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1 – 10 of over 20000Marie‐Paule Laurent, Mathias Schmit and Suk Chun Van Belle
The purpose of this paper is to examine residual value risk modelling issues with a focus on automotive lease portfolios. Residual value risk is approached through a re‐sampling…
Abstract
Purpose
The purpose of this paper is to examine residual value risk modelling issues with a focus on automotive lease portfolios. Residual value risk is approached through a re‐sampling technique that provides the probability density function of losses and VaR measures for credit portfolios.
Design/methodology/approach
The methodology is applied to a portfolio of 37,523 operating leases issued between 1989 and 2001 by a major European financial institution.
Findings
The results show that residual value losses are low and sometimes non‐existent. Moreover, the major part of residual value risk is idiosyncratic and can thus be eliminated through adequate diversification. Additionally, this internal model seems to prove that capital requirements stemming from the Basel Committee's proposed new framework are somehow overestimated.
Originality/value
This paper advocates determining a more accurate risk weight for residual value risk in order to better reflect this relatively low‐risk part of leasing activities.
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Ghassen Nouajaa and Jean-Laurent Viviani
The purpose of this paper is to investigate whether CEO compensation scheme may induce some agency conflicts in the foreign exchange risk hedging policy.
Abstract
Purpose
The purpose of this paper is to investigate whether CEO compensation scheme may induce some agency conflicts in the foreign exchange risk hedging policy.
Design/methodology/approach
Residual exposure is a post-hedging variable computed as the ratio of unrealized foreign exchange risk gains/losses to international sales. The authors follow the optimal hedging theory developed by Smith and Stulz (1985). The residual foreign exchange risk exposure is a way to capture some consequences of the managerial risk aversion, whereas the compensation scheme granted to CEO reveals that of the shareholders. The authors interpret any deviation to the predictions of this theory as a mark that some agency conflicts exist.
Findings
CEO compensation (stock-options, shares and so) significantly influence the level of the residual foreign exchange risk exposure. Both in-the-money exercisable options and shares are negatively related to the residual exposure of foreign exchange risk. The authors also document that the effect of agency problems is rather contingent because shares and options have especially a negative impact when the level of foreign exchange risk is relatively high.
Originality/value
The residual FX risk exposure variable the authors promote in this paper completes the traditional proxies used to depict the corporate hedging policy such as the nominal or total fair value of currency derivatives (Davies et al., 2006), use of nominal values (Spanò, 2007), use of fair values of derivatives and the fraction of production hedged (Wang and Fan, 2011). The information that it conveys differs significantly from the one provided by traditional proxies because it captures the year-end post hedging firm’s risk profile.
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This paper investigates the extent to which risk reduction can be achieved within the UK property market in high and low Beta portfolios. This issue is examined by making…
Abstract
This paper investigates the extent to which risk reduction can be achieved within the UK property market in high and low Beta portfolios. This issue is examined by making simulations of property portfolios of increasing size using the largest sample (392) of actual property returns that is currently available, over the period 1981 to 1996. In particular it is shown that the achievable level of risk reduction is negatively related to the level of market risk of the individual assets. Thus portfolios based on individually high market risk assets require larger numbers of properties to achieve the same level of risk reduction than low Beta risk portfolios. In addition it is shown that the number of properties needed to “track” the market is prohibitively large and unlikely to be achievable for all but the very largest UK property funds. The practical implications of this are that UK property fund performance is likely to be mainly driven by stock selection, even for the largest funds. For those fund managers who wish to track the market the costs in terms of portfolio value seem prohibitively expensive. On this basis, no UK property fund, even the largest, would follow a passive investment policy.
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Fidan Ana Kurtulus, Douglas Kruse and Joseph Blasi
Using the NBER Shared Capitalism Database comprised of over 40,000 employee surveys from 14 firms, we investigate worker attitudes toward employee ownership, profit sharing, and…
Abstract
Using the NBER Shared Capitalism Database comprised of over 40,000 employee surveys from 14 firms, we investigate worker attitudes toward employee ownership, profit sharing, and variable pay. Specifically, our study uses detailed survey questions on preferences over profit sharing, forms of employee ownership like company stock and stock option ownership, as well as preferences over variable pay in general, to explore how preferences for these different types of output-contingent pay vary with worker risk aversion, residual control, and views of co-workers and management. Our key results show that, on average, workers want at least a part of their compensation to be performance-related, with stronger preferences for output-contingent pay schemes among workers who have lower levels of risk aversion, greater residual control over the work process, and greater trust of co-workers and management.
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Anthony Loviscek and Elven Riley
This paper aims to assess the impact of the global financial crisis of 2007‐09 on the risk structure of S&P 500 firms by examining their market, active, and residual risks before…
Abstract
Purpose
This paper aims to assess the impact of the global financial crisis of 2007‐09 on the risk structure of S&P 500 firms by examining their market, active, and residual risks before and during the crisis.
Design/methodology/approach
The classic one‐factor model is estimated for each firm in the S&P 500 to decompose risk into market, active, and residual components. Five sets of regression estimates based on monthly return data are used: 2002‐06, 2003‐07, 2004‐08, 2005‐09, and 2006‐10. The estimates provide insight into the risk structure of S&P 500 firms before and during the crisis.
Findings
The average correlation coefficient between S&P 500 firms rose during the crisis from 0.20 to 0.35, an increase of 75 percent. Although the results indicate that active and residual risks are significant across the firms and across the periods, the impact of the financial crisis was mostly on market risk. The increase in risks was pronounced for financial firms, especially insurance companies, and industrial firms, especially “hard” manufacturing.
Research limitations/implications
Because the study focuses on the global financial crisis of 2007‐09, researchers should be careful about generalizing the results to the post‐crisis period.
Practical implications
Investors should be aware that equity portfolio risk reduction during major crises can be hard to achieve because the average correlation coefficient between stock returns may rise significantly, crimping the efficacy of diversification.
Originality/value
It was very difficult for equity investors to shield themselves from the risk associated with the global financial crisis of 2007‐09.
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In 1996, an International Accounting Standards Committee (IASC) working party suggested that current methods of accounting for leases should be changed and in 1999 this work…
Abstract
In 1996, an International Accounting Standards Committee (IASC) working party suggested that current methods of accounting for leases should be changed and in 1999 this work culminated in a position paper from the UK Accounting Standards Board (ASB) which made a number of suggestions for consultation (ASB, 1999). The paper assumes that the overall thrust of the proposed changes will be accepted and that will mean that occupying lessees will be required to capitalise the liability to pay rent for their lease and place that liability on the balance sheet. It will also require that property owners identify the value of the lease and the residual property value separately. These are by no means the only issues that are raised by the position paper but it is the implications of these two proposals for valuation methodology that is the subject of this paper. The property industry response in the UK to these two proposals is outlined and it shows that a minimalist approach is recommended, which incidentally is the preferred approach of the UK ASB. This paper argues that market valuations should already be carried out by techniques that attempt to identify the different values of the lease and the residual property value. The minimalist approach will replace one missing set of information with a misleading set, meaning that the IASC attempt to improve the ability of accounts to provide a “fair view” of companies will be thwarted. Alternative valuation models should be adopted which accurately appraise the assets and liabilities distributed by the lease and also identify the residual property value. Conventional market valuation approaches do not work in this context.
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In Private Finance Initiative (PFI) projects, value for money (VFM) tests and accounting treatment are distinct but related issues. VFM analysis should be concerned with total risk…
Abstract
In Private Finance Initiative (PFI) projects, value for money (VFM) tests and accounting treatment are distinct but related issues. VFM analysis should be concerned with total risk, not just with the sharing of risk, which dominates the accounting treatment decision. A framework is developed for logical thinking about what is meant by “best VFM” in the context of PFI projects. This involves consideration of the full set of alternatives, not an artificially diminished subset. The credibility of analytical techniques can be tarnished if they are misused to legitimate a predetermined decision. A reduction in construction risk may be a powerful source of VFM gains under PFI, but, under UK accounting regulation, this should not influence the accounting treatment decision. New complications about how VFM should be interpreted arise directly from the process of public sector fragmentation: affordability to the client is not necessarily the same as VFM for the public sector as a whole. Only public auditors, such as the National Audit Office, can gain access to PFI documentation on the conditions necessary for a comprehensive assessment of both accounting treatment and VFM. However, such studies require the kind of theoretical underpinning provided in this article, as otherwise the findings are likely to be ambiguous and hence vulnerable to rebuttal. In particular, VFM judgements must make explicit the basis of comparison on which they rest.
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Van Son Lai, Duc Khuong Nguyen, William Sodjahin and Issouf Soumaré
We identify a novel concept of discretionary idiosyncratic volatility proxied by the idiosyncratic volatility component not related to the non-systematic industry volatility as a…
Abstract
We identify a novel concept of discretionary idiosyncratic volatility proxied by the idiosyncratic volatility component not related to the non-systematic industry volatility as a source of agency problems that have implications for firms’ cash holdings and their investment decisions. We find that firms with low discretionary idiosyncratic volatility, which likely captures discretionary effort and risk-taking by managers, have smaller cash reserves. Moreover, while high discretionary idiosyncratic volatility firms spend cash internally (internal capital building), low discretionary idiosyncratic volatility firms use it for external acquisitions, consistent with the “quiet life” hypothesis. Our findings thus indicate a need for reinforcement of existing regulations and corporate laws to control for agency costs, which could in turn reduce firm risk and the probability of financial meltdown at the aggregate level.
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So‐de Shyu, Yi Jeng, W.H. Ton, Kon‐jung Lee and H.M. Chuang
With the development of the modern portfolio theory and the advancement of information technology, the employment of quantitative approaches to practically measure asset risks and…
Abstract
Purpose
With the development of the modern portfolio theory and the advancement of information technology, the employment of quantitative approaches to practically measure asset risks and returns, and the construction of portfolios (even dynamic portfolios) has become possible and popular. Therefore, the purpose of this paper is to construct a multi‐factor model for Taiwan stock universe using fundamental technical descriptors and then to apply the equity market neutral investing using multiple‐factor models as a tool.
Design/methodology/approach
This study constructs a Taiwan equity multi‐factor model using cross‐sectional fundamental technical approach.
Findings
The model involves 28 explanatory factors (including 20 industry factors), and the results of the estimations are satisfactory. The model's explanatory power is 58.6 per cent on average. Furthermore, this multi‐factor model is feasible, modulized, dynamic (i.e. modified over time) and updating.
Originality/value
The multi‐factor model, constructed and utilized in this study, is a useful and feasible tool. It generates important inputs into the applications of building market neutral portfolio.
Purpose
Taiwan OTC market is an electronic, order driven, call market. The purpose of this paper is to gain understanding of whether trade size or number of transaction provides more information on explaining price volatility and market liquidity in this market. The paper also aims to investigate how market condition can affect the relationship between information type and trading activities.
Design/methodology/approach
The paper uses data from the Taiwan OTC market to run the empirical tests. It divides firms into five size groups based on their market capitalization. Regression equations are run to test: whether number of transactions has a more significant impact on price volatility on the Taiwan OTC market; the impact of market information on number of transactions; the relative impact of firm specific and market information on number of transactions; and the impact of number of transaction of bid‐ask spread.
Findings
Findings show that the larger the number of transactions, the higher the price volatility. Smaller firms on the Taiwan OTC market are traded based on firm‐specific information. This relation is further affected by market trends. Especially for the larger firms, when the market is up and the amount of market information increases, number of transactions increases. When the market is down and the amount of market information increases, number of transactions decreases. Finally, it is found spread size is more likely to be influenced by number of transactions, instead of trade size. Overall, based on these empirical results, the information content of number of transactions seems to be higher than that of trade size in the Taiwan OTC market.
Practical implications
Investors now understand that number of transaction actually carry more information than trade size does.
Originality/value
The relation between market information and number of transaction, also that between market information and trade size is influenced by market condition. The paper fills a gap in the literature to show that market condition has an impact on the relation between information type and trader's behavior. A number of transactions are identified that provide more information than trade size does. It is also shown that market conditions can further affect the impact of information on trading activities.
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Assumes that the education of valuers is generally directed towardsproducing professionally qualified personnel who are able to value awide variety of properties by using standard…
Abstract
Assumes that the education of valuers is generally directed towards producing professionally qualified personnel who are able to value a wide variety of properties by using standard accepted methodology. Suggests that teaching the concepts of valuation in isolation without any economic reference point is insufficient to establish whether the acquisition of any property will improve the performance of a portfolio. Concludes that the basis of education in valuation needs to change in order to address those issues that have economic relevance in a market dominated by international institutional investors.
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