Financial Economics

History Shows European Monetary Union May Have Been 'Bridge Too Far'

by Gilles Bransbourg

A short reflexion about the Eurozone crisis, published under the form of a media column. A short reflexion about the Eurozone crisis, published under the form of a media column.

Earnings Distribution Discontinuity from a Continuous Model of Earnings Management

by Andrew Yim

I formulate a tractable model of earnings management with benchmark beating and auditor-client interaction. Prior... more I formulate a tractable model of earnings management with benchmark beating and auditor-client interaction. Prior models have omitted one or both of these aspects. Under mild conditions, the optimal misreporting strategy is unique. A general characterization of the strategy is provided, with two (effectively four) closed-form solutions derived for certain combinations of the extended audit cost distribution and misreporting cost functions. Some of the solutions are expressed in terms of the Lambert W function, which has wide applications in many scientific fields. The shape of the function can lead to a “discontinuity” in earnings related distributions. Simulation results indicate that the model can accommodate the discontinuity phenomenon, as well as the volcano shape of the distributions of earnings change and earnings surprise, documented in the literature. The insights from the simulations can be summarized in two hypotheses, namely, the mixture conjecture and the continuous “discontinuity” conjecture. Maximum likelihood and nonlinear least squares methods can be used to estimate the model parameters. Several applications of the model are suggested, including the construction of an earnings manipulation measure distinct from but complementary to abnormal accruals.

Skewness and kurtosis in Japanese equity returns: empirical evidence

by Raj Aggarwal

Contracts and Exits in Venture Capital Finance

by Douglas Cumming

Cumming, D.J., 2008. “Contracts and Exits in Venture Capital Finance” Review of Financial Studies 21, 1947-1982.

Using a sample of European venture capital investments, I study the relation between venture capital (VC) contracts... more Using a sample of European venture capital investments, I study the relation between venture capital (VC) contracts and exits. The data indicate that ex ante, stronger VC control rights increase the likelihood that an entrepreneurial firm will exit by an acquisition, rather than through a write-off or an IPO. My findings are robust to controls for a variety of factors, including endogeneity and cases in which the VC preplans the exit at the time of time of contract choice. My findings are consistent with control-based theories of financial contracting, such as Aghion and Bolton (1992).

Private Equity Returns and Disclosure Around the World

by Douglas Cumming

Cumming, D.J., and U. Walz, 2010. “Private Equity Returns and Disclosure around the World” Journal of International Business Studies 41(4), 727-754.
- Reprinted as Cumming, D.J., and U. Walz, 2010. “Private Equity Returns and Disclosure around the World” Journal of Business Valuation, Vol 2., pp.1-33 (lead article)
- Winner of the Canadian Institute of Chartered Business Valuators (CICBV) Best Paper Prize ($5,000)
- PWC Global Competency Centre Research Excellence Award (€3,000)

To obtain more funds from the institutional investors, private equity fund managers may report inflated valuations of... more To obtain more funds from the institutional investors, private equity fund managers may report inflated valuations of private investee companies that are not yet sold. However, such overvaluations may result in a reputational cost when those investments are realized. Using evidence from 39 countries, we show that there are significant systematic biases in managers' reporting of fund performance. We find that these biases depend on the accounting and legal environment in a country, and on proxies for the degree of information asymmetry between institutional investors and private equity fund managers.

Analysis of Stock Screening Principles in Islamic Mutual Funds Industry

by Salman Ahmed Shaikh

According to Islamic principles for investments in stocks, market price per share should be greater than net liquid... more According to Islamic principles for investments in stocks, market price per share should be greater than net liquid assets per share. It may suggest that this principle restricts investments in the stock of liquid companies. Creditors prefer a favorable Current and Quick ratio but shareholders are not exactly happy when the company has immense liquidity. Excess liquidity implies the company has excess funds, but it has not invested them in its operations fully. There is a trade-off between profitability and liquidity companies have to make. Cash equivalents and marketable securities usually yield a return that is negative in real terms in most developing countries. The interests of creditors are managed by another principle that if a company has financed a portion of its assets with interest bearing debt; then, the interest bearing debt should not be more than 40%. Debt financing is a double-edge sword. Leveraged companies can magnify their returns in booms, but in slumps, they lose the edge and can even go bankrupt and make both their shareholders and creditors suffer. Debt financing results in a zero-sum game in which at least one stakeholder i.e. shareholders or creditors suffer. Equity financing ensures normal returns in booms and survival in slumps. Therefore, the company will not be squeezed of liquidity as interest expense as an ‘autonomous expense’ will not feature as a significant portion of total operating expenses.

Status of the 'BRICs': An Analysis of Growth Factors

by Holly A. Bell

Published in 'International Research Journal of Finance and Economics' 2011

In 2001, Goldman Sachs coined the term BRICs (Wilson, Kelston, & Ahmed, 2010) to describe the four large... more In 2001, Goldman Sachs coined the term BRICs (Wilson, Kelston, & Ahmed, 2010) to describe the four large developing countries of Brazil, Russia, India, and China that Goldman Sachs predict will overtake the G6 (US, Japan, UK, Germany, France, and Italy) in terms of GDP (in US$) by 2050 (Wilson & Purushothaman, 2003). The report established a set of four core factors that would create the conditions the BRIC countries would need for the predicted growth.

Metafiziksel Olgular ve Güven Krizleri: 2008 Krizi'nde Türkiye'de Yatırımcı Davranışı Üzerine Ampirik Bir İnceleme

by Ömer Tuğsal Doruk

Co-authored with Yusuf Can Şahintürk

Credit Crunch or not? Case of Turkey during the Global Economic Crisis

by Baris Soybilgen

Co-authored with Kerim Gökay,  Zümrüt İmamoğlu. First Draft. Working Paper.

This paper analyzes whether Turkish firms experienced a credit crunch at the outset of the global crisis. Our... more This paper analyzes whether Turkish firms experienced a credit crunch at the outset of the global crisis. Our hypothesis is that if a credit crunch was experienced in Turkey, firms that are more dependent on external finance for investment and working capital must have been affected more severely. Hence, we should observe a higher drop in their stock returns during the crisis. Using firm-level data, we find that returns of firms with high dependence on external finance for working capital and balance sheet problems before the crisis decline more during the crisis. We also run the same regressions for pre-crisis drops in the stock market as a placebo test. We find that stock returns were not affected by dependence on external finance for investment and working capital in the non-crisis period. Our results suggest that Turkish firms might have experienced a credit crunch at the outset of the crisis even though Turkish banking sector was intact. On the other hand, we find no evidence for a demand effect: Being an exporter does not matter for the decrease in stock returns.

A COMPARATIVE STUDY OF DOLLAR COST AVERAGING VS. VALUE AVERAGING

by Pawel Stefan Benedykcinski

AUTHOR: PAWEL STEFAN BENEDYKCINSKI and ADVISOR: St. Olaf College ECONOMICS PROF. RICHARD GOEDDE

A COMPARATIVE STUDY OF DOLLAR COST AVERAGING VS. VALUE AVERAGING
Pawel S. Benedykcinski and Prof. Rick Goedde... more A COMPARATIVE STUDY OF DOLLAR COST AVERAGING VS. VALUE AVERAGING
Pawel S. Benedykcinski and Prof. Rick Goedde (Advisor)
Economics Department
St. Olaf College
Northfield, MN

My research compares three investment techniques, fixed and variable dollar cost averaging and value averaging to determine if any of the methods yield superior investment returns in the long run. Mutual funds, stocks, and exchange-traded funds were used to test the methods. Value averaging is a formula-based investment technique using a mathematical formula to guide the investment of money into a portfolio over time. With this method investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. Dollar cost averaging invests equal amounts regularly and periodically over specific time periods in a particular investment or portfolio. By doing so more shares are purchased when prices are low, and fewer shares are purchased when prices are high.

After testing many mutual funds, ETFs, and individual stocks, I concluded that Value Averaging yields better Internal Rates of Return than fixed and variable Dollar Cost Averaging. The results also indicate that the three methods provide superior investment returns over extended investment time periods with little increase in risk, even if prices are volatile. One important difference between these three formula investment techniques is that value averaging requires larger sums of money to be invested at regular time intervals than fixed or variable dollar cost averaging do.

Time for a transformation towards/into my Excellent Monetary System and Society

by Wilfred Berendsen

This is a draft version of an article about the real cause of debt crisis and the solution. It also partly discusses that inflation is NOT an argument against creation of money without debt creation. Which is basically one of main features of my innovation for the money system. But the ways how money is created is also important just like who is allowed to do so. And the aims and possibilities. This paper discusses the possibilities and aims and also what is wrong with current monetary policies and current monetary system. And the fact that my innovation for the money system, leading to the excellent monetary system, can and will not only solve the debt crisis or financial crisis worldwide, but is also a tool for great additional possibilities. Like cancelling really all of taxes worldwide, detaching/decoupling income from wages and working (which is really needed given growing efficiency and creating a situation where unemployment is neither negative nor a problem anymore) and creating a situation with enough money for anything that is really desirable to maintain. Like healthcare, eldery care, caring for the weak in society. But also additional improvements in society since money is not a problem - or better not a constraint- anymore in the Excellent Monetary System initiated by me. This paper is still a draft but should make clear that the idea of my innovation from the money system origins from me, just like the understanding about real causes of the crisis - insanity/incompleteness of current money system- and the real solution. Also this paper should complement my book on amazon about the crisis and solution. I already mentioned the possibilities of my innovation there but did not label the situation that will unfold then as being the Excellent Monetary System initiated and created by me. Whatever, this is my creation and will drastically improve future society. First the debt crisis can and will be solved with it. And after that, the innovation can be used within the Excellent Monetary System and society to create a much better future for humankind and fix some of current problems and prevent future ones. This draft will be perfectionized and then i will forward it , submit it, to Journal of Political Economy (JPE).

Evidence of market manipulation in the financial crisis

by Marco Lagi

Milton Friedman: Grand héraut de l'"orthodoxie" néo-libérale

by Lucas Bouchard

Del funcionalismo a la concepción sistémica: El caso del sistema de gestión de calidad: De METROAGUA SA

by alberto carvajalino

Post Washington Konsensüsü Döneminde Yeni Finansal Mimaride Makroekonomik İstikrar İçin Regülasyon:Quo Vadis? (Abstract)

by Ömer Tuğsal Doruk

Yusuf Can Şahintürk ile Ortak Çalışma,Finans Politik ve Ekonomik Yorumlar Dergisi Kasım 2011 Sayısı 48:561,69-82

Are Swap and Bond Markets Alternatives to Each Other in Turkey?

by Murat Duran

Co-authored with Doruk Küçüksaraç from the Central Bank of Turkey. Draft version.

Cross currency swaps are agreements to exchange interest payments and principals denominated in two different... more Cross currency swaps are agreements to exchange interest payments and principals denominated in two different currencies and usually have one leg fixed and the other floating. The interest rate on the fixed leg is closely related to the yields on the securities of the same tenure and currency. In Turkey, cross currency swaps and treasury bonds have similar cash flow structures and risk profiles and hence these markets are perceived to be alternatives to each other. In this context, using daily data for the period August 2008 – January 2012, this study investigates the level relationship between the cross currency swap rates and treasury bond yields of 1-month to 4-year tenures by the cointegration testing procedure suggested by Pesaran, Shin and Smith (PSS). Our empirical results indicate that, at shorter tenures, cross currency swap rates and treasury bond yields have a one-to-one long-run equilibrium relationship and hence the deviations from the equilibrium are quickly arbitraged away. On the other hand, the relationship becomes weaker as the tenure exceeds 6 months and completely disappears after 1 year. We also carry out some robustness checks ranging from changing the specification of the PSS test to conducting different cointegration testing procedures. The results of the robustness checks are broadly in line with our initial findings.

401k Manifesto™ – The New Standard

by Neil Plein

The magnum opus. A must read.

The 401k Manifesto calls for a revolution in the retirement industry, the core of which is an entirely new structure... more The 401k Manifesto calls for a revolution in the retirement industry, the core of which is an entirely new structure designed around exclusively offering Exchange Traded Funds as investment options. This presents the only truly viable way to enact the type of technological change participants urgently need to build higher average retirement balances on a macro scale.

A new rebalancing methodology to reduce risk and increase dollar cost averaging in defined contribution plans

by Neil Plein

PDF Version.

This study was conducted over a 3 year period to determine whether or not the frequency of portfolio rebalancing in... more This study was conducted over a 3 year period to determine whether or not the frequency of portfolio rebalancing in defined contribution plans had an effect on risk mitigation. A professionally constructed model portfolio designed to exist on the efficient frontier was used and It was hypothesized that that the higher the frequency of rebalancing the greater the degree of risk mitigation.

As methods of rebalancing have two primary components, cash flow management (plan contributions) and rebalance frequency; the traditional methods studied use plan contributions as being passively invested based on an originally designed asset allocation, followed by rebalancing (highest to lowest) at either quarterly, semi-annual or annual intervals.

These three methods were compared to a fourth method, that of the Self Aligning Portfolios™ methodology (U.S. Pat. 8,060,428) developed by Invest n Retire® (INR); which uses cash flows at each payroll period to bring a portfolio either wholly or partially back into balance followed by a quarterly rebalance as necessary. This method served as the highest frequency rebalancing method considered.

The data strongly supported the hypothesis, that the higher the rebalancing frequency, the higher the degree of risk mitigation (evidenced through higher returns and fewer losses when compared to traditional passive cash flow management and reduced rebalancing frequencies).

Furthermore, at the conclusion of the study, the Self Aligning Portfolios™ had generated larger asset positions than comparative methods; the result of utilizing cash flows at each contribution period to purchase more shares of underweighted positions and either few or no shares in over weighted positions.

The Romanian Army Officer Lt. Alexandru Gheorghe (27 y.o.) Fights for Democracy Under the Weight of the Lingering Communist Era Tombstones

by Adrian Toader-Williams

Denigrating intellectuals and eliminating people that stands out against the ruling government for a public interest cause has deep roots in the old time human behavior tendency to hold power. Personally I have hard time to accept that during our days such concepts and practices are still generalized in the civilized countries. Remainders of the old communist and dictatorial regimes isolated tendencies are possible to linger around. We can aim towards a sustainable development only by reaffirming the democracy, the social contract and the fundamental law protecting the Human Rights. If not absolutely nothing makes sense. Full Article: http://ireport.cnn.com/docs/DOC-743320 Military Army NATO Romania Social Contract Human Rights Health Freedom Economy Economics Equilibrium TEKT Triangular Ecokinematics Theory Webcast Romania Retirement Law Education Security Sustainable Development Government Finances Banks Money Inflation Attribution

Denigrating intellectuals and eliminating people that stands out against the ruling government for a public interest... more Denigrating intellectuals and eliminating people that stands out against the ruling government for a public interest cause has deep roots in the old time human behavior tendency to hold power. Personally I have hard time to accept that during our days such concepts and practices are still generalized in the civilized countries. Remainders of the old communist and dictatorial regimes isolated tendencies are possible to linger around. We can aim towards a sustainable development only by reaffirming the democracy, the social contract and the fundamental law protecting the Human Rights. If not absolutely nothing makes sense. Full Article: http://ireport.cnn.com/docs/DOC-743320

Emerging markets and financial crises: Regional, global or isolated shocks?

by Dimitris Kenourgios

Kenourgios, D., Padhi, P. (2012) Emerging markets and financial crises: Regional, global or isolated shocks?, Journal of Multinational Financial Management, Vol. 22(1-2), pp. 24-38.

This paper investigates financial contagion of three emerging market crises of the late 1990s, as well as the subprime... more This paper investigates financial contagion of three emerging market crises of the late 1990s, as well as the subprime crisis of 2007, focusing on financial markets of emerging economies, USA and 2 global indices. Conventional cointegration and vector error correction analysis show long and short run dynamics only among emerging stock markets during the Russian and the Asian crises, for both stock and bond markets during the subprime crisis, while the Argentine turmoil has no impact on any of the examined markets. Further analysis into a multivariate time-varying asymmetric framework provides evidence on the global impact of the Russian default, the contagion effects of the subprime crisis, the regional aspect of the Asian crisis and the isolated nature of the Argentine turmoil. Moreover, stock markets seem to constitute a stronger transmission mechanism during the three contagious crises. Our findings have crucial implications for international investors, policy makers and multi-lateral organizations.