). I also estimate the parameters of the standard Glosten-Milgrom model and empirically test the restriction of no event uncertainty. The main contribution of this paper is to explore the assumption that information arrives overnight. I test the robustness of the daily parameter estimates when we consider different assumptions on what we consider to be a trading “round” in the aggregation of the order flow. My results show that the parameters are reasonably stable for different assumptions on the arrival time.

Financial planning is the process of assessing the financial goals of an individual, its taking money that he is owing, determine life goals, and then take necessary steps in order to achieve goals in the determining period. It is a technique of quantifying a person's requirements in terms of money. This study aims at answering these questions; Q1: how can the investor plan for his financial resources? Q2: What is the overview of the investor in short and long term goals? For data collection, the researcher has collected primary data by surveying investor's investment objectives and risk profile. The result found that the comprehensive study about each aspect of this topic has shown that the Financial Planning is a dynamic and flexible concept which involves regular and systematic analysis, proper management, judgment, and actions.

Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. ABC enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also enables improved product and customer profitability analysis. It supports performance management techniques such as continuous improvement and scorecards. It is because; the company should implement ABC rather than traditional costing system.

Volatility is the most imperative input in the pricing of an option. As similar to underlying asset price, strike price, risk free rate of interest, remaining time to expiration and dividend, volatility also influences much on option pricing and trading. For a sophisticated trader, option trading is nothing but volatility trading and the trader who can forecast volatility the best is the most successful trader. The objective of this paper is to elucidate the efficiency of the market participants in forecasting the implied volatility using historical volatility and to study the relationship between historical volatility and implied volatility. This is done by considering ten stocks and their respective options which are consistently traded during the years 2014 and 2015. The stocks returns are tested for stationarity and then historical volatility is calculated. Using the Black Scholes option pricing model the implied volatilities are calculated. To check the nexus between historical volatility and implied volatility, Regression Analysis (OLS) and Grangers Casuality Test was conducted through Eviews. It was observed from the study that stock returns are stationary series and the historical and implied volatilities are significantly different and historical volatility does not have casual effect on forecasting implied volatility. This proved that implied volatility cannot be forecasted only by historical volatility, there were other factors (µ) that determines the implied volatility forecasting.

ABSTRACT. This study highlights the issues in the screening process of Sharīʿahcompliant
stock universe from Sharīʿah and professional perspectives. We have
critically analyzed Sharīʿah-compliance methodologies of selected (eight) institutions
in the light of Islamic principles of business. The findings suggest multiple
weaknesses in the process, including variations in tolerance limits (for ḥarāmelements),
variations in the use of calculation methods (total assets and market
capitalization), insufficient income purification mechanism, and confusions about the
application of bayʿ al-ṣarf and bayʿ al-dayn regulations. In addition, we find lack of
revisions in the tolerance limits, corresponding to the expansion of the Islamic
finance market. We also find that certain important areas, such as questionable
marketing and sales practices and environmental damages, are ignored in filtration.
This study proposes a Sharīʿah-compliance rankings mechanism for Islamic stock
markets, within agreed upon framework, based on the degree of violations.
Keywords: Islamic capital market, Sharīʿah Screening, Islamic finance, Islamic
Indices, Islamic Business, Islamic stock Portfolio, Income purification.
JEL Classification: G10
KAUJIE Classification: L41, L43, O0

This paper examines the performance of cryptocurrencies issued in initial coin offerings (ICOs) over a three-year period after the initial exchange listing. Average (median) ICO underpricing amounts to 15% (3%), even though 4 out of 10 ICOs destroy value on the first trading day. Liquidity, market capitalization, and high-low price ratios predict returns. Long-run buy-and-hold returns are positive for the mean and negative for the median. For holding periods between one and twenty-four months, the median ICO depreciates by 30%. Evidently, there is substantial positive skewness in the cryptocurrency market. Further, a size effect emerges from the data as an empirical regularity: Large ICOs are more often overpriced and underperform in the long run. JEL classification: G24, G32, K22, L26.

This paper is intended to study the impact of various macroeconomic variables on Indian stock market. Based on the Arbitrage Pricing Theory (APT) propounded by Ross in 1976 and various other studies, a number of macroeconomic variables including, inflation, industrial production, exchange rate, money supply, interest rate, and oil price have been identified to have a significant impact on the stock market. We have applied the multivariate extension of the classical linear regression model computed on Ordinary Least Squares method and Granger Causality test to re-establish the relationship between macroeconomic variables and stock returns over a period of 10 years from 2005 to 2015 using monthly observations. The results of this study show that only exchange rate has a significant negative impact on stock returns. The other macroeconomic variables are not significantly affecting stock returns; however, their impact is in accordance with the economic theory. The Granger Causality test reveals absence of any causal relationship between stock returns and macroeconomic variables, except in case of oil prices, where we find a unidirectional causal relationship running from stock returns to oil prices. However, the Granger Causality results should not be taken in the conventional meaning of causality, but results merely identifying precedence

The purpose of this study is to identify the determinants of capital structure of large taxpayer share companies in Ethiopia. In this paper, econometric analysis were performed for a panel of 37 listed companies in Ethiopian Revenue and Customs Authority (ERCA) large taxpayers' branch office in Addis Ababa for the study period of 2006–2010. Nine conventional explanatory variables were adopted in this study, including profitability, size, age, tangibility, liquidity, non-debt tax shield, growth, dividend payout ratio and earnings volatility. As a result of the improvement in the existing estimation methods that enables to employ cross-sectional and time-series data concurrently, random-effect panel data regression was applied to study the effect of selected independent variables on capital structure. The result shows that size, age, tangibility, liquidity position and non-debt tax shield of a company are positively correlated with leverage, whereas profitability, earnings volatility and dividend payout ratio are negatively associated with leverage. Growth variable was found to be statistically insignificant in affecting leverage of large taxpayer share companies in Ethiopia. The sign of these relations suggest that, Agency cost theory provide more convincing evidence than other capital structure theories in elucidating the capital structure of large taxpayer share companies in Ethiopia.