Hulley, H & Schweizer, M 2010, 'M-6-On Minimal Market Models and Minimal Martingale Measures' in Chiarella, C & Novikov, A (eds), Contemporary Quantitative Finance: Essays in Honour of Eckhard Platen, Springer, Germany, pp. 35-+.
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The well-known absence-of-arbitrage condition NFLVR from the fundamental theorem of asset pricing splits into two conditions, called NA and NUPBR. We give a literature overview of several equivalent reformulations of NUPBR; these include existence of a growth-optimal portfolio, existence of the numeraire portfolio, and for continuous asset prices the structure condition (SC). As a consequence, the minimal market model of E. Platen is seen to be directly linked to the minimal martingale measure. We then show that reciprocals of stochastic exponentials of continuous local martingales are time changes of a squared Bessel process of dimension 4. This directly gives a very specific probabilistic structure for minimal market models.
Roesch, D & Scheule, H 2010, 'Downturn model risk: Another view of the global financial crisis' in Scheule, H & Roesch, D (eds), Model risk - Identification, measurement and management, Risk Books, London, UK, pp. 3-18.
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Researchers and practitioners have spent ample resources modelling credit, explaining correlations between risk models as well as inputs and outputs. One popular example is asset correlation, which describes the co-movement between the asset value returns of corporate borrowers or issuers. Other examples are default correlations, correlations between default and recovery processes and correlations between risk categories such as credit, interest, liquidity or market risk. In statistical terms, correlations are often placeholders for relationships which cannot be explained and are also known as 'seeming correlations'. The 2008-9 global financial crisis caught us by surprise and showed that, starting with US subprime mortgage markets, other markets such as equity, credit and commodity markets have declined globally. These links have not been included into existing risk models, and this chapter identifies these links and shows . how to address these relationships in risk models.
Bruti-Liberati, N, Nikitopoulos-Sklibosios, C & Platen, E 2010, 'Real-world jump-diffusion term structure models', QUANTITATIVE FINANCE, vol. 10, no. 1, pp. 23-37.
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This paper considers interest rate term structure models in a market attracting both continuous and discrete types of uncertainty. The event-driven noise is modelled by a Poisson random measure. Using as numeraire the growth optimal portfolio, interest rate derivatives are priced under the real-world probability measure. In particular, the real-world dynamics of the forward rates are derived and, for specific volatility structures, finite-dimensional Markovian representations are obtained. Furthermore, allowing for a stochastic short rate in a non-Markovian setting, a class of tractable affine term structures is derived where an equivalent risk-neutral probability measure may not exist. © 2010 Taylor & Francis.
Comerton-Forde, C & Putniņš, TJ 2010, 'Pricing Accuracy, Liquidity and Trader Behavior with Closing Price Manipulation', Experimental Economics, vol. 14, no. 1, pp. 110-131.
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We study the effects of closing price manipulation in an experimental market to evaluate the social harm caused by manipulation. We find that manipulators, given incentives similar to many actual manipulation cases, decrease price accuracy and liquidity. The mere possibility of manipulation alters market participants’ behavior, leading to reduced liquidity. We find evidence that ordinary traders attempt to profitably counteract manipulation. This study provides examples of the strategies employed by manipulators, illustrates how these strategies change in the presence of detection penalties and assesses the ability of market participants to identify manipulation.
Drago, D, Lazzari, V & Navone, M 2010, 'Mutual Fund Incentive Fees: Determinants and Effects', FINANCIAL MANAGEMENT, vol. 39, no. 1, pp. 365-392.
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We investigate the how and why of performance fee provisions in a free contracting environment such as the Italian mutual fund market until 2006. We find weak support for the hypothesis that these provisions emerge as an economically efficient solution in a rational asset management industry plagued by asymmetric information. They appear to emerge mainly as the product of strategic pricing by asset managers wishing to ease market competition, leverage on investors' sentiment, and hedge their cost structure. Alternatively, fears that managers may opportunistically alter funds' investment policies to maximize the option value embedded in the incentive provisions appear unjustified.
Forte, G, Iannotta, G & Navone, M 2010, 'The Banking Relationship's Role in the Choice of the Target's Advisor in Mergers and Acquisitions', EUROPEAN FINANCIAL MANAGEMENT, vol. 16, no. 4, pp. 686-701.
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We analyse the factors influencing the target company's choice of bank advisor in mergers and acquisitions (M&As). We first examine the choice of hiring an advisor, which is nontrivial, since in one-third of transactions our sample target companies did not hire one. We also analyse the choice to hire as advisor a bank with a strong prior relationship with the company (i.e., the main bank). Using data on 473 European M&A transactions completed in the period 1994-2003, we find evidence that the decision to hire an advisor depends on three main factors: (i) the intensity of the previous banking relationship, (ii) the reputation of the bidder company's advisor, and (iii) the complexity of the deal. We also investigate the impact of the bank advisor on shareholder wealth. We find that the abnormal returns of target company shareholders increase with the intensity of the previous banking relationship, thus indicating a 'certification role' on the part of investment banks. © 2009 Blackwell Publishing Ltd.
Glover, KJ, Duck, PW & Newton, DP 2010, 'ON NONLINEAR MODELS OF MARKETS WITH FINITE LIQUIDITY: SOME CAUTIONARY NOTES', SIAM JOURNAL ON APPLIED MATHEMATICS, vol. 70, no. 8, pp. 3252-3271.
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The recent financial crisis and related liquidity issues have illuminated an urgent need for a better understanding of the effects of limited liquidity on all aspects of the financial system. This paper considers such effects on the Black-Scholes-Merton financial model, which for the most part result in highly nonlinear partial differential equations (PDEs). We investigate in detail a model studied by Schönbucher and Wilmott (2000) which incorporates the price impact of option hedging strategies. First, we consider a first-order feedback model, which leads to the exceptional case of a linear PDE. Numerical results, and more particularly an asymptotic approach close to option expiry, reveal subtle differences from the Black-Scholes-Merton model. Second, we go on to consider a full-feedback model in which price impact is fully incorporated into the model. Here, standard numerical techniques lead to spurious results in even the simplest cases. An asymptotic approach, valid close to expiry, is mounted, and a robust numerical procedure, valid for all times, is developed, revealing two distinct classes of behavior. The first may be attributed to the infinite second derivative associated with standard option payoff conditions, for which it is necessary to admit solutions with discontinuous first derivatives; perhaps even more disturbingly, negative option values are a frequent occurrence. The second failure (applicable to smoothed payoff functions) is caused by a singularity in the coefficient of the diffusion term in the option-pricing equation. Our conclusion is that several classes of model in the literature involving permanent price impact irretrievably break down (i.e., there is insufficient 'financial modeling' in the pricing equation). Our analysis should provide the information necessary to avoid such pitfalls in the future. © 2010 Society for Industrial and Applied Mathematics.
Michayluk, D & Zhao, R 2010, 'Stock Splits and Bond Yields: Isolating the Signaling Hypothesis', Financial Review, vol. 45, no. 2, pp. 375-386.
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Roesch, D & Scheule, HH 2010, 'Downturn Credit Portfolio Risk, Regulatory Capital and Prudential Incentives', International Review of Finance, vol. 10, no. 2, pp. 185-207.
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This paper analyzes the level and cyclicality of bank capital requirement in relation to (i) the model methodologies through-the-cycle and point-in-time, (ii) four distinct downturn loss rate given default concepts, and (iii) US corporate and mortgage loans. The major finding is that less accurate models may lead to a lower bank capital requirement for real estate loans. In other words, the current capital regulations may not support the development of credit portfolio risk measurement models as these would lead to higher capital requirements and hence lower lending volumes. The finding explains why risk measurement techniques in real estate lending may be less developed than in other credit risk instruments. In addition, various policy recommendations for prudential regulators are made.
Bird, R & Yeung, DC 1970, 'Institutional ownership and IPO performance: Australian evidence', Financial Management Association 2010 Meetings, Financial Management Association Annual Meeting, Financial Management Association, New York, USA, pp. 1-25.
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The duo IPO anomalies of underpricing and long run underperformance have inspired a plethora of studies. Yet few have examined the impact of majority investors in IPOs, namely institutional investors. Consistent with previous studies, we found large underpricing which was greatest in those issuers with the highest initial institutional ownership. Yet these issuers experienced the worst long]run underperformance which casts doubts over the informed]trading hypothesis. The findings are consistent with overreactions driven by informational cascade in the IPO market. High level of initial institutional interests generates informational herding that drives these issuersf prices beyond the fundamental. Over time, market correction leads to the long]run underperformance. Our results cast a somewhat different light on institutionsf role in IPOs, rather than being a valuable source of price discovery; Institutions may be a force of destabilization in what is already an event wrath with uncertainty.
Casavecchia, L & Hulley, H 1970, 'The effect of idiosyncratic risk on mutual fund flows and performance', Seminar Presentation, Queensland University of Technology, Brisbane, Australia.
Casavecchia, L & Hulley, H 1970, 'The effect of idiosyncratic risk on mutual fund flows and performance', Seminar Presentation, University of Western Australia, Perth, Australia.
Casavecchia, L & Hulley, H 1970, 'The effect of idiosyncratic risk on mutual fund flows and performance', Finance and Corporate Governance Conference, Melbourne, Australia.
Casavecchia, L & Hulley, H 1970, 'The effect of idiosyncratic risk-taking on mutual fund performance and fees', Financial Management Association 2010 Meetings, Financial Management Association Annual Meeting, Financial Management Association, New York, USA, pp. 1-50.
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We identify for the first time the crucial role played by idiosyncratic risk as a determinant of performance persistence, flow-performance sensitivity and management fees charged to fund shareholders. Using a sample of US equity mutual funds, we show that high idiosyncratic volatility indirectly captures the aggressiveness of fund investment strategies. We document that funds characterized by high idiosyncratic risk exhibit high probabilities of transitioning into the tails of the performance distribution. In particular, these high transition probabilities in performance cause funds characterized by high idiosyncratic risk to jump more frequently from one tail of the performance distribution to the other, making them appear as if they do not significantly underperform as opposed to funds with low levels of idiosyncratic risk. Consistent with the model of Berk and Green (2004), we argue that idiosyncratic risk is a confusing factor and significantly compromises investors ability to clearly quantify managerial skills. Since investors learn about managerial abilities from past returns and chase performance accordingly, we should expect high noise in performance to reduce the precision of investors priors about these abilities. As a result, in the presence of switching costs and search costs, investors may optimally choose to wait to receive a better signal before (re-) allocating their capital. We document in fact that the sensitivity of flows to performance significantly and monotonically plunges for those funds engaging in high idiosyncratic risk, irrespective of their performance rankings.
Finnoff, D, Hambusch, G & Shaffer, S 1970, 'Optimal management of mean reverting losses', Annual Conference of the Multinational Finance Society, Barcelona, Spain.
Gerig, A & Glover, K 1970, 'What makes the market in a market without market-makers?', 16th International Conference on Computing in Economics and Finance, London, UK.
Glover, K 1970, 'Optimal prediction of the CEV process', Quantitative Methods in Finance 2010 Conference, Sydney, Australia.
Glover, K, Peskir, G & Samee, F 1970, 'The British Russian option', 6th World Congress of the Bachelier Finance Society, Toronto, Canada.
Hulley, H 1970, 'The Economic Plausibility of Strict Local Martingales in Financial Modelling', Quantitative Methods in Finance 2009 Conference, Springer Berlin Heidelberg, Sydney, Australia, pp. 53-75.
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Meyer, PH, Hutcheson, TJ & Jie, F 1970, 'What's in it for me? A comparison of postgraduate and undergraduate performance in supplemental instruction at an Australian university', Enhancing the Effectiveness of Learning and Teaching in Economics: Proceedings of the 13th Australasian Teaching Economics Conference, 13th Australasian Teaching Economics Conference, Lambert Academic Publishing, Sydney, Australia, pp. 42-49.
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PASS has proven to be a popular progrem with m:dergraduate University students. r:rls study examines the impact of the PASS pro''',, when it is introduced into a postgraduate subject. The results imply that the postgraduate students who attended PASS 'were on average able to achieve higher .marks fum: students that did not However, the feedback provided by postgraduate students on the her:efits they felt they achieved whi!st attending PASS was not as positive as the feedback provided by undergraduate students.
Michayluk, D, Neuhauser, K & Walker, S 1970, 'Are certain dividend increases predictable? The effect of repeated dividend increases on market returns', Financial Management Association 2010 Meetings, Financial Management Association Annual Meeting, Financial Management Association, New York, USA, pp. 1-38.
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Positive abnormal returns around dividend increase announcements are well documented. The conventional explanation for these abnormal returns is that a dividend increase conveys favorable information about a firms prospects causing the stock price to increase in response to the announcement. This study offers a new perspective by studying a special group of firms that consistently increase their dividends each year. Abnormal returns around each dividend increase announcement are investigated based on the number of consecutive annual increases. In light of survey results that indicate firms endeavor to maintain steady dividend payments, one hypothesis is that after a certain number of dividend increases, a firm may develop a reputation as a dividend-increasing firm and consequently the market will learn to anticipate future dividend increases. Consistent with this hypothesis, we find that abnormal returns are significantly positive for the first and second dividend increase. Returns are not significant for all other increases, with the exception of the ninth consecutive increase. Our results suggest that, by the third consecutive increase, the market has learned to expect further increases. Our findings are robust and provide further evidence that, consistent with other types of corporate announcements, the stock market reacts differently depending on the frequency of an action.
Professor Ronald Geoffrey Bird, R & Yeung, DC 1970, 'How do investors react under uncertainty?', Asian Finance Association International Conference 2010, Hong Kong.
Glover, K, Peskir, G & Samee, F 2010, 'The British Russian Option', Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney.
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Following the economic rationale of [10] and [11] we present a new class of lookback options (by first studying the canonical 'Russian' variant) where the holder enjoys the early exercise feature of American options where upon his payoff (deliverable immediately) is the 'best prediction' of the European payoff under the hypothesis that the true drift of the stock price equals a contract drift. Inherent in this is a protection feature which is key to the British Russian option. Should the option holder believe the true drift of the stock price to be unfavourable (based upon the observed price movements) he can substitute the true drift with the contract drift and minimise his losses. The practical implications of this protection feature are most remarkable as not only is the option holder afforded a unique protection against unfavourable stock price movements (covering thea bility to sell in a liquid market completely endogenously) but also when the stock price movements are favourable he will generally receive high returns. We derive a closed form expression for the arbitrage-free price in terms of the rational exercise boundary and show that the rational exercise boundary itself can be characterised as the unique solution to a nonlinear integral equation. Using these results we perform a financial analysis of the British Russian option that leads to the conclusions above and shows that with the contract drift properly selected the British Russian option becomes a very attractive alternative to the classic European/American Russian option.
