Applied Finance Letters (E-Journal - Auckland Centre for Financial Research)
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149 research outputs found
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The Effect of Credit Derivatives on Financial Stability
Full text linkDue to the recent financial turmoil, questions have been raised about the impact ofcomplex financial products, like credit derivatives, on financial stability. The academicliterature however does not provide a clear answer to this question. This paper empiricallylinks the stability of the financial sector to the use of credit derivatives for the main constituentsof the European financial sector. We find that the use of credit derivatives increases theprobability of default and thus reduces the overall financial sector stability. In addition,we find evidence that this relationship is progressive and economically meaningful
Moving Average Trading Rules for NASDAQ Composite Index
Full text linkThis paper tests a few moving average technical trading rules for the NASDAQ Composite and Goldman Sack commodity indexes from 1972 to 2015. Our results indicate that moving average rules do exhibit strong predictive power for NADSAQ composite index but much weaker predictive power for GSCI. Can a trader use this predictive to beat the B&H strategy? We show that MA-100 days could most of the time make an abnormal profit in the case of NASDAQ composite index by considering both transaction costs and risk.
Board Composition and Innovation
Full text linkCorporate boards make key economic and financial decisions. Diversity in the boardroom, on hand can lead to higher innovation by increasing interaction between heterogeneous agents; on the other hand it can lead to more conflict based on the predictions of social identity theory. In an examination of US firms from 1999 to 2006, this study finds that demographic diversity; directors’ individual characteristics and affiliation are associated with higher innovation in form of patents and quality of innovation in form of citations
Multidimensional Liquidity: Evidences from Indian Stock Market
No full textVarious dimensions of liquidity including breadth, depth, resiliency, tightness, immediacy are examined using BSE 500 and NIFTY 500 indices from Indian Equity market. Liquidity dynamics of the stock markets were examined using trading volume, trading probability, spread, Market Efficiency coefficient, and turnover rate as they gauge different dimensions of market liquidity. We provide evidences on the order of importance of these liquidity measures in Indian stock market using machine learning tools like Artificial Neural Network (ANN) and Random Forest (RF). Findings reveal that liquidity variables collectively explains the movements of stock markets. Both these machine learning tools performs satisfactorily in terms of mean absolute percentage error. We also evidenced lower level of liquidity in Bombay Stock Exchange (BSE) than National Stock Exchange (NSE) and findings supports the liquidity enhancement program recently initiated by BSE
Pricing Currency Risk in Two Interlinked Stock Markets
Full text linkoai:ojs.aut.ac.nz:article/2We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rate regime. Tests are conducted for a conditional asset pricing model using the Ding and Engle (2001) specification which allows estimation of multivariate GARCH-in mean models. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the flotation of the currencies. We also find some evidence of crosscountry exchange rate effects. Our model has many practical applications and can easily be applied to study other countries, different asset classes, or industries that are closely connected
Understanding Causality: What came first the Chicken or the Egg?
Full text linkThe question of association as opposed to causation is an important issue in many scientific fields, including finance. Much of the empirical research in finance deals with the question of causality or stated differently what came first: the chicken or the egg. We are interested, for example, to know the transmission channels through which shocks propagate themselves in financial markets (e.g., how volatility shocks in one stock market affect other markets); or to build superior forecasting models to find out price leadership among similar financial assets traded on different markets (e.g. is it the shares listed on the home market or the host market of a cross-listed firm that first reacts to a corporate event). Hence, being able to correctly infer the direction of causality among financial assets is crucial for accurately understanding relations among those assets. While in practice we can easily observe correlations among financial assets or markets, detecting causal relationship (in other words, who moves first and who reacts) is often not an easy tas
On the existence of an optimal estimation window for risk measures
Full text linkWe investigate whether there can exist an optimal estimation window for financial risk measures. Accordingly, we propose a procedure that achieves optimal estimation window by minimizing estimation bias. Using results from a Monte Carlo simulation for Value at Risk and Expected Shortfall in distinct scenarios, we conclude that the optimal length for the estimation window is not random but has very clear patterns. Our findings can contribute to the literature, as studies have typically neglected the estimation window choice or relied on arbitrary choices
The Demand Function for Bank-Issued Warrants
Full text linkBank-issued warrants are securitized options which are particularly designed to give smaller individual investors the opportunity to participate in the derivative markets. As banks incorporate potentially different margins on top of the theoretical fair values of the products, investors face the problem of choosing an optimal product. While previous literature has characterized individual investors as “noise traders”, this paper finds that they do act pricesensitively. In particular, we provide evidence that demand decreases with increasing margins, but also show that larger investors still realize lower margins than smaller investors
A Critical Review of the Fair Value Settlement Procedure for Stock Options
Full text linkWe review the European practice of fair value settlement of stock options after a successful takeover bid. We argue on both fundamental and practical grounds that the inherent complexity, arbitrariness and inaccuracy of fair value calculations call for replacement by intrinsic value settlement. This alternative is simple, transparent, well-defined, and common practice at other exchange
Efficiency of Hedging Against Fluctuating Prices of Dairy Products
Full text linkThis paper investigates hedging and cross-hedging internationally traded milk derivative products with internationally traded commodities, recently launched New Zealand dairy futures, New Zealand agricultural products, and mature United States dairy market futures. The contribution of the paper is twofold. First, we show that international dairy commodities are a distinct commodities subgroup, as changes in prices of dairy products are uncorrelated with other worldwide traded commodities. Second, we show that New Zealand Stock Exchange dairy futures are an effective tool for hedging exposure to smaller size trades and may not necessarily be of large positions as required by cooperatives and multinational