Category Archives: Finance

Birth order and portfolio choice

Yosef Bonaparte, Frank J Fabozzi, David Koslowsky
Applied Economics,Pages: 1-16.
This paper examines the impact of birth order on financial decision-making. In lieu of explanations such as dissimilar parental style across children with different birth orders (due to learning and experience) or the existence of sibling externalities commonly offered in the literature to explain the impact of birth order on financial decision-making, our key conjecture is that birth order influences a host of personality traits, including risk-taking behaviour, and thus financial decisions. Indeed, we find that only born males tolerate greater financial risks and exhibit higher propensity to participate in the stock market. Irrespective of their birth order, only born individuals are 4.7-13.7% more likely to participate in the stock market. Furthermore, we also find that only born males demonstrate more activity in the financial market (higher tendencies to trade assets). Collectively, our stylized results suggest that birth order can be used

Does the NCAA’s Collegiate Model Promote Competitive Balance? Power-5 Conference Football Versus the NFL

E Woodrow Eckard
Journal of Sports Economics,Vol. 20, Issue 5, Pages: 654-670.
The disparity between athlete compensation and major sports revenues has produced criticisms of The National Collegiate Athletic Association (NCAA)’s Collegiate Model of athletic competition. In defense, the NCAA argues that it promotes competitive balance. One implication is that moving toward a professional model would reduce balance. The present article tests this hypothesis by comparing competitive balance in Power-5 conference football to that for the professional National Football League (NFL) using a variety of balance metrics. The results provide no support for the NCAA’s implicit hypothesis of less balance in the NFL, undermining competitive balance as a legitimate defense of the NCAA’s Collegiate Model.

Rationalizing Trading Frequency and Returns: Maybe Trading is Good for You

Yosef Bonaparte, Russell Cooper, Mengli Sha
National Bureau of Economic Research,Issue w25838,
Barber and Odean study the relationship between trading activity and returns. They find that households who trade more have a lower net return than other households. They argue that these results cannot emerge from a model with rational traders and instead attribute these findings to overconfidence. In contrast, we find that household financial choices generated from a dynamic optimization problem with rational agents and portfolio adjustment costs can produce trading and return patterns that closely mimic these facts. Adding various forms of irrationality, modelled as beliefs about income and return processes that are not data based, do not improve the ability of the model to explain the patterns of turnover and net returns. Irrationality can improve the ability of the model to match a larger set of moments, including these turnover and net return moments coupled with those that capture the wealth to income ratio and portfolio composition.

Institutional quality and sovereign credit default swap spreads

Wei Huang, Shu Lin, Jian Yang
Journal of Futures Markets,
We examine how the quality of political, legal, and regulatory institutions impacts sovereign risk premia. An improvement in institutional quality significantly lowers a country’s sovereign credit default swap (CDS) spread, even after controlling for domestic and global macroeconomic factors. The incremental effect of institutional quality may also be economically important in explaining the variations in the level of sovereign CDS spreads. The basic results are robust to alternative model specifications, samples, control variables, measures of institutional quality, estimation methods, and controls for endogeneity. Overall, the evidence suggests that institutional quality may play a significant role in explaining sovereign CDS spreads.

When is it Good to be Bad? Contrasting Effects of Multiple Reputations for Bad Behavior on Media Coverage of Serious Organizational Errors

David Chandler, Francisco Polidoro Jr., Wei Yang
Academy of Management Journal,
We have long known that organizational reputation is consequential. While highlighting the effects of a reputation for ‘good’ behavior, however, prior work has largely overlooked the possibility that a reputation for ‘bad’ behavior is qualitatively distinct. In addition, we know that organizational reputation is multidimensional. Although this is conceptually intriguing only if different types of reputation produce different effects, concurrent tests of such differences are rare. In response, we study the effects of multiple reputations for bad behavior on media coverage of a serious error by the firm. Due to the need for the news to be ‘new,’ we predict the media is more likely to cover errors that supplement a firm’s general ‘character reputation,’ but will likely ignore errors that are redundant given a firm’s specific ‘capability reputation.’ We test this theory in the context of 113 major oil spills in the U.S., from 1985 to 2016. Results

Disentangling and assessing uncertainties in multiperiod corporate default risk predictions

Miao Yuan, Cheng Yong Tang, Yili Hong, Jian Yang
Annals of Applied Statistics,Vol. 12, Issue 4, Pages: 2587-2617.
Measuring the corporate default risk is broadly important in economics and finance. Quantitative methods have been developed to predictively assess future corporate default probabilities. However, as a more difficult yet crucial problem, evaluating the uncertainties associated with the default predictions remains little explored. In this paper, we attempt to fill this blank by developing a procedure for quantifying the level of associated uncertainties upon carefully disentangling multiple contributing sources. Our framework effectively incorporates broad information from historical default data, corporates’ financial records, and macroeconomic conditions by (a) characterizing the default mechanism, and (b) capturing the future dynamics of various features contributing to the default mechanism. Our procedure overcomes the major challenges in this large scale statistical inference problem and makes it practically feasible by

Conditional co-skewness and safe-haven currencies: A regime switching approach

Kalok Chan, Jian Yang, Yinggang Zhou
Journal of Empirical Finance,Vol. 48, Pages: 58-80.
We examine hedging benefits of safe-haven currencies in terms of currency co-skewness with the global stock market (covariance between currency return and global equity volatility) derived from a Markov regime switching model. Of the major currencies, the US dollar, the Japanese yen and the Swiss franc have positive currency co-skewness, providing a hedge against global stock volatility. Moreover, lower excess returns and associated lower interest rates on these currencies are partially attributable to their positive co-skewness because currency co-skewnesses are significantly priced with the expected negative risk premia. The co-skewness pricing effect remains robust even after allowance for time-varying or downside beta, volatility and skewness.

Investors and stranded asset risk: evidence from shareholder responses to carbon capture and sequestration (CCS) events

John Byrd, Elizabeth S Cooperman
Journal of Sustainable Finance & Investment,Vol. 8, Issue 2, Pages: 185-202.
To avoid catastrophic climate change risk, the case for fossil fuel reserves not being burned has become stronger. This is particularly the case for coal, as the highest emitter of CO2 per unit of energy, with large portions of coal reserves likely to become stranded assets, posing significant risk to investors. Technology in the past has come to the rescue, so investor valuations may depend on perceptions for the success of technology in reducing stranded asset risk. We examine whether coal company shareholders perceive coal as a technologically stranded asset by studying shareholder reactions to news about CCS (carbon capture and sequestration) technology breakthroughs and setbacks. We find significant positive reactions to CCS breakthroughs, but no reaction for setbacks. This suggests investors have embedded expectations of stranded asset risk into their valuations, but also recognize the significance of

Corporations to the Rescue: A New Stakeholder Paradigm? An Overview for U.S. Corporations & Financial Institutions

Elizabeth S. Cooperman
International Review of Accounting, Banking, and Finance, Vol. 10, Issue No. 1/2, Pages: 23-42.
Whether corporations should intervene when governments fail to act on important public issues is an interesting question. With considerable political discord in the US many CEOs have stepped up as social activists by expressing approval or disapproval of public policies providing a platform for discussion to encourage positive government actions. Businesses and major financial institutions have also engaged in environmental activism as well. This paper provides a discussion of a paradigm shift from the single role of corporations to maximize shareholder wealth to considerations for multiple stakeholders, and new roles that CEOs of financial institutions and corporations have taken on including acting as social and ethical mediators for important public policy issues, focusing on key issues in the US

Housing price spillovers in China: A high-dimensional generalized VAR approach

J Yang, Z Yu, Y Deng
Regional Science and Urban Economics,Vol. 68, Pages: 98-114.
Applying a proposed spillover index of high-dimensional generalized VAR framework, this paper, for the first time, explores housing price spillovers among 69 large- and medium-sized Chinese cities from July 2005 to June 2015. We find that city-level monthly housing prices in China are highly interactive with each other. Demonstrating the important role of government policy, data-determined systemically important cities in the price spillover network appear to be consistent with core cities supported by several regional development plans of the Chinese government and agglomerate in five relatively concentrated areas. A higher administrative status, population, city GDP and secondary education are significant determinants of the (net) positive spillover pattern. These findings shed new lights on understanding the housing market, regional development policies, and economic geography in China.

The impact of crude oil inventory announcements on prices: Evidence from derivatives markets

Hong Miao, Sanjay Ramchander, Tianyang Wang, Jian Yang
Journal of Futures Markets,Vol. 38, Issue 1, Pages: 38-65.
This study examines the impact of weekly crude oil storage announcements on oil futures and options prices. We document evidence of a strong announcement day effect on both markets, and find prices to move in anticipation of the inventory surprise. Futures returns significantly decrease with positive surprises and increase with negative surprises. There is no evidence of an asymmetric impact on futures prices. Nearthemoney options exhibit the greatest price sensitivity, and the magnitude of the price response of both futures and options declines with maturity. The results remain robust even after controlling for various macroeconomic and other storagerelated news variables.

Human Capital, Skilled Immigrants, and Innovation

Rasha Ashraf, Rina Ray
Skilled Immigrants, and Innovation (September 14, 2017),
Before 2004, by sourcing skilled labor in the international labor market, large, innovative US firms effectively utilized an alternative to investing in the existing human capital stock of these firms. After the immigration policy shock of 2004, when new skilled immigrant hiring became constrained, the firms dependent on skilled immigrant workers reduced R&D investment proactively and contemporaneously. Firm-level innovation outcome, measured by patents and citations, declined for these firms and there was an increase in Sales, General, and Administrative (SG&A) expense beginning three years after the shock. An increase in SG&A suggests a plausible increase in investment in the human capital of existing employees. Our results are robust to placebo tests, tests for alternative hypotheses, a set of falsification tests, and a battery of robustness checks. Although real wages declined for both immigrants and host-country workers after the shock, the decline is statistically significant only for the immigrant workers.

A flexible approach to estimate the equity premium

Yosef Bonaparte, Frank J Fabozzi
Applied Economics,Pages: 1-11.

In this article, we estimate the risk aversion for households accounting for their lifetime consumption risk. Households take into account the overall lifetime uninsured consumption risk when optimizing their resources, which based on micro data varies across households. Thus, representing households’ consumption by merging cross-sectional micro data into the single Euler equation (the common approach for estimating risk aversion based on consumption-based asset pricing theory) may be too rough an approximation, leading …
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Estimating the elasticity of intertemporal substitution accounting for stockholder-specific portfolios

Yosef Bonaparte, Frank J Fabozzi
Applied Economics Letters,Vol. 24, Issue 13, Pages: 923-927.

This article estimates the elasticity of intertemporal substitution using stockholder actual return experience. The approach is motivated by numerous data sources indicating that the median US stockholder has a portfolio composed of only three or four individual stocks, rather than a well-diversified portfolio as suggested by portfolio theory. Therefore, representing an individual stockholder portfolio by a proxy financial index (the common approach taken in the literature) may be too rough an approximation of investor …
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Political climate, optimism, and investment decisions

Yosef Bonaparte, Alok Kumar, Jeremy K Page
Journal of Financial Markets, Volume 34, Pages 69-94

We show that people’s optimism towards financial markets and the macroeconomy is dynamically influenced by their political affiliation and the current political climate. Individuals become more optimistic and perceive markets to be less risky and more undervalued when their preferred party is in power. Accordingly, investors increase allocations to risky assets and exhibit a stronger preference for high market beta, small-cap, and value stocks, and a weaker preference for local stocks. The differences in optimism …
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Does corporate governance matter in competitive industries? Evidence from China

Zhuangxiong Yu, Jie Li, Jian Yang
Pacific Basin Finance Journal,Vol. 43, Pages: 238-255.

Using the data of Chinese listed firms from 2003 to 2013, this study examines how product market competition affects the impact of corporate governance on firm value. In sharp contrast with the overwhelming empirical evidence based on the US and European developed markets that product market competition acts as a substitute for corporate governance and good governance matters only in non-competitive industries, we document that good governance of Chinese firms significantly increases firm value only in …
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The uncertainty-of-outcome hypothesis and the industrial organization of sports leagues: Evidence from US college football

E Woodrow Eckard
Journal of Sports Economics,Vol. 18, Issue 3, Pages: 298-317.
The uncertainty-of-outcome hypothesis (UOH) posits that sports fans value competitive contests, implying that competitive imbalance within a league will motivate stronger teams to leave. Testable hypotheses can be formulated utilizing the many college football conference realignments over the last century. The results support the UOH. For example, schools leaving an existing conference to form a new major conference, or join a preexisting one, were on average stronger than their former associates in the years before their departure. Also, the number of seed conference championships won by departing schools generally exceeded their “fair share” under an equal-likelihood assumption.

Heterogeneous traders, liquidity, and volatility in crude oil futures market

Erik Haugom, Rina Ray
Journal of Commodity Markets,Vol. 5, Pages: 36-49.

We are the first to analyze the relation between liquidity, volatility, and return distributions for the crude oil futures market. We do this by using a quantile regression method while most of the research in the field of liquidity and volatility has employed conventional OLS regression. While the latter approach can be useful in many applications, it fails to provide any insight about the effects in the rest of the distributions-outside the mean-of interest. Our results show that a distinct volatility “smile” is formed when trading activity, …
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Shareholder Activism for Stranded Asset Risk: An Analysis of Investor Reactions for Fossil Fuel Companies

John Byrd, Elizabeth S Cooperman
International Review of Accounting, Banking and Finance,Vol. 9, Issue 1, Pages: 59-78.
Environmental shareholder activists engage in corporate governance activities including divestment campaigns and shareholder resolutions to get companies to change harmful practices. During 2011 to 2015, activists engaged in both activities to compel major fossil fuel companies to acknowledge unburnable reserves (ie, stranded assets) with their burning associated with rising global temperatures and catastrophic climate change. We examine stock market reactions to key news events for activist activities during 2011 to 2015.

Managing Financial Institutions: Markets and Sustainable Finance

Elizabeth S. Cooperman
Routledge,Pages: 1 to 477.
WE live in times with the world transforming around us, with rapid advances in technology, climate change risks, and accompanying social risks in the aftermath of the global financial crisis. These are challenging times, and the obligation of financial institutions to operate in a responsible way, including engagement in sustainable development, has never been more important, requiring socially and environmentally accountable financial institution management. As Achim Steiner (2015, p. 1) in the foreword to the United Nations Environment Programme (UNEP) Inquiry Report for the Design of a Sustainable Financial System notes:The financial system underpins growth and development. In 2008 we witnessed some of the world’s most sophisticated financial systems spawn the worst global financial crisis seen in decades. As markets in some developed countries collapsed, others in both developed and developing