Modern Finance
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The effect of underwriter reputation and market sentiment on IPO underpricing: Evidence from Indonesia
Get PDFUnderpricing is a phenomenon that occurs worldwide, and many factors could affect its variation, either from internal or external aspects. This paper examines whether market sentiment and underwriter reputation explain the cross-sectional variation of underpricing among 424 Indonesian initial public offerings (IPOs) from 2016 to 2024. The study differentiates the data into three groups: the period before, during, and after the COVID-19 pandemic. As predicted, the study shows a significant negative effect of market sentiment and underwriter reputation on the level of IPO underpricing. The adverse effect persists during the pandemic but disappears during the period before and after the pandemic. Age and size of the Board negatively and significantly affect the underpricing level, but company size has a positive and significant effect. The finding implies that investors wishing to gain from the IPO market must select the company underwritten by a reputable underwriter
Financial determinants of economic growth: The Tanzanian perspective
Get PDFThis study investigated the influence of key financial variables on Tanzania's economic growth from 1990 to 2022, using time series data from the World Bank Development Indicators. The analysis examined the relationship between GDP growth and four financial variables: exchange rate, inflation, trade openness, and domestic credit to the private sector. After applying the Augmented Dickey-Fuller test, all variables became stationary after first differencing. The Johansen cointegration test identified four cointegrating relationships, and a Vector Error Correction Model captured both short-term dynamics and long-term equilibrium. Results indicated that exchange rate depreciation and inflation negatively affected GDP growth, while trade openness had a positive impact. Domestic credit’s effect was weak and insignificant. Based on these findings, it is recommended that the government and central bank should implement policies focusing on stabilizing the exchange rate, controlling inflation, improving financial sector efficiency, and enhancing trade integration for sustainable economic growth
Could ChatGPT have earned abnormal returns? A retrospective test from the U.S. stock market
Get PDFThis paper attempts to assess the ability of OpenAI’s ChatGPT to provide high-quality recommendations for a casual investor looking to beat the market. Going back to 1985 and instructing the GPT-4 model to restrict its knowledge to only what could have been known at the time of stock selection, the GPT-4 model was able to average alphas of approximately 1% per month for two-year holding periods beginning July 1 every year from 1985 to 2021. These abnormal returns persisted after controlling for size, book-to-market, profitability robustness, investment approach, and intermediate- and long-term prior returns. Individual portfolio alphas are only positive and significant about one out of four years but are never negative and significant. This paper also illustrates some of the precision needed to induce the GPT-4 model to provide any recommendations and briefly assesses the asset allocation strategy it appears to pursue
Returns and volatility linkages in the US soybean industry: An empirical analysis across time and frequencies
Get PDFThe objective of this work is to investigate the links among price returns and among (realized) price volatilities in the US soybean industry. To this end, it employs daily futures prices from 2010 to 2025 and the flexible Wavelet Local Multiple Correlation (WLMC) approach. The joint returns link among soybeans, soybean meal, and soybean oil is positive, time-varying, and frequency-dependent (i.e., asymmetric). The vertical links (those between the input and each of the two co-products of the soybean crush) tend to be stronger than the horizontal one (between soybean meal and soybean oil). The joint link for realized volatility is also positive and asymmetric. For both returns and realized volatility, the input market appears to be a recipient of shocks from the co-products markets.  
Human capital in asset pricing: The case of the Brazilian stock market during crisis periods
Get PDFIn recent years, multi-factor models outperformed traditional models in explaining the cross-sectional variability in asset returns. Therefore, the current study examines the performance of the human capital-based six-factor model in the Brazilian stock market for the period spanning from July 2010 to June 2023. This study takes daily stock price data of non-financial firms and constructs a set of thirty-two portfolios sorted on size, value, profitability, investment, and labor income growth. Moreover, this study includes human capital as an additional factor in the Fama and French five-factor model, thus proposing an augmented six-factor model. We use Fama and Macbeth's (1973) two-step estimation approach for the empirical analysis. Findings indicate that small stock portfolios earn higher returns than big ones. Further, findings reveal that market size, value, profitability, investments, and labor income growth (proxy of human capital) premium significantly explain the time series variability in excess portfolio returns. Furthermore, we find that the Brazilian economic crisis and the COVID-19 pandemic create identical volatility in the stock markets, which reduces the performance of the six-factor model during an economic crisis and pandemic period. Additionally, we employ the Gibbons, Ross, and Shanken (GRS) test to evaluate the model's performance in sub-sample analysis. Lastly, the findings report important implications for policymakers, investors, and portfolio managers to select appropriate portfolios for investment during economic turmoil
Did the COVID-19 pandemic permanently impact e-commerce in the US market?
Get PDFThe pandemic compelled many individuals, initially hesitant about online shopping, to overcome their reservations, acquire essential skills, and transition to online retail. This provided a natural experiment to assess whether the barriers to online shopping and the comfort of traditional in-store habits have hindered a broader shift to e-commerce. This paper uses the US retail data to analyze e-commerce activities before, during, and after the pandemic to determine whether the pandemic has permanently altered the pattern of the activities to determine whether the pandemic has permanently altered the pattern of the activities by utilizing structural break detection tools. Additionally, we carry out a forecasting exercise for post-pandemic based on pre-pandemic data to confirm our findings. Results suggest that while e-commerce activities surged during lockdown, they have predominantly reverted to pre-pandemic patterns. Our findings caution both investors and companies against overreaction in the face of exuberant changes in the market to avoid painful corrections afterward
Foreign direct investment and economic growth in developing countries: The role of international trade and foreign debt
Get PDFThe existing literature is sparse on the role of international finance in modeling the FDI-growth nexus. This study integrates the role of international trade and external debt in the FDI-economic growth nexus for Brazil, Nigeria, and Vietnam. We apply the Autoregressive Distributed Lag (ARDL) model to annual data covering the period 1990-2021. The results show that FDI and trade have positive but insignificant effects on economic growth in all three countries. In addition, our results show that external debt hampers long-term economic growth in these countries. Based on the results, we propose country-specific recommendations that take into account specific economic and financial conditions, global market dynamics, and the long-term development goals of developing countries
Financial inclusion and monetary policy targets: Evidence from the ECOWAS countries
Get PDFThe study examines the impact of financial inclusion on monetary policy targets in the Economic Community of West African States for the period between 2004 and 2020. To capture how a shock to financial inclusion affects monetary policy targets in the ECOWAS sub-region, the study employs panel vector autoregression via the Generalized Method of Moments framework and uses the impulse response functions. The results show that in all ECOWAS countries, financial inclusion leads to an appreciation of the local currency, thereby improving the value of the exchange rate. However, it reduces the effectiveness of monetary policy. In particular, financial inclusion increases consumer prices and interest rates. Based on the findings, the study recommends, among others, the need for a single monetary policy in the ECOWAS sub-region to properly integrate its monetary policy framework in line with the economic and monetary integration policy of the West African Monetary Zone
The issuance spread of China's low-carbon transition bonds
Get PDFLow-carbon transition bonds, as a particular type of sustainable financial instrument, raise funds specifically for the low-carbon transition sector, filling the gap in green finance's support for high-carbon industries. This paper takes low-carbon transition bonds as the research object, studies the current development status of low-carbon transition bonds, and uses the ordinary least squares method to analyze the impact of the transition attribute of these bonds on issuance spreads, showing that they can reduce corporate financing costs. The findings reveal that: (1) There is a significant negative correlation between transition attribute and issuance spreads, and this result holds true after a series of robustness checks. Moreover, the characteristics of the bond itself influence its pricing. (2) Heterogeneity analysis indicates that low-carbon transition bonds can better help non-listed companies and economically underdeveloped regions to finance at lower costs. Finally, this paper provides policy recommendations for the future development and improvement of low-carbon transition bonds
Blockchain in trade finance: The Good, the Bad and the Verdict
Get PDFThis study explores the potential of blockchain technology to optimize trade finance processes and to address inefficiencies and fraud risks in centralized systems that contribute to a growing global trade finance gap, particularly affecting SMEs. Through documentary analysis and the case of Morocco's OCP Group, with insights for practitioners, we explore the benefits and challenges of integrating blockchain into trade finance. Our findings suggest a hybrid solution integrating blockchain into existing infrastructure, relying on both off-chain and on-chain governance mechanisms in smart contracts. This approach aims to bridge the gap between traditional and blockchain solutions in trade finance and discusses the potential for a more pragmatic way forward for the industry