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1 – 10 of 238Christina E. Bannier, Thomas Heidorn and Heinz-Dieter Vogel
This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime…
Abstract
Purpose
This paper aims to provide an overview of the market for corporate and sovereign credit default swaps (CDS), with particular focus on Europe. It studies whether the subprime crisis of 2007/2008 and, particularly, the European debt crisis 2009/2010 led to a differential development on corporate and sovereign CDS markets and investigates the primary use (speculative risk-trading or risk-hedging) of the two markets in recent years.
Design/methodology/approach
The authors use aggregate market data on the size of the respective markets and on the structure of market participants and their changes over time to assess the main research question. They enhance existing data from public sources such as the Bank for International Settlements and Depository Trust and Clearing Corporation with their own statistics on European sovereign CDS and combine their conclusions with observations regarding standardisation efforts and regulatory changes in the CDS market.
Findings
The authors show that after the subprime crisis 2007/2008 and the European debt crisis 2009/2010, the corporate and sovereign CDS markets developed quite differently. They provide evidence that since mid-2010, market participants started to use the sovereign CDS market more strongly for speculative purposes than for risk-hedging. This shows both in the shift of risk-quality of sovereign CDS contracts and in the changing structure of market participants. The ongoing standardisation and regulation in the CDS market – leading to further increases in transparency and reductions in transaction costs – may be expected to trigger a similar change also for corporate CDS.
Originality/value
Based on a broad variety of market infrastructure data, the authors show a diverging development of corporate and sovereign CDS markets in Europe in recent years. Particularly the sovereign CDS market appears to have shifted from a risk-hedging instrument to being used more strongly for speculative risk-trading. The authors combine their findings with recent regulatory action and market standardisation schemes and draw conclusions for the future development of CDS markets.
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This paper aims to provide an economic rationale for Islamic finance.
Abstract
Purpose
This paper aims to provide an economic rationale for Islamic finance.
Design/methodology/approach
Its methodology is simple. It starts with listing the contributions to economic analysis relevant to the required rationale in the theories of banking, finance, price, money and macroeconomics, to identify the main rationale for Islamic finance. A concise description of the author’s model for an Islamic economic system, within which Islamic finance can be operational, is provided.
Findings
The paper finds distinct advantages of Islamic finance, when properly applied within the author’s model. Islamic finance can therefore be a candidate as a reform agenda for conventional finance. It opens the door for significant monetary reform in currently prevalent economic systems.
Research limitations/implications
The first limitation of the paper is that the distinct benefits of Islamic finance are all of macroeconomic types which are external to Islamic banking and finance institutions. They are therefore not expected to motivate such institutions to apply Islamic finance to the letter, without regulators interference to ensure strict application. The second limitation is the necessity to set up enabling institutional and regulatory arrangements for Islamic finance.
Originality/value
The results are unique as they challenge the received doctrine and provide non-religious rationale for Islamic finance.
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Kaylene Zaretzky and J. Kenton Zumwalt
Earlier research found that firms with the highest distress risk have low book‐to‐market (B/M) ratios and low returns. This paper aims to examine the robustness of those's results…
Abstract
Purpose
Earlier research found that firms with the highest distress risk have low book‐to‐market (B/M) ratios and low returns. This paper aims to examine the robustness of those's results and provide further evidence that high distress‐risk firms do not enjoy the same high returns earned by high B/M firms and that distress risk is unlikely to explain the Fama and French high‐minus‐low (HML) B/M factor.
Design/methodology/approach
A distress‐risk measure, distressed‐minus‐solvent (DMS), is calculated and a range of zero investment distress‐risk trading strategies is investigated. Value‐ and equal‐weighted portfolios are examined both with negative book‐equity firms and without. These most distressed firms have low or negative B/M values and would either not be included in the Fama and French sample or included in the low B/M portfolio.
Findings
The paper finds that the DMS factor is negative and significant, and none of the zero investment strategies earns significantly positive returns.
Research limitations/implications
The findings suggest that exposure to distress risk does not earns investors a positive risk premium. It appears that over the period examined, market inefficiencies drive the market value and returns of high distress‐risk firms.
Originality/value
The distress‐risk premium is shown to be negative and, therefore, cannot be driven by bankruptcy risk alone. The negative premium is not consistent with a financial distress explanation for the Fama and French HML factor.
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William C. Auden, Joshua D. Shackman and Marina H. Onken
The paper seeks to address four key Top Management Team (TMT) demographic characteristics in their relationship with firm performance: age, functional background, educational…
Abstract
Purpose
The paper seeks to address four key Top Management Team (TMT) demographic characteristics in their relationship with firm performance: age, functional background, educational field, and team tenure. The study extends research on the TMT by explicitly introducing team performance as a new context measured in the form of International Risk Management Factor, in addition to demographic characteristic effects. International Risk Management Factor is developed based on multiple international risks trading off theory. In order to calculate that factor International Risk Management Index is introduced.
Design/methodology/approach
In the paper a sample of 212 firms was used, including 4,009 executives; also four hypotheses were tested. The hypotheses were tested using multiple regression analysis.
Findings
The findings in this paper support the proposition that top management team is an appropriate unit of study, due to its impact on firm performance. The results indicate that there is a significant correlation between TMT demographic characteristics and firm performance. This study concluded that three of the proposed four TMT demographic characteristics, including age, functional background, and team tenure influence firm performance. Results validate the proposition that TMT demographic characteristics show a significant positive correlation with firm performance, particularly when the accounting measure is applied. In addition, Top Management Team performance was positively correlated to team tenure, suggesting that as team tenure progresses team performance improves.
Originality/value
The paper differs in many features from previous research. Some of the most important aspects include scope of the study, scale of the sample, complexity of the moderated variable, uniqueness of moderated variable operationalization, and innovation in calculating International Risk Management Factor. For the first time, the study focuses exclusively on Top Management Team performance. The concept, which captures complexity of all TMT characteristics, is not included in demographic characteristics of TMT.
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In February 1995, Simon Jones and Tony Railton of Barings Bank planned a meeting that afternoon with their star Singapore trader, Nick Leeson, to iron out a few financial…
Abstract
In February 1995, Simon Jones and Tony Railton of Barings Bank planned a meeting that afternoon with their star Singapore trader, Nick Leeson, to iron out a few financial discrepancies that had arisen in his Far Eastern office. A few minutes after the meeting was confirmed, Leeson made an excuse to leave the office … and never came back. It is common knowledge (as well as management folklore) what Leeson did leave behind – debts of over £850 million that brought down one of England’s most prestigious banks. At the time we thought that this scandal was a one‐off, never to be repeated story of deception and mismanagement. But when John Rusnak was arrested for covering up losses of £529 million at AIB earlier this year, senior managers were forced to ask themselves “could this happen to my organization?”
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Mehmet F. Dicle and Kendra Reed
As investors’ fear has an impact on their risk-return tradeoff, this fear leaves markets susceptible to sudden and large fluctuations. The purpose of this study is to suggest…
Abstract
Purpose
As investors’ fear has an impact on their risk-return tradeoff, this fear leaves markets susceptible to sudden and large fluctuations. The purpose of this study is to suggest regulators to amend their precautionary methods to recognize the difference in investor behavior for high-risk periods versus low-risk periods.
Design/methodology/approach
The authors empirically show the difference in investor response to changes in expected risk as a function of level of risk. They then show different return patterns for high-risk and low-risk days. Their approach is implemented to evaluate whether investors’ reaction is the same to changes in risk during high-risk versus low-risk periods.
Findings
The results indicate that the negative return response to incremental increases in risk is significantly higher for periods of high versus low expected risk, with high defined as risk levels above long-run normal.
Research limitations/implications
Investors’ increased response to changes in risk exposes financial markets to higher likelihood of sudden and larger fluctuations during high-risk periods. Regulator-imposed circuit breakers are designed to protect markets against such market crashes. However, circuit breakers are not designed to account for investor behavior changes. The results show that circuit breakers should be different for high- versus low-risk periods.
Practical implications
A circuit breaker that is designed to protect investors against large drops should be amended to have a lower threshold during high-risk periods.
Originality/value
The contribution is, to the authors’ knowledge, the first research effort to evaluate the effects of differences in investor behavior on investor reactions and regulator imposed fail-safes. During the times of extreme market risk, the proposed changes may enable circuit breakers function their intended purposes.
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Sean M Collins and Alisa G. Brink
The purpose of this paper is to report the results of a study concerning how fundamental-motivated investors, and their subsequent impact on the path of prices, affect the…
Abstract
Purpose
The purpose of this paper is to report the results of a study concerning how fundamental-motivated investors, and their subsequent impact on the path of prices, affect the severity of price bubbles in an experimental laboratory asset market.
Design/methodology/approach
In a laboratory experiment, asset markets are manipulated by systematically replacing inexperienced human traders with automated traders programmed to submit bids and asks at fundamental value.
Findings
When traders in a market are automated to invest on fundamentals, deviations from fundamental value are initially suppressed, but reappear when automated traders cease to influence prices. A significant reduction in the severity of the resulting bubble may be attributed to the interaction of automated traders and humans through the initial path of prices when controlling for changes in liquidity. This reduction corresponds to reduced autocorrelation in the time series of returns.
Originality/value
This paper represents the first attempt (to the authors’ knowledge) to extend the intervention approach of the seminal paper by Smith et al. (1988) to systematically study the extent to which manipulation of initial path of prices impacts the formation and magnitude of bubbles in the laboratory.
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Abstract
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Stock market investment strategies have one ultimate goal—to buy low and sell high. If only it were that easy. The multitude of options available to investment strategists and…
Abstract
Stock market investment strategies have one ultimate goal—to buy low and sell high. If only it were that easy. The multitude of options available to investment strategists and portfolio managers today, coupled with the myriad of vehicles in which to pursue them, often leaves many perplexed. Some business people have a clear advantage—they can sense where the market is headed. Many cannot—at least not until now.
In this case study the authors outline how a major financial institution in the Netherlands deals with the practical aspects of implementing a Basel II‐compliant economic capital…
Abstract
In this case study the authors outline how a major financial institution in the Netherlands deals with the practical aspects of implementing a Basel II‐compliant economic capital framework. The paper gives an overview of the programme Rabobank has set on track for the implementation and discusses the prioritisation of project streams and how to track progress of the programme. An important aspect of the whole programme is communication between all the parties involved. Finally, the paper concludes with a discussion of the major challenges faced during the implementation process.
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