Search Results (26)

The notion of compensation for systematic risk is well ingrained in finance and constitutes the basis for numerous empirical tests. The concept an increase in systematic risk is accompanied by an increase in the required risk premium has strong intuitive content: The more risk there is to be borne, the greater the compensation therefor. In recognizing previous research on the ex ante and ex post reward to risk, the thrust of this paper is to augment those previous tests of expected and realized returns by providing several distinct empirical tests of the proposition the market rewards the undertaking of systematic equity risk, the latter as measured by the VIX volatility index. Thus, in this paper’s empirical section, we use several empirical approaches to answer the question, Using realized returns, is an increase in systematic risk VIX accompanied by an increase in the equity risk premium? While the empirical results are not always statistically significant, our answer is in the affirmative. Full article

A large set of macroeconomic variables have been suggested as equity risk premium predictors in the literature. Acknowledging the different predictability of the equity premium in expansions and recessions, this paper proposes an approach that combines equity premium forecasts from two-state regression models using an agreement technical indicator as the observable state variable. A comprehensive out-of-sample forecast evaluation exercise based on statistical and economic loss functions demonstrates the superiority of the proposed approach versus combined forecasts from linear models or Markov switching models and forecasts from machine learning methods such as random forests and gradient boosting. The parsimonious state-dependent aspect of risk premium forecasts delivers large improvements in forecast accuracy. The results are robust to sub-period analyses and different investors’ risk aversion levels. Full article

This research explores the efficacy of rebalancing strategies in a diversified portfolio constructed exclusively with exchange-traded funds (ETFs). We selected five ETF types: short-term U.S. Treasury bonds, U.S. equities, global commodities, U.S. real estate investment trusts (REITs), and a multi-strategy hedge fund. Using a 10-year historical period, we applied a unique simulation model to generate random portfolios with varying asset weights and rebalancing tolerance bands, assessing the impact of rebalancing premiums on portfolio performance. Our study reveals a significant positive correlation (r = 0.6492, p < 0.001) between rebalancing-weighted returns and the Sharpe ratio, indicating that effective rebalancing enhances risk-adjusted returns. Support vector regression (SVR) analysis shows that rebalancing premiums have diverse effects. Specifically, equities and commodities benefit from rebalancing with improved risk-adjusted returns, while bonds and REITs demonstrate a negative relationship, suggesting that rebalancing might be less effective or even detrimental for these assets. Our findings also indicate that negative portfolio rebalancing returns combined with positive rebalancing-weighted returns yield the highest average Sharpe ratio of 0.4328, highlighting a distinct and reciprocal relationship between rebalancing effects at the asset and portfolio levels. This research highlights that while rebalancing can enhance portfolio performance, its effectiveness varies by asset class and market conditions. Full article

Greening the environment cannot be achieved satisfactorily, considering that the private sector lags behind the public sector in participation levels. The purpose of this study was to determine the reasons behind the gap in green finance between the two sectors using numerically derived outcomes. Six-year data in the form of total shareholder returns, comprising capital gains and dividends paid from the largest banks in China, the USA, and Europe involved in financing fossil fuels, were extracted from Yahoo.com finance and Macrotrends public forums. Equity premiums were calculated from the total shareholder returns and risk-free rates. A 95% confidence interval was established to determine the lower and upper limits of the equity premiums. The resulting upper limits were used to project premiums that could attract the private sector by 2030. Equity premiums averaged 2.73%, 9.73%, and 4.31% for China, the USA, and Europe, respectively, indicating the substantial task in the USA of attracting the private sector compared to Europe and China. The projections of total shareholder returns showed the same patterns in equity premiums among China, the United States (USA), and Europe. To bridge the gap, the significant need for economic benefits for the private sector should ideally be addressed through green bonds, tailored to green financing projects that are earmarked for revenue generation. Full article

This study derives space travel pricing by Walrasian Equilibrium, which is logical reasoning from the general relativity theory (GRT), the accounting equation, and economic supply and demand functions. The Cobb–Douglas functions embed the endogenous space factor as new capital to form the space travel firm’s production function, which is also transformed into the consumer’s utility function. Thus, the market equilibrium occurs at the equivalence of supply and demand functions, like the GRT, which presents the equivalence between the spatial geometric tensor and the energy–momentum tensor, explaining the principles of gravity and the motion of space matter in the spacetime framework. The mathematical axiomatic set theory of the accounting equation explains the equity premium effect that causes a short-term accounting equation inequality, then reaches the equivalence by suppliers’ incremental equity through the closing accounts process of the accounting cycle. On the demand side, the consumption of space travel can be assumed as a value at risk (VaR) investment to attain the specific spacetime curvature in an expected orbit. Spacetime market equilibrium is then achieved to construct the space travel pricing model. The methodology of econophysics and the analogy method was applied to infer space travel pricing with the model of profit maximization, single-mindedness, and envy-free pricing in unit-demand markets. A case study with simulation was conducted for empirical verification of the mathematical models and algorithm. The results showed that space travel pricing remains associated with the principle of market equilibrium, but needs to be extended to the spacetime tensor of GRT. Full article

The study focuses on the selected aspects of investment measurement and management for the support of financial and economic decision-making of investors in wood-processing sectors. The aim of the study was to analyze the indicators for the structure and cost of capital of furniture and paper/forest branches in Slovakia, quantify the actual expected return on investment based on the selected methodology, and consequently find out the fundamental differences resulting from the specific conditions of given sectors. Methodologically, the study uses procedures for the weighted average cost of capital (WACC), capital asset pricing model (CAPM) for determining the cost of equity, and calculation of the beta coefficient considering the risk premium. The results of the study demonstrated a similar levered beta in both analyzed sectors (1.17 in furniture, 1.20 in paper/forest), but in each sector for a different reason. The expected rate of return is higher in furniture (7.84%) compared to paper/forest products at the level of 6.04%. The findings provide the possibility of comparing the required and expected rate of return on invested capital and making the appropriate long-term investment decisions. Full article

Purpose: This paper examines the interrelatedness between countries’ stock market development and competitiveness and the equity risk premium (hereinafter, ERP). In addition, this paper examines the length of time that stock market development takes to have an impact of ERP. The results offer an empirical guide to stock market authorities about the robust factors that help reduce ERP, which, in turn, encourages raising equity financing. Design/methodology: The dataset includes 59 countries that are listed in the market potential index (hereinafter, MPI) covering the years 1996 to 2020. The MPI provides comprehensive macroeconomic factors that can be used for examining stock market competitiveness and, thus, its potential effects on ERP. Findings: The results of the robustness test show that (a) a negative and significant association exists between the turnover ratio of domestic shares to stocks traded and ERP, (b) the increases in stock market competitiveness are associated with increases in the number of listed companies, (c) lowly ranked countries in the MPI are associated with increasing ERP, and (d) in terms of the interaction between duration of stock market development and competitiveness, the relatively competitive stock markets take 2–6 years for stock market development indicators to have a significant effect on ERP. Originality: This paper offers two main contributions to the related literature. The first contribution is to offer a measure of stock market competitiveness using indicators of stock market development. Therefore, robust indicators of stock market development can be reached. The second contribution is to offer empirical results about the length of time (referred to in this paper as duration) required for the indicators of stock market development to have a favorable effect on ERP. Full article

Currently, insurance companies exclude the buildings’ envelope of their policies since they lack reliable information about the risks and degradation models and are unable to estimate the probabilities of intervention and corresponding costs. This study intends to overcome the existing gap, proposing property maintenance insurance policies developed based on condition-based maintenance plans, using stochastic information regarding the degradation process of the buildings’ envelope elements in the definition of insurance policies. To perform this work, external thermal insulation composite systems (ETICS) are used as case study, for the definition of an insurance policy. This approach allows reducing the uncertainty associated with the degradation of ETICS even when subject to scheduled maintenance actions. Several insurance policies are analysed, with different insurance premiums, evaluating different risks accepted by the owners when adopting a certain maintenance plan. For owners, the main advantages of acquiring this insurance product are: (i) changing the nature of the risk, transferring the risk to the insurer; and (ii) increasing the asset’s equity value, reducing the risk associated with the degradation of ETICS and the uncertainty of maintenance costs over time. Full article

The present study documents a positive market reaction to mergers and acquisition (M&A) deals involving renewable energy companies. Acquirers record positive post-deal cumulative risk-adjusted returns upon taking over a renewable energy target, especially if the former also operates in the renewable energy sector. Such deals often involve purchases of majority equity stakes financed with acquirers’ stock rather than cash. Acquirers of renewable energy firms tend to be more profitable and cash-rich than their industry peers, yet they are less likely to be serial acquirers and channel cash reserves towards M&As. We evidence that the quality of corporate governance in the energy sector may play a substantial role in shaping the choice of targets; a director’s outside affiliations increase the likelihood of takeovers of non-energy firms, while the presence of outsiders on board appears to incentivize diversification into renewable energy. While acquisitions of renewable energy firms feature lower-than-average acquisition premia and generate positive short-term stock returns, they are found to exercise an overall negative short- and medium-term impact on the combined entities’ operating performance. Overall, capital markets appear to attach a sizeable premium to risky deals involving renewable energy firms, possibly in expectation of wealth accrual in the long term. Full article

This study attempts to predict how long a newly listed corporation, usually termed initial public offering (IPO), will survive on the equity listing market. The three-fold contribution of this study comprises a hand-collected and substantially expanded dataset for listed IPOs (1990–2017) over a maximum tracking period of 31 years (1990–2020) to predict the IPO survival on emerging Malaysian capital market, the rationale and consequences for unifying the two listing boards (Main Board and Second Board) in 2009, and an investigation of the predictive role of ex ante strategic prospectus information as early warning signals for sustainable survival of Malaysian IPOs. We also make comparisons for the survival profile of IPOs listed on different listing equity boards. We use Cox proportional hazard (PH) model to estimate the empirical results because of the cohort research design of the study. Overall empirical results show that survival curves for IPOs listed on Main Board and Second Board were not statistically different. However, Second Board IPOs remained more vulnerable to hazard. The survival curves for IPOs listed on Main Market and ACE Market are statistically different. Empirical results reveal that high share premium, high listed capital, and longer firm age at listing date significantly increase the survival (reduce hazard) of IPOs listed on the Main Market and the Second Board. However, bigger firm size and elevated risk factors significantly reduce the survival (increase hazard) of the listed IPOs mentioned above. However, share premium is the only variable that has a negative and significant correlation with IPO survival on ACE Market. These results have implications for the regulators, prospective investors, and policymakers of emerging markets, where the IPO prospectus disclosures bridge the information asymmetry gap prevailing due to the nonexistence of public information prior to the IPO. Empirical findings of this study can be generalized to other developing and emerging markets where IPO prospectus substantially mitigates information asymmetry and ex ante strategic firm characteristics act as early warning signals in predicting IPO survival. Full article

In an exchange economy with endowment inequality, we investigate how preferences with external habits affect the equity risk premium. We show that the dynamics of external additive habits with wealth inequality are complex when a background risk is present. It is ambiguous whether wealth inequality will increase or decrease the equity premium even when the income uncertainty is low. This result extends literature by suggesting that wealth inequality has a small role in explaining asset pricing puzzles. Full article

We study the bond price reaction of a merged firms peers, in order to better understand how the market responds to a restructuring. We argue that a merger announcement may signal the possibility of a merger wave to the industry, and in doing so, increase the conditional probability that peer firms might themselves be acquired in the future. However, while peer firm equity holders expect a direct benefit from a potential acquisition—in the form of a price premium—peer firm bond holders can only expect an indirect benefit—in the form of a risk reduction. Consistent with these hypotheses, we show that price reactions are stronger for firms that have a higher unconditional probability of being acquired ex-ante. In addition, we document that, cross-sectionally, the abnormal returns we observe from peer bondholders are concentrated among firms that have the highest expected risk reduction benefit from a potential acquisition. In order to distinguish a potential reduction in risk as the explicit return driver, we show that abnormal bond returns within firm (between different bond issues) are also concentrated among issues that have the highest expected risk reduction benefit. Full article

This paper focuses on four major aggregate stock price indexes (SP 500, Stock Europe 600, Nikkei 225, Shanghai Composite) and two “safe-haven” assets (Gold, Swiss Franc), and explores their return co-movements during the last two decades. Significant contagion effects on stock markets are documented during almost all financial crises; moreover, in line with the recent literature, the defensive role of gold and the Swiss Franc in asset portfolios is highlighted. Focusing on a new set of macroeconomic and financial series, a significant impact of these variables on stock returns correlations is found, notably in the case of the world equity risk premium. Finally, long-run risks are detected in all asset portfolios including the Chinese stock market index. Overall, this empirical evidence is of interest for researchers, financial risk managers and policy makers. Full article

We developed a model-free Bayesian extraction procedure for the stochastic discount factor under a yield curve prior. Previous methods in the literature directly or indirectly use some particular parametric asset-pricing models such as with long-run risks or habits as the prior. Here, in contrast, we used no such model, but rather, we adopted a prior that enforces external information about the historically very low levels of U.S. short- and long-term interest rates. For clarity and simplicity, our data were annual time series. We used the extracted stochastic discount factor to determine the stripped cash flow risk premiums on a panel of industrial profits and consumption. Interestingly, the results align very closely with recent limited information (bounded rationality) models of the term structure of equity risk premiums, although nowhere did we use any theory on the discount factor other than its implied moment restrictions. Full article

While floods and other natural disasters affect hundreds of millions of people globally every year, a shared methodological approach on which to ground impact valuations is still missing. Standard Cost-Benefit Analyses typically evaluate damages by summing individuals’ monetary equivalents, without taking into account income distribution and risk aversion. We propose an empirical application of alternative valuation approaches developed in recent literature, including equity weights and risk premium multipliers, to a case study in Ecuador. The results show that accounting for inequality may substantially alter the conclusions of a standard vulnerability approach, with important consequences for policy choices pertaining damage compensation and prioritization of intervention areas. Full article