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.
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 …
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.
Xu, Tracy, Han, Yufeng and Jiang, Yang
Real Estate Economics, Vol. 40 Issue 3, September 2012, pp.
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.
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 …
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.
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.
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 …
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.
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.
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.
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.
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.
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.
Juan Cabrera, Tao Wang, and Jian Yang
Journal of Real Estate, Vol. 33, Num., Pages: 565-594
This paper examines the short-horizon return predictability of the ten largest international securitized real estate markets, paying special attention to possible nonlinearity-in-mean as well as nonlinearity-in-variance predictability. Although international securitized real estate returns are generally not predictable based on commonly-used statistical criteria, there is much evidence for the predictability based on economic criteria (i.e., direction of price changes and trading rule profitability), which is more often due to nonlinearity-in-mean. The forecast combinations for various models appear to improve the forecasting performance, while the allowance of data-snooping bias using White’s reality check substantially mitigates spurious out-of-sample forecasting performance and weakens otherwise overwhelmingly strong predictability. Overall, there is robust evidence for the predictability in many international securitized real estate markets.
Glenn A Wolfe, Elizabeth S Cooperman
Journal of Applied Business Research (JABR),Vol. 6, Issue 1, Pages: 40-50.
This study examines the relationship between underpricing for new issues of common stock and issue size (offer price and number of shares) after controlling for an issues risk. Both risk and offer price are found to be significant factors in explaining underpricing. Offer price dominates as an explanatory variable in cold issue markets, while risk dominates in hot issue markets.
Takeshi Nishikawa, Andrew K. Prevost, and Ramesh P. Rao
Journal of Financial Research Vol. 34, Issue 3, pages 503–522
We reexamine the bondholder wealth impact of stock repurchases with a focus on the wealth transfer effect. We do not detect any transfer of wealth from bondholders to shareholders surrounding open market stock repurchases. For the overall sample (1994–2002), using daily data we document a significant decrease in bond yields surrounding repurchase announcements. Subsamples classified by attributes that capture wealth transfer propensity also do not reveal evidence consistent with a wealth transfer effect. Correlation analysis between bond and stockholder wealth effects similarly is not supportive of a wealth transfer effect. Contrary to the wealth transfer hypothesis, we document a greater proportion of bond rating upgrades than downgrades in the three months following a repurchase announcement. Our results are robust to alternate bond price data and event return methodology.
Michael V Mannino, Elizabeth S Cooperman
Journal of Pension Economics & Finance,Vol. 10, Issue 3, Pages: 457-483.
This study uses a unique data set of retiree characteristics and salary histories for administrators, teachers, and non-professional employees of the Denver Public School Retirement System (DPSRS) to analyze surplus deferred compensation for DPSRS and four state K-12 defined benefit pension plans. We find sizable levels of surplus deferred compensation for each plan, with significant differences across plans, job classes, and age groups. Across plans, differences in cost of living allowances impact the expected present …
Yufeng Han and David Lesmond
Review of Financial Studies Vol. 24, Issue 5 Pp. 1590-1629
We model a microstructure effect on daily security returns, embodied by zero returns and the bid-ask spread, and derive a closed-form solution for the resulting bias in the estimated idiosyncratic volatility. Our empirical tests show that controlling for the bias eliminates the ability of idiosyncratic volatility estimates to predict future returns. We also find a significant reduction in the pricing ability of idiosyncratic volatility after exogenous shocks to liquidity evidenced in the 1997 reduction in the quotes to sixteenths and the 2001 decimalization. Finally, minimizing liquidity’s influence on the estimated idiosyncratic volatility, by orthogonalizing the percentage of zero-return and spread effects on the estimated idiosyncratic volatility, demonstrates that the resulting idiosyncratic volatility estimate has little pricing ability.
Stephen Thomas and Ji Chen
Journal of Contemporary China, Volume 20, Issue 70, Pp. 467-478
China has established two of the world’s newer large sovereign wealth funds (SWFs): the official China Investment Corporation (CIC), and the non-official and less transparent State Administration of Foreign Exchange (SAFE) Investment Company (SIC). Both provide alternative investment opportunities for China’s exploding foreign exchange reserves, at US$2.4 trillion at the end of 2009, the largest in world history. This paper will address how China has accumulated its huge and growing foreign exchange reserves, and what roles these reserves, until 2007 managed only by the State Administration of Foreign Exchange (SAFE), have played in the establishment and development of China’s two new SWFs. We will look specifically at why China’s foreign exchange reserves have developed, and how the new SWFs are a part of broader efforts to provide investment alternatives for China’s ballooning foreign exchange surpluses, particularly in light of the inflow of ‘hot’ foreign speculative funds. We will then point out some of the difficulties for China’s financial officials of SWFs as they try to pursue multiple and sometimes competing goals, set by boards of directors representing different bureaucratic and economic interests, all within the context of a general lack of transparency and a rapidly growing economy. Finally, we will present our conclusions about the future roles of the two SWFs as well as of the policies being developed to decentralize foreign exchange reserve holdings while at the same time not slowing the growth of China’s foreign trade surpluses, nor its foreign direct investments, nor its overall economic growth. We will also examine the effects of US-promoted Chinese currency appreciation on the future of China’s foreign exchange reserves and its sovereign wealth funds.