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1 – 10 of 24Jawad Ali, Michael Rainey and Asal Saghari
To examine the implications of the cessation of LIBOR in the context of Islamic finance transactions and to suggest potential solutions for the Shari’ah-compliant use of near…
Abstract
Purpose
To examine the implications of the cessation of LIBOR in the context of Islamic finance transactions and to suggest potential solutions for the Shari’ah-compliant use of near risk-free reference rates (RFRs) in such transactions.
Design/methodology/approach
Provides an overview of the main regulatory changes by the UK’s Financial Conduct Authority (FCA) to LIBOR, a review of the key details regarding the cessation of LIBOR and specific risk factors, a discussion of core concepts of Islamic finance and the unique challenges that the models face considering the LIBOR reforms, and an outline of several innovative solutions that can be utilized by organizations and institutions to overcome the potential complexities of the LIBOR reforms.
Findings
The financing component of a seller’s profit margin in a murabaha transaction may be calculated using LIBOR, a forward-looking rate. LIBOR as a financing rate benchmark is being replaced by RFRs, which are backward-looking rates. A possible way to use RFRs in a murabaha transaction might be to recalculate the seller’s profit margin depending on actual RFRs during the financing period with the seller offering appropriate rebates to the buyer.
Originality/value
Expert guidance from experienced corporate, financing, investment, and Islamic financing lawyers.
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J. Paul Forrester and Mary Jo N. Miller
Summarize and review the key developments during the first three-quarters of 2021 relating to transition of the London InterBank Offered Rate (LIBOR) to alternative risk-free rates…
Abstract
Purpose
Summarize and review the key developments during the first three-quarters of 2021 relating to transition of the London InterBank Offered Rate (LIBOR) to alternative risk-free rates, in accordance with the guidance of global regulators and market participants.
Design/methodology/approach
Outlines and explains four key events to date during 2021 that are instrumental to the success of LIBOR transition, including the ISDA 2020 IBOR Protocol and Supplement, the 5 March 2021 announcements by ICE Benchmark Administration and the Financial Conduct Authority, the transition of interdealer swap conventions from LIBOR to SOFR, and the ARRC endorsement of the CME Group SOFR term rate.
Findings
The global adherence to the ISDA Protocol and Supplement, the successful launch of “SOFR First” and other “RFR First” swaps convention transitions, and the ARRC’s endorsement of CME’s SOFR term rate have given the market the clarity and tools that it needs to complete the transition away from LIBOR by the deadlines fixed by the 5 March 2021 benchmark transition event.
Practical implications
It now is clear that market participants globally have the resources to, and must, move to adopt alternative reference rates and related operational systems and other infrastructure to cease origination of new LIBOR-linked contracts after 31 December 2021. The ARRC’s endorsement of the SOFR term rate for business loans and related derivatives and securitizations is a critical positive development for the structured finance market.
Originality/value
Expert analysis and guidance from experienced finance lawyers.
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The purpose of this paper is to discuss the principal measures of performance used in property and other investment types. In particular, the briefing will explore the…
Abstract
Purpose
The purpose of this paper is to discuss the principal measures of performance used in property and other investment types. In particular, the briefing will explore the relationship of the expected IRR with the initial return, highlighting the role of growth in the investment dynamic.
Design/methodology/approach
This education briefing is an overview of investment growth models with worked examples.
Findings
The analysis of property growth models is akin to the Fisher and Gordon growth models used in other finance markets.
Practical implications
This comparison of the models can work for all forms of investment. Similarly, instead of looking at the overall return as the measure of comparison (expected vs required), it is possible to work backwards and deduce market expectations and compare these with the investors view on those variables.
Originality/value
This is a review of existing models.
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Maurizio d'Amato, Nikolaj Siniak and Giulia Mastrodonato
The purpose of this study is providing a possible methodological solution to the valuation of cyclical.assets. International Valuation Standards introduce a brand new definition…
Abstract
Purpose
The purpose of this study is providing a possible methodological solution to the valuation of cyclical.assets. International Valuation Standards introduce a brand new definition of property: the cyclical asset (International Valuation Standards Council 2017, IVS 105, p. 39 and p. 41). Among different property valuation methods, normally this kind of properties is appraised using income approach. In this group of methodology, the opinion of value is based on a proportional relationship between property value and rent. In the past years, a group of methods called cyclical capitalization has been proposed (d’Amato, 2003; d’Amato, 2013;d’Amato, 2015; d’Amato, 2017a; d’Amato 2017 b; d’Amato, 2017c). This method proposes an integration between property valuation and property market cycle.
Design/methodology/approach
Cyclical capitalization method is applied using a time series of property market rent of offices in prime location in the South Bank area in London. It consists of the determination of more than one all-risk yield to reproduce the property market cycle.
Findings
A comparison between the cyclical capitalization and two traditional capitalization rate shows how the proposed model is able to provide a stable opinion of value.
Research limitations/implications
The method may represent a contribution for the determination of the value of cyclical assets or for the mortgage lending value.
Practical implications
This paper provides the possibility to have a property valuation method less sensitive to upturn and downturn of the property market.
Social implications
The valuation based on cyclical capitalization are less sensitive to the upturn and the downturn of the market.
Originality/value
It is one of the first scientific paper addressing the problem of the determination of the value of cyclical assets.
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Ahmad Ridhuwan Abdullah and Nur Adiana Hiau Abdullah
The purpose of this paper is to examine the risk-adjusted performance of rated funds and determine the usefulness of Lipper Leader rating of unit trusts in Malaysia during the…
Abstract
Purpose
The purpose of this paper is to examine the risk-adjusted performance of rated funds and determine the usefulness of Lipper Leader rating of unit trusts in Malaysia during the period 2000 to 2010.
Design/methodology/approach
The paper utilizes the Sharpe ratio, Treynor ratio, Jensen’s alpha and Fama-French three-factor model to measure performance.
Findings
During the period of study, the performance of the market index and risk-free rate outperformed that of 68 equity unit trust funds in the 3-year, 5-year and 10-year investment horizons. The ranking, based on four performance measures, corresponds to Lipper rating for the lowest rated and leader funds, but not for the three- and four-key rated funds. Further, there is a significant difference in the performance of the five-key, four-key and three-key rated funds which outperform the lowest rated funds, indicating that Lipper rating is able to distinguish superior and inferior unit trust funds.
Research limitations/implications
Some of the limitations in this study are that the indexes could be self-constructed. The existing index might not represent the asset allocation of the funds concerned. Additional variables might have to be considered when examining fund performance as they should correspond to the characteristics of a fund.
Practical implications
The results indicate that Lipper rating classification could identify the highest and lowest performing funds. Therefore, investors could use this rating to make informed investment decisions without undertaking time-consuming analysis to ascertain the good- and bad-quality funds in the market.
Social implications
The findings of this study could be used by the academia as another source of reference to enhance their understanding of the applicability of Lipper rating for unit trust funds in an emerging market.
Originality/value
The contribution of this study is that it analyzes the effectiveness and capability of Lipper Leader rating in identifying quality funds in the context of an emerging market. Performance comparison between Lipper Leader rating and methods used in the portfolio theory bridges the theory-practice gap between practitioners and academics. To date, there have been no attempts to study and compare the ratings of advisory firms with theoretical performance measures, particularly in the context of Malaysia.
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Property investment risk is traditionally accounted for by valuers in a risk‐adjusted discount rate approach, although this term, popular in mainstream finance, is rarely used…
Abstract
Property investment risk is traditionally accounted for by valuers in a risk‐adjusted discount rate approach, although this term, popular in mainstream finance, is rarely used. This paper shows that RADR is but one of several risk adjustment techniques that may be employed within an explicit cash flow framework. It explains how a certainty equivalent technique may be used in an objective manner by use of standard deviation analysis, and develops a new technique for use in the UK prime market known as the sliced income approach. The paper goes further by setting risk adjustment (deterministic) techniques within the wider context of risk analysis and compares a simple probabilistic approach and sensitivity analysis with these techniques for use in property investment appraisal. A case study is employed in illustrations.
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The purpose of this paper is to establish whether a terminal value is a substantial amount of the final figure in a hotel’s valuation. Malta’s scenario has been delved into. This…
Abstract
Purpose
The purpose of this paper is to establish whether a terminal value is a substantial amount of the final figure in a hotel’s valuation. Malta’s scenario has been delved into. This due to the fact that owing to Malta’s high population density and its restrictive land area, land values attract a high premium as compared with larger developed countries. Other matters such as earnings’ multipliers derived from a cap rate (initial yield), CAPEX has also been delved into.
Design/methodology/approach
The methodologies adopted in hotel valuation practice has been delved into. An extensive literature review is undertaken to analyse the earnings multiplier adopted by various authors over the past 30-year period. The hotel cap rate (initial yield) has been compared with similar yields adopted in the institutional and property markets and then compares to market-based data. A discussion is undertaken on the validity of adopting discounted cash flow, as against the short cut market appraisal approach. Capitalization rates, cap rates have also been referred to as obtained from the academic and practitioners field and compared. Depreciation and the anticipated annual accommodation charges have been analysed. A database of hotel rooms value over the past 20-year period has been referred.
Findings
A table outlines the earnings’ multipliers in perpetuity or for the limited expected design life for various cap rates. This data will act as a guide in guiding practitioners to establish an earnings’ multiplier to be applied in their valuation methodology. An example in the Appendix clarifies the manner in which this data table is to be utilized. The finding of this example notes that for this hotel in Malta, as constructed on private land, the terminal value for this development hovers around the 30 per cent of the market value.
Research limitations/implications
This analysis is based on five valuations as undertaken on five hotels in Malta with classification grades varying from III to V. This notes that the terminal value varies within a range of 9-45 per cent of the total value. This analysis has to be undertaken for other countries for a global range of land terminal values percentages to be established.
Practical implications
Establishing the terminal value of a hotel business, will offer greater security for secured lending facilities required. It will further act as an important tool to establish the feasibility of a hotel development.
Originality/value
Updated insight is given to existing hotel valuation methodologies by delving into the workings of the earnings’ multiplier and establishes that in today’s market the terminal value of the hotel basis has to be accounted for. The above findings are based on a link between theory and practice.
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A large number of empirical studies investigate the determinants of price-earnings (P/E) ratio by focusing on fundamental factors. However, there has been an increasing concern…
Abstract
Purpose
A large number of empirical studies investigate the determinants of price-earnings (P/E) ratio by focusing on fundamental factors. However, there has been an increasing concern that stock valuation is also driven by investor sentiment. This paper aims to extend the existing literature by exploring whether investor sentiment impacts the P/E ratio.
Design/methodology/approach
The paper examines the determinants of P/E ratio by applying latent variable models with investor sentiment as a latent variable and several fundamental factors as control variables. Investor sentiment is proxied by trading volume, advance-decline ratio and price volatility.
Findings
Using annual data of the US industries over the period of 1998-2014, the current paper produces new empirical evidence that investor sentiment significantly affects the P/E ratio. This result is robust to the inclusion of several control variables that have been documented to explain the P/E ratio.
Practical implications
The findings have important implications for investors, as downplaying sentiment can lead to significant errors in making equity investment choices based on the P/E ratio.
Originality/value
The analytical framework of the current paper is differentiated from the conventional analysis in which the P/E ratio is regressed against control variables and proxies for sentiment, thus falling into the trap of implicitly presupposing that proxies are perfect measures of investor sentiment. As all proxies may have measurement errors to the true but unobservable investor sentiment, the current paper uses latent variable models to shed new light on the influence of investor sentiment on the P/E ratio.
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Evan J. McSweeney and Andrew C. Worthington
This paper aims to examine the impact of crude oil prices on Australian industry stock returns. With rising energy prices, it is important to consider oil as a pricing factor in…
Abstract
Purpose
This paper aims to examine the impact of crude oil prices on Australian industry stock returns. With rising energy prices, it is important to consider oil as a pricing factor in asset pricing models.
Design/methodology/approach
Multifactor static and dynamic models consider crude oil and other macroeconomic factors as pricing factors in industry excess returns from January 1980 to August 2006. The macroeconomic factors comprise the market portfolio, oil prices, exchange rates and the term premium. The industries consist of banking, diversified financials, energy, insurance, media, property trusts, materials, retailing and transportation.
Findings
Oil prices are an important determinant of returns in the banking, energy, materials, retailing and transportation industries. The findings also suggest oil price movements are persistent. Nonetheless, the proportion of variation in excess returns explained by the contemporaneous and lagged oil prices appears to have declined during the sample period.
Research limitations/implications
Macroeconomic factors are important for multifactor asset pricing at the industry level. Apart from oil prices, the market portfolio is a significant pricing factor in all industry excess returns. Exchange rates are also an influential factor for excess returns in the banking and diversified financials industries, and the term premium as a proxy for future real activity is a priced factor in the energy, insurance and retailing industries.
Originality/value
While past studies have provided some evidence that oil prices constitute a source of systematic asset price risk and that exposure varies across industries, no recent work is known in the Australian context.
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Corporate social responsibility (CSR) has several dimensions that are inherently unobservable or measured with errors. Due to measurement errors of CSR proxies, regression…
Abstract
Purpose
Corporate social responsibility (CSR) has several dimensions that are inherently unobservable or measured with errors. Due to measurement errors of CSR proxies, regression analysis seems inappropriate for investigating the relationship between CSR and firm value. Accounting for CSR measurement errors, the purpose of this paper is to use a latent variable analysis to examine whether CSR affects firm value.
Design/methodology/approach
This study applies a latent variable model that directly takes into account the measurement errors of CSR proxies. Moreover, the inclusion of firm-fixed effects in the model controls for time-invariant unobservable firm-specific characteristics that may drive both CSR and firm value. CSR is measured by environmental, social, and corporate governance activities.
Findings
Based on data of US firms between 2002 and 2014, this study finds conflicting evidence of a direct association between each CSR proxy and firm value. When all CSR proxies are incorporated into a latent variable model, CSR significantly positively impacts firm value. Therefore, CSR strategies based on a single measure of CSR or the equal weighting of CSR measures tend to underestimate the influence of CSR on firm value.
Practical implications
Corporate managers should enhance firm value by simultaneously engaging in environmental, social, and corporate governance activities because there is a synergistic effect with firm value. Furthermore, investors who downplay CSR factors in firm valuation can lead to significant errors in making equity investment choices.
Originality/value
This study presents a novel examination of the price-earnings ratio in the CSR valuation by using the latent variable model with firm-fixed effects.
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