Category Archives: Finance

Context-Based Sustainability and Corporate CO2 Reduction Targets: Are Companies Moving Fast Enough?

John W Byrd, Ken Bettenhausen, Elizabeth S Cooperman
International Review of Accounting, Banking, and Finance, Volume 5 Issue 3/4, Fall/Winter 2013, pp. 87-104.

Corporate sustainability activities are often ad hoc; that is, the extent to which a company moves toward being more sustainable is based on organizational feasibility or economic acceptance rather than true sustainability criteria. This paper examines corporate climate and carbon policy through the lens of context-based sustainability (CBS). CBS argues that true sustainable efforts must consider the ecological capacity of the environment and the fair allocation of this capacity. Only by doing so will the result be an outcome of a livable and sustainable world. The paper combines aspects of physical science (atmospheric CO2 carrying capacity) and philosophy (inter-generational equity and resource allocation) with corporate policy. When applied to climate change this implies examining corporate efforts relative to climate stabilization paths and further examining what a fair allocation of future emissions would be. We look at the documented carbon reductions for a sample of large US corporations including EPA Climate Leadership Award Winners in 2012 and a larger sample of companies from the same industries and compare their carbon reductions to several allocations of the global carbon budget required to limit climate change to just 1°C or 2°C. We find that the emissions path of these US corporations only satisfies the most generous, business-as-usual allocation of carbon emissions.

Time-Varying Risk–Return Trade-off in the Stock Market

Hui Guo, Zijun Wang, Jian Yang
Journal of Money, Credit and Banking, Vol. 45, Issue 4, pp. 623-650

We uncover a strong comovement of the stock market risk–return trade-off with the consumption–wealth ratio (CAY). The finding reflects time-varying investment opportunities rather than countercyclical aggregate relative risk aversion. Specifically, the partial risk–return trade-off is positive and constant when we control for CAY as a proxy for investment opportunities. Moreover, conditional market variance scaled by CAY is negatively priced in the cross-section of stock returns. Our results are consistent with a limited stock market participation model, in which shareholders require an illiquidity premium that increases with CAY, in addition to the risk premium that is proportional to conditional market variance.

The Greening of Finance: A Brief Overview.

Elizabeth S Cooperman
International Review of Accounting, Banking & Finance, Volume 5 Issue 1, March 2013, Pp. 47-65.

This paper provides a brief overview of some of the sustainability developments that companies and non-profit groups have undertaken in the finance area including sustainability in banking, venture capital and investment companies, and integration of sustainability as part of corporate social responsibility by large and small companies. Although in practice by many corporations have taken on a more social and environmental focus in terms of sustainable finance and accounting efforts, the field of finance generally …

Political Activism, Information Costs, and Stock Market Participation

Yosef Bonaparte and Alok Kumar
Journal of Financial Economics, Volume 107, Issue 3, Pp. 760–786

This paper examines whether political activism increases people’s propensity to participate in the stock market. Our key conjecture is that politically active people follow political news more actively, which increases their chance of being exposed to financial news. Consequently, their information gathering costs are likely to be lower and the propensity to participate in the market would be higher. We find support for this hypothesis using multiple micro-level data sets, state-level data from the US, and cross-country data from Europe. Irrespective of their political affiliation, politically active individuals are 9–25% more likely to participate in the stock market. Using residence in “battleground” states and several other geographic instruments, we demonstrate that greater political activism reduces information gathering costs and causes higher market participation rates. Further, consistent with our conjecture, we find that politically active individuals spend about 30 minutes more on news daily and appear more knowledgeable about the economy and the markets.

onsumption Smoothing and Portfolio Rebalancing: The Effects of Adjustment Costs

Yosef Bonaparte, Russell Cooper and Guozhong Zhu
Journal of Monetary Economics, Volume 59, Issue 8, Pp. 751–768

A household’s response to income and return shocks depends on the costs of portfolio adjustment. In particular, the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non-convex portfolio adjustment costs. Suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs. Due to these portfolio adjustment costs, the household demands both stocks and bonds. A household can buffer some income fluctuations without incurring adjustment costs and engage in costly portfolio rebalancing less frequently. Using the estimated preference parameters and portfolio adjustment costs, the response to income and return shocks is nonlinear and reflects the interaction of portfolio rebalancing and consumption smoothing.

Consumption smoothing and portfolio rebalancing: The effects of adjustment costs

Yosef Bonaparte, Russell Cooper, Guozhong Zhu
Journal of Monetary Economics,Vol. 59, Issue 8, Pages: 751-768.

A household’s response to income and return shocks depends on the costs of portfolio adjustment. In particular, the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non-convex portfolio adjustment costs. Suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs. Due to these portfolio adjustment costs, the household demands both stocks and bonds. A household can buffer some income fluctuations without incurring adjustment costs and …
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State uncertainty in stock markets: How big is the impact on the cost of equity?

Yufeng Han
Journal of Banking & Finance, Vol 36, Issue 9, Sept 2012, Pages 2575–2592

We propose a novel Bayesian framework to incorporate uncertainty about the state of the market. Among others, one advantage of the framework is the ability to model a large collection of time-varying parameters simultaneously. When we apply the framework to estimate the cost of equity we find economically significant effects of state uncertainty. A state-independent pricing model overestimates the cost of equity by about 4% per annum for a utility firm and by as much as 3% for industries. We also observe that the expected return, volatility, risk loading, and pricing error all display state-dependent dynamics that coincide with the business cycle. More interestingly, the forecasted market and Fama–French factor risk premiums can predict the future real GDP growth rate even though the model does not use any macroeconomic variables, which suggests that the proposed Bayesian framework captures the state-dependent dynamics well.

U.S. Monetary Policy Surprises and Mortgage Rates

Xu, Tracy, Han, Yufeng and Jiang, Yang
Real Estate Economics, Vol. 40 Issue 3, September 2012, pp.
461-507

This paper examines how the U.S. monetary policy surprises impact the mortgage rates in the nation and across five regions from 1990 to 2008. Regression analysis based on bootstrapping shows that surprises in the target federal funds rate (the target factor) have a significantly positive impact on the 1-year adjustable-rate mortgage (ARM) rate within the week of the FOMC announcements and the positive impact lasts up to one week after the announcements. Surprises in the future direction of the Federal Reserve monetary policy (the path factor) have significantly positive impacts on both the 1-year ARM rate and the 30-year fixed mortgage rates in the first week after the announcement. Furthermore, the responses of mortgage rates are asymmetric and affected by the size of monetary policy surprises, the stage of the business cycle and whether the monetary policy is tightening or loosening. There also exists heterogeneity in the mortgage rate pass-through process across regions and monetary policy surprises have differential impacts on the regional mortgage rates. The cross-region variations are mainly correlated with the regional housing market conditions, such as home vacancy and rental vacancy rates.

US Monetary policy surprises and mortgage rates

Pisun Xu, Yufeng Han, Jian Yang
Real Estate Economics,Vol. 40, Issue 3, Pages: 461-507.

This article examines how the US monetary policy surprises impact the mortgage rates in the nation and across five regions from 1990 to 2008. Regression analysis based on bootstrapping shows that surprises in the target federal funds rate (the target factor) have a significantly positive impact on the 1-year adjustable-rate mortgage (ARM) rate within the week of the Federal Open Market Committee announcements and the positive impact lasts up to 1 week after the announcements. Surprises in the future direction of the Federal …
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Asymmetric Correlation and Volatility Dynamics among Stock, Bond, and Securitized Real Estate Markets

Jian Yang, Yinggang Zhou and Wai Kin Leung
The Journal of Real Estate Finance and Economics, Vol. 45, Issue 2, pp 491–521
We apply a multivariate asymmetric generalized dynamic conditional correlation GARCH model to daily index returns of S&P500, US corporate bonds, and their real estate counterparts (REITs and CMBS) from 1999 to 2008. We document, for the first time, evidence for asymmetric volatilities and correlations in CMBS and REITs. Due to their high levels of leverage, REIT returns exhibit stronger asymmetric volatilities. Also, both REIT and stock returns show strong evidence of asymmetries in their conditional correlation, suggesting reduced hedging potential of REITs against the stock market downturn during the sample period. There is also evidence that corporate bonds and CMBS may provide diversification benefits for stocks and REITs. Furthermore, we demonstrate that default spread and stock market volatility play a significant role in driving dynamics of these conditional correlations and that there is a significant structural break in the correlations caused by the recent financial crisis.

Extreme correlation of stock and bond futures: International Evidence

Chin Man Chui and Jian Yang
The Financial Review, Vol. 47 Issue 3, August 2012, pp. 565-587

This study explores time-varying extreme correlation of stock-bond futures markets in three major developed countries. In the U.S. and the UK, there is evidence of positive extreme stock-bond correlation when both futures markets are extremely bullish or markets are extremely bearish. In German, stock-bond futures extreme correlation is negative, suggesting the most diversification potentials of bond futures when German stock when German stock index futures market plunges. Macroeconomic News,The Business cycle and the stock market uncertainty all significantly median stock bond futures correlation. However, only the stock market uncertainty still significantly affects the extreme stock-bond futures correlation when the stock market is extremely bearish.

Extreme correlation of stock and bond futures markets: international evidence

Chin Man Chui, Jian Yang
Financial Review,Vol. 47, Issue 3, Pages: 565-587.

This study explores time-varying extreme correlation of stock-bond futures markets in three major developed countries. In the United States and the United Kingdom, there is evidence of positive extreme stock-bond correlation when both futures markets are extremely bullish or bearish. In Germany, stock-bond futures extreme correlation is negative, suggesting the most diversification potentials of bond futures when German stock index futures market plunges. Macroeconomic news, the business cycle, and the stock …
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Do Shareholder Proposals Affect Corporate Climate Change Reporting and Policies?

Byrd, John and Cooperman, Elizabeth
International Review of Accounting, Banking & Finance, Volume 4 Issue 2, pp. 100-126

This study examines the effect of shareholder proxy proposals on climate change issues, using a sample of climate change resolutions submitted to U.S. corporations during 2007 to 2009. We test the hypothesis that shareholder climate-change proposals are effective in getting firms to engage in future actions. We examine differences in future actions based on company responses including: (1) SEC exclusion; (2) negotiation and withdrawal; and (3) proxy proposals voted on, and the percentage of vote received on proposal measures. We find evidence of future actions taken for climate change in response to resolutions, although actions can be relatively minor compared to proposal requests. Future actions occur more often for proposals with negotiated withdrawals. For proposals taken to vote, action occurs more often with a shareholder vote of 20 percent or higher. Extractive industry firms are also shown to be more reluctant to engage in climate change actions versus firms in non-extractive industries.

Are two heads better than one? Evidence from the thrift crisis

John Byrd, Donald R. Fraser, D. Scott Lee, and Semih Tartaroglu
Journal of Banking & Finance, Volume 36, Issue 4, pp. 957–967

We employ a natural experiment from the 1980s, predating the ubiquitous clamor for independence influenced corporate governance structures, to examine which governance mechanisms are associated with firm survival and failure. We find that thrifts were more likely to survive the thrift crisis when their CEO also chaired the firm’s board of directors. On average, chair-holding CEOs undertook less aggressive lending policies than their counterparts who did not chair their boards. Consequently, taxpayer interests were protected by thrifts that bestowed both leadership posts to one person. This is an important policy issue, because taxpayers become the residual claimants for depository institutions that fail as a result of managers adopting risky strategies to exploit underpriced deposit insurance. Our findings corroborate recent evidence that manager-dominated firms resist shareholder pressure to adopt riskier investment strategies to exploit underpriced deposit insurance.

Intraday price discovery and volatility transmission in stock index and stock index futures markets: Evidence from China

Jian Yang, Zihui Yang, and Yinggang Zhou
Journal of Futures Markets, Vol. 32, Issue 2, pages 99–121
Using high-frequency data, this study investigates intraday price discovery and volatility transmission between the Chinese stock index and the newly established stock index futures markets in China. Although the Chinese stock index started a sharp decline immediately after the stock index futures were introduced, the cash market is found to play a more dominant role in the price discovery process. The new stock index futures market does not function well in its price discovery performance at its infancy stage, apparently due to high barriers to entry into this emerging futures market. Based on a newly proposed theoretically consistent asymmetric GARCH model, the results uncover strong bidirectional dependence in the intraday volatility of both markets.

Reaching for the stars: the appointment of celebrities to corporate boards

Stephen P. Ferris, Kenneth A. Kim, Takeshi Nishikawa and Emre Unlu
International Review of Economics Vol. 58, Issue 4, Pages: 337-358

For a sample of over 700 celebrity appointments to corporate boards of directors over the period 1985–2006, we find positive excess market returns at the time of their announcement. The 1-, 2-, and 3-year long-run performance of the appointing firms provide corroborating evidence of the value of these appointments. We conclude that the appointment of celebrities as directors increase a firm’s visibility in a fashion consistent with Merton’s (J Finance 42:483–510, 1987) investor recognition hypothesis.

U.S. Monetary Policy Surprises and International Securitized Real Estate Markets

Pisun Xu and Jian Yang
The Journal of Real Estate Finance and Economics, Vol. 43, Issue 4
This paper examines the impact of U.S. monetary policy surprises on securitized real estate markets in 18 countries. The policy surprises are measured by both the surprise changes to the target federal funds rate (the target factor) and surprises in the future direction of the Federal Reserve monetary policy (the path factor). The results show that most international securitized real estate markets have significantly positive responses to surprise decrease in current or future expected federal funds rates, though such responses vary greatly across countries. Also, while the U.S. securitized real estate market reacts mainly to the target factor, foreign securitized real estate markets react to the path factor. Furthermore, we find that the cross-country variation in the response to the target factor is correlated with the country’s exchange rate regime and its degree of real economic and particularly financial integration, while the cross-country variation in the response to the path factor is mainly related to the country’s degree of financial integration.

Household Search Choice: Theory and Evidence

Yosef Bonaparte and Frank J. Fabozzi
Applied Economics Volume 43, Issue 26, pp. 3835-3847

Since the work by Stigler (1961) on the economics of information in the early 1960s, economists have paid closer attention to the role of search for information. However, search methods are not considered in the theory of portfolio choice. We present a model of investor search behaviour in order to provide a framework by which to evaluate our empirical evidence on the role of search in portfolio selection and performance. We study two types of search methods: informal and professional. We show that the income, wealth and risk preference of households influence their search choice.