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  • Osmekhin, Sergey (Svenska handelshögskolan, 2016-04-11)
    Financial markets and the pace of trading have changed dramatically over the last decade. Stock exchanges have replaced their traditional physical floors with electronic trading platforms. Most market participants now employ automated, algorithmic strategies, which are the focus of the present thesis. The thesis consists of introduction and three essays. In the first essay, I study the impact of algorithmic trading activity on market properties. The analysis is based on a proprietary dataset from NASDAQ OMX Nordic. The essay presents a method for causality identification that does not rely on exogenous events. Separating maker’s and taker’s activity provides the analysis of causality between traders and market properties. The results identify two-way causality from the activity of algorithmic liquidity providers to relative bid-ask spread and from bid-ask spread to the activity of algorithmic liquidity takers. In the second essay, I study the impact of trading fees on market properties and activity of traders using the natural experiment of unifying the tariff structure of the NASDAQ OMX Nordic exchange trading price lists. I test the hypothesis that if the change of the exchange fees is less than uncertainties of other trading costs (e.g. cost of future bid-ask spread), the impact of the change is economically insignificant. The third essay presents a quantitative approach to measure market efficiency, based on the waiting time distribution. Constructing mean-reverting portfolios of cross-listed stocks provides observation of inefficient states by divergence of price from its mean. The farther the price diverges from its mean, the quicker the mean-reversion is. The essay shows that the parameter of the waiting-time exponential distribution is a good indicator of market efficiency. The findings presented in the thesis have the potential to be of interest for investors, regulators, and policy makers internationally.
  • Haga, Jesper (Svenska handelshögskolan, 2016-04-05)
    Asset pricing models provide investors with a relation between risk and expected returns. Higher risk levels should be linked to higher expected returns. In addition, trading strategies that earn risk adjusted abnormally high or low returns are referred to as asset pricing anomalies. These asset pricing anomalies present an important challenge for us researchers. Either our asset pricing models are incorrect or there exist frictions in the capital markets allowing such anomalies to persist. A better understanding of these anomalies can help in the development of asset pricing models. Knowledge about these anomalies is of course gained by studying them, which is where my thesis comes in. This dissertation investigates three different topics in asset pricing literature. The first two papers study anomalies. In the first essay the momentum anomaly is investigated. In this respect, the momentum strategy consists of buying previous outperformers and selling previous underperformers. Moreover, this strategy generates abnormal returns. More specifically, the first essay studies the robustness of intermediate-term momentum. The result suggests that the difference found between short-term and intermediate-term momentum is mainly driven by low credit risk firms and that the optimal momentum strategy can be dependent on firm characteristics. In the second essay we investigate the credit risk puzzle. Previous studies have shown that firms with a high credit risk exhibit lower excepted returns than firms with a low credit risk. This phenomenon is referred to as the credit risk puzzle. Contrary to previous findings, we suggest that the credit risk puzzle is only a temporary occurrence. Furthermore, the reason for this temporary mispricing of high credit risk firms could be the result of stronger limits to arbitrage during the subsample or possibly due to a sudden increased power to the debtholders during the early subsample. The third essay shows that a higher reporting frequency can act as a stabilizing factor in times of market distress. Firms that report quarterly instead of semi-annually experience lower stock price volatility during times of market distress. However, the important systematic volatility is higher for stock prices of firms that report quarterly. Ultimately, there exists a trade-off between higher firm specific systematic volatility on average and lower total volatility in times of market distress.
  • Olufeagba, Olugbenga (Svenska handelshögskolan, 2016-03-01)
    Asset price movements play credible role as leading indicator for activity, financial distress and general economic wellbeing, and as such, are closely monitored by investors and policymakers alike. All assets’ prices are expressed in a unit of account, usually the home currency of the jurisdiction in which the asset is domiciled, and the values of these currencies continually vary, depending on the balance of demand and supply. The continuous variation in the value of currencies suggests that, at best, they can only be an inappropriate unit of measure of an asset. This dissertation aims to shed more light on why single currencies are inaccurate units of measure of asset prices. Our first study investigates how the currency of valuation affects the outcome of the return and volatility spillovers between the stock market and the foreign exchange (FX) market. Evidence from our study suggests the presence of exchange rate premium in asset prices, which in turn significantly affects the nature of the relationship between the equity and FX markets when asset prices are measured in an aggregate unit of account rather than pair-wise or single currency. In our second study, we examine the currency effect on the predictability of stock returns in the short term. Although previous studies have concentrated on investigating the factors or models that best predict asset returns, our study investigates the effect of currency of valuation on stock return predictability. Our results suggest that reducing the volatility of the variables by valuing them in an aggregate unit of account improves the predictability of stock returns on the short horizon. Our last study investigates the currency effect on the long-term relationship between the stock market and macroeconomic variables. Our results show evidence of significant changes in the relations between the stock market and macroeconomic variables with the introduction of the aggregate currency factor, marked by reducing the effect of the aggregate currency-denominated US macroeconomic variables on the aggregate currency-denominated stock index. Moreover, the results show that the previously documented relations between the stock market and macroeconomic variables, without accounting for the influence of the currency of valuation, might not necessarily hold when the currency factor is discounted.
  • Pettersson, John (Hanken School of Economics, 2015-07-02)
    The efficient market hypothesis stipulates that investors are unable to consistently gain risk adjusted returns with the information known to them at the time of the investment. The expected return, conditional on the information set known to investors, is determined from an assumed expected return theory (asset pricing model). However, it has previously been shown that past winners outperform past losers. A trading strategy taking a long position in previous winner stocks and a short in previous loser stocks earn positive statistically and economically significant risk-adjusted returns. These results are confirmed in international markets, but also in different asset classes. A number of alternative asset pricing models explaining momentum returns imply that momentum should be stronger among high uncertainty assets. Many of these alternative asset pricing models build on investor psychology. This premium, with higher momentum returns among high risk stocks has also been empirically documented. This dissertation evaluates some behavioral explanations to momentum returns by their implications. Behavioral explanations often imply that the momentum anomaly is stronger when uncertainty about information is high. Essay one confirms that there is an overreaction to information causing momentum to be high when uncertainty is high. However, when uncertainty is low momentum still exists, now caused by a slow incorporation of new information into asset prices. Contrary to what many behavioral models imply, the results in essay three suggest that uncertainty about information in the portfolio formation period does not cause a stronger momentum anomaly. Stock prices imply a larger under-reaction to positive and relatively reliable information, than to more uncertain information. Based on previous literature, the results in this study suggest that the driver of the return premium in high volatility assets is the general risk level of single stocks, and not uncertainty about portfolio formation period information. Using equity index futures data, essay two links time series momentum profits to volatility states. Time series momentum portfolio returns are driven by assets in a low volatility state. These results support the general finding that momentum is not caused by uncertainty about portfolio formation period information.
  • Blomkvist, Magnus (Svenska handelshögskolan, 2014-09-29)
    The recent financial crisis of 2007-2009 highlights the impact that financial markets can have on firm behavior. The effect of market states on asset prices is well documented. Until recently, market states have played a less significant role in the corporate finance literature. This dissertation aims to give further understanding concerning firms’ financing and investments during different market states. In the first essay, I study firm-specific factors behind merger waves. My evidence suggests that acquisition activity of financially constrained firms is an important determinant of the observed waves in the aggregate M&A activity. When capital liquidity increases, financially constrained firms are better able to obtain debt and equity financing to finance their investment opportunities. In contrast, financially unconstrained firms are indifferent to the overall capital liquidity and thereby do not have equally clustered M&A activity. In the second essay, I study the behavior of equity issuing firms during cold IPO-markets. I find that firms that go public during cold markets tend to stage their financing while firms that issue during hot markets tend to raise a larger amount financing, which is consistent with the market timing effect. In the third essay, I study whether the acquisition motive of equity issuance differs between firms going public in hot and cold markets.
  • Délèze, Frédéric (Svenska handelshögskolan, 2014-08-15)
    Financial assets prices are not always in perfect equilibrium and deviate from their fundamental values. The dramatic rise and fall of the stock market raises concern about the rationality of sudden changes in stock valuations. The mispricing of assets contributes to financial crises, which can damage the overall economy. This dissertation analyses the effect of market imperfections at different time horizons. Starting at a macroeconomic level with a change of currency, the first essay analyses the impact of the introduction of Euro on interest rate sensitivity of European firms. We found that the connection between bond issuance and reductions in interest rate sensitivity is most significant among financially constrained firms, which suggests that financially constrained firms are the main beneficiaries of the relaxed public borrowing constraint in Europe after the introduction of euro. Releases of macroeconomic news announcements cause sudden price discontinuities, or jumps and co-jumps, on financial markets. The second essay attempts to explain the effect of US macroeconomic announcements on European equity, interest rate and foreign exchange markets at a high-frequency level. While European equity markets are more sensitive to US fundamentals, US macroeconomic announcements cause significant jumps and cojumps on all European asset classes. We found that European markets are highly co-integrated and observed a strong correlation between the type of news and the direction of the jumps. Motivated by the phenomenal success of some quantitative trading funds, the third essay describes a new pairs trading strategy, where the spread between two co-integrated portfolios is modelled stochastically. Taking into account transaction costs, the algorithm generates a systematic positive excess return based on a pure statistical arbitrage strategy. While very convenient, traditional asset pricing relies on two restrictive assumptions. First, asset returns are conventionally modelled with Gaussian-based distributions even though actual financial time series exhibit volatility clustering. The second assumption mainly affects market microstructure studies. Time series are sampled at regular interval of time and asset return distribution is used as the unique driver to model the price fluctuation of an asset over time. In reality, the time between two transactions, often called waiting-time, is stochastic and conveys important information about price formation. The two last essays relax the assumptions of log-normally of asset prices and model asset prices with a continuous-time random walk. The fourth article compares the Markovian and non-Markovian forms of the continuous-time random walk process and shows the relevance of the waiting-time distribution on price formation. The last article applies the framework to statistical arbitrage.
  • Pöyry, Salla (Svenska handelshögskolan, 2014-08-05)
    The fundamental function of financial markets is to channel funds within an economy. To efficiently do so, financial markets need to generate asset prices that consistently incorporate all available information and reflect all non-diversifiable dimensions of risk. While perhaps elegant, perfect market functionality and efficiency can nonetheless be seen as an unattainable ideal. Financial market imperfections, such as those generated by asymmetric information or transactions costs, can easily distort the underlying financial markets mechanisms. The research questions that are addressed in this thesis are all related to phenomena that have been associated with, or explained by, financial market frictions or imperfections. This thesis consists of four separate essays that examine questions that would be irrelevant in a perfect market – that is, in a world with no predictability of returns, informational advantages or institutional weaknesses. At least, they would be irrelevant when considering the perfect market setting as described by financial economists up until the mid- 1980s. While the guiding principles may have been somewhat updated, it is nonetheless important to stress that recent findings do not necessarily conflict with the view that markets are reasonably efficient or driven by rational market forces. The first essay of this thesis examines the under-diversification of investors and its sources using data from the Finnish Central Securities Depository (FCSD) legal liability accounts. That is, is under-diversification rational and driven by informational advantages, or the result of the behavioral biases of investors? The former source relies on market inefficiency to justify its existence whereas the latter is an imperfection in itself. In the second essay, I examine the impact of market fragmentation on private investors using the same data source. It examines whether market functionality deteriorated for private investors as a result of a regulatory change (MiFID I) that enabled market fragmentation on a large scale, but did not guarantee equal access to all market venues across all investor types. In the third essay, we explore and document a novel and robust connection between firm-level asset changes and return momentum using US stock data. The momentum anomaly is one of the most robust documented return anomalies and is recognized as one of the biggest challenges to asset pricing research. While the existing theoretical literatures on risk-based or behavioral models do not offer a clear explanation to our empirical results, recent real options models appear to hold the most promise. In the last paper, we explore the relation between ownership structures and capital structures in Russia. This is a market plagued by severe institutional imperfections and inefficiencies.
  • Wang, Peng (Svenska handelshögskolan, 2014-06-16)
    This dissertation consists of four self-contained papers. The first two of them concern pyramidal ownership structure, the third one deals with dual-board system, and the last one explores the contemporaneous relation between foreign investment flows and local equity returns. I choose the Chinese stock market as my laboratory. China will soon become the largest economy in the world, and China’s domestic stock markets are growing up rapidly since their establishment in the early 1990s. According to the World Federation of Exchanges (WFE), the number of listed companies in the two domestic stock markets, i.e., the Shanghai Stock Exchange and the Shenzhen Stock Exchange reaches 2,491 with a total market capitalization of 3.7 trillion of U.S. dollars at the end of 2012. Despite this fast growth, extant studies on the Chinese stock market are still limited in scope. Perhaps because researchers’ perceptions on Chinese listed firms still remain with older patterns, such as the dominance of state-owned enterprises (SOEs), the corrupted bureaucracy, the politically-appointed executives, and a market that is inaccessible to foreign investors. In this regard, one of my objectives in this dissertation is to provide some new insights into the modern corporate finance issues among Chinese listed firms. The first essay examines the ownership structure of the Chinese Growth Enterprise Market (GEM). I show that 46% of sample firms are set up in the pyramidal structure. Further, I demonstrate that the owners of most firms in the GEM are families, which stands in stark contrast with the firms listed on the main board in China, which are state-owned. The second essay is naturally an extension of the first one, we investigate Initial Public Offerings (IPOs) of firms on the GEM. The likelihood of a pyramid structure increases with the size of the IPO firm and state control. Our results do not suggest that pyramids are set up to overcome financial constraints. However, we document that pyramid IPOs are discounted before the IPO. The price to book ratio estimated at the subscription price is significantly lower for pyramid IPOs compared to stand-alone IPOs. The third one examines board effectiveness and independence by studying all firms listed in China from 2000 to 2009. I find a significant inverse relationship between supervisory board size and firm performance. This result indicates that large supervisory board size per se causes free-rider and communication or coordination problems, as occurs with boards of directors. The last essay examines the trading behavior and price effects of foreign institutions under the celebrated Qualified Foreign Institutional Investor (QFII) scheme on all non-financial firms in the Chinese A-share markets. I find that foreign institutions in the Chinese A-share markets do not show positive or negative feedback trading; however, their flows have a strong impact on future equity returns because of informational advantage.
  • Hyttinen, Lilia (Svenska handelshögskolan, 2013-06-13)
    The aim of this dissertation is to examine critical issues that pharmaceutical industry currently facing through lenses of corporate finance theories. Tirole (2006) suggest that the pharmaceuticals market is primarily an innovation market; thus, each firm must develop new technology and know-how in order to enter and serve the market. A firm’s profit, when it succeeds in a development, depends on whether it faces a competitor, that is, whether the other firm also succeeds. A common theme in the essays stems from a role corporate finance decisions are playing in the interactions of a pharmaceutical firm with its strategic partners and/or competitors. The modern theoretical Corporate Finance research asks how the agency problems, asymmetric information, signaling and incomplete contracting affect corporations’ optimal investing and financing activities while taking into consideration also the strategic behavior of other market participants. This research is a collection of three empirical studies of economics of pharmaceutical industry, while three theoretical corporate finance models, i.e. incomplete contracting, asymmetric information and signaling render frameworks for the three essays respectively. I explore the impact of corporate finance decisions by addressing three broad questions. First: How the ownership and control over assets are allocated within drug development partnerships; and how contracts are designed to incorporate contingency provisions, such as a drug failure in clinical trials and monitoring problems? Second: What are determinants of the settlements of pharmaceuticals’ patents litigations and whether settlements can help alleviate the costs of the informational asymmetry problem (i.e. a patent’s validity)? Third: Can a firm, by signaling high barriers to entry and commitment to behave aggressively, effectively deter potential market entrants? This thesis contributes to the several lines of literature by increasing the knowledge as to how the drug development partnerships’ contracts are structured, what are determinants and benefits of the settlements of pharmaceuticals’ disputes as well as sheds the light on biologic drugs competitive strategies. The problems being examined are focused on the specific strategic interactions (events) of the pharmaceutical and biotechnology firms, and because the dissertation’s issues all are relatively little analyzed, the study is very relevant. More specific knowledge of the issues that pharmaceutical firms face plausibly increases the intelligence of the practitioner and, thus, leads to better finance and investment decisions, as well as, increased value creation in corporate world.
  • Virk, Nader (Svenska handelshögskolan, 2013-05-23)
    The fundamental issue in financial economics is looking for new solutions to the age-old problems at the very intersection of economic design of human rationality and mathematical formulation of it; including how assets are priced. Notwithstanding, the ever present uncertainty in analyzing and categorizing valuable information and inability to fully comprehend human behavior provides the twist in cluttering observable realities across financial markets. This limitation in segregating, what is important and is of economic rationale from noise and idiosyncrasies, has bestowed numerous interpretations of similar occurrences. The cornerstone of solving the central puzzle – that expected returns on financial assets are different – in the asset pricing theory remain the search for measuring risk that could identify why the payoffs vary across assets, business cycle conditions and markets. Overall, the testing of asset pricing models provides diverging evidence depending upon the cross-section of test assets used across markets. This thesis delves into the Finnish stock market for reporting independent evidence; given the peculiarities associated with this market. The first essay shows macro risks possess sufficient ability to capture variations in industry portfolio expected returns and are significantly more important than the systematic market factor. The second essay reports among canonical asset pricing models – that identify consumption variations across states and periods capture variations in investor marginal utilities to proxy aggregate risk – habit specification of Campbell and Cochrane (1999) explain variations in Finnish stock and bond returns better than the remaining. The third essay given the peculiar conditions in Finnish stock market, for few big firms making abnormally large component of total market capitalization, reports size and value risk factors are important risk factors in suppressing model specification errors. Furthermore, the conditional CAPM, when provided the opportunity to have time varying factor sensitivities, improves in reducing model specification than its unconditional counterpart. Fourth essay identifies liquidity risks capture important variations in aggregate risk premium; nevertheless remain pertinent risk for small capitalization and less traded stocks. The chaos in asset pricing, for the reported success of numerous discounting proxies in explaining periodical variations in expected returns, is also evident in the Finnish market. The unfinished task is to look for a risk proxy which is able to explain not only all kinds of independent sorts and partitions of data across markets and could also be linked with the variations in investor marginal utilities and variations in risk premia in the long run, ex-ante.
  • Liu, Xing (Svenska handelshögskolan, 2012-11-05)
    The integration of European agriculture into the world economy has also accelerated price interaction between member states and the rest of the world during last decades. Consequently, the fluctuation in world market prices was more quickly transmitted to European member states, including Finland. Increasing price uncertainty and price volatility in agricultural products became more evident. The openness of regional agriculture such as EU and Finnish to the world is irreversible, and the international community needs timely and differentiated information on the situation in different places in order to respond appropriately. The theme of this dissertation concerns the properties of price linkage of agricultural commodities across space during the last decades. Such properties include hedging issues, price transmission and marketing margin in the agricultural commodity market. By understanding the issues, agricultural market participants, including farmers, processors, industries, consumers and policy makers can benefit from insights into these issues either in order to assess past actions and decisions or to derive guidelines for future action. In summary, this dissertation consists of 5 independent articles. Article 1 presents a case study on optimal hedging on Finnish wheat under both price and yield risks. The result shows that the forward contract might not be the best hedging tool for the farmers in Finland where the yield volatility per unit is bigger than price volatility. Article 2 presents an efficiency test of the CPO futures market in Malaysia for European participants using the cointegration technique. The results suggest that the futures market in Malaysia is not efficient for European participants, which indicates that they should be more cautious in using the hedging strategy in this futures market. Articles 3 focuses on the price transmission of the Finnish food market at vertical level, and Article 4 investigates horizontal price transmission of the Finnish meat market towards the European market in both symmetric and asymmetric ways. The result from Article 3 implies that the Finnish market is characterized by buyer power according to the measure of Lloyd et al. (2009). The result from Article 4 detects that the Finnish meat sector is integrated with EU benchmark countries symmetrically or asymmetrically. Moreover, the degree of integration and speed of adjustment of Finnish pork and beef towards the EU market are proved in different level. Article 5 presents an inventory model to investigate the relationship between price volatility and the inventory in the global wheat market. The results reveal that there is only a short-term significant relationship between price volatility and the inventory.
  • Kuttu, Saint (Svenska handelshögskolan, 2012-07-30)
    The 2008 financial crisis brought to the fore the relative resilience of emerging and frontier equity markets. This has made international investors to turn their attention to emerging and frontier equity markets to minimise their down side risk exposure. Against this backdrop, it is important for international investors to understand and appreciate the unique features such as pervasive thin trading and severe illiquidity which impact on the evolution of returns and volatility in these equity markets. This thesis, which consists of three essays, examines the first and the second moment dynamics in thinly traded African equity markets. The main findings of the first essay suggest a reciprocal return stimuli spillover between Ghana and Kenya, and between Nigeria and South Africa. South Africa passes past return stimuli to Kenya and Nigeria but receives none. In the second moment, however, Nigeria appears to be the dominant one. Specifically, Nigeria exports volatility stimuli to Kenya and South Africa and receives none. Bad news from Kenya increases volatility on the equity market of Ghana more than good news of equal magnitude from the same source. Also, for the equity markets of Ghana, Nigeria and South Africa, changes in volatility in the four markets from domestic shocks are comparatively more important than the innovations from the other markets. Essay two reports a bi-directional mean relationship between the equity and foreign exchange markets of Ghana. Also past returns in the foreign exchange market influence current returns in the equity market of Nigeria. In the second moment, previous volatility in the equity market of Ghana influences current volatility in the foreign exchange market and not vice versa. In addition, political violence related negative news affects the equity and the currency markets of Nigeria, but for Ghana, it only affects the equity market. Furthermore, ethnic violence related negative news affects respectively the returns of the equity and the foreign exchange markets of Ghana and Nigeria. Only the volatility in the foreign exchange markets of Ghana is sensitive to political violence related news. The findings in essay three suggest that conditional jumps are time varying, and jumps are sensitive to past shocks for the equity markets of Egypt and South Africa. For Nigeria, however, the jump intensity is constant. Jump sensitivity is persistent in all the equity markets, and only the equity market of South Africa displays jump volatility asymmetry. Overall, this thesis which, adjusted for thin trading before the models were applied, sheds light on the importance of the proper handling of the thin trading issue in order to minimise spurious dependencies from plaguing the results.
  • Badshah, Ihsan Ullah (Svenska handelshögskolan, 2010-11-23)
    Modeling and forecasting of implied volatility (IV) is important to both practitioners and academics, especially in trading, pricing, hedging, and risk management activities, all of which require an accurate volatility. However, it has become challenging since the 1987 stock market crash, as implied volatilities (IVs) recovered from stock index options present two patterns: volatility smirk(skew) and volatility term-structure, if the two are examined at the same time, presents a rich implied volatility surface (IVS). This implies that the assumptions behind the Black-Scholes (1973) model do not hold empirically, as asset prices are mostly influenced by many underlying risk factors. This thesis, consists of four essays, is modeling and forecasting implied volatility in the presence of options markets’ empirical regularities. The first essay is modeling the dynamics IVS, it extends the Dumas, Fleming and Whaley (DFW) (1998) framework; for instance, using moneyness in the implied forward price and OTM put-call options on the FTSE100 index, a nonlinear optimization is used to estimate different models and thereby produce rich, smooth IVSs. Here, the constant-volatility model fails to explain the variations in the rich IVS. Next, it is found that three factors can explain about 69-88% of the variance in the IVS. Of this, on average, 56% is explained by the level factor, 15% by the term-structure factor, and the additional 7% by the jump-fear factor. The second essay proposes a quantile regression model for modeling contemporaneous asymmetric return-volatility relationship, which is the generalization of Hibbert et al. (2008) model. The results show strong negative asymmetric return-volatility relationship at various quantiles of IV distributions, it is monotonically increasing when moving from the median quantile to the uppermost quantile (i.e., 95%); therefore, OLS underestimates this relationship at upper quantiles. Additionally, the asymmetric relationship is more pronounced with the smirk (skew) adjusted volatility index measure in comparison to the old volatility index measure. Nonetheless, the volatility indices are ranked in terms of asymmetric volatility as follows: VIX, VSTOXX, VDAX, and VXN. The third essay examines the information content of the new-VDAX volatility index to forecast daily Value-at-Risk (VaR) estimates and compares its VaR forecasts with the forecasts of the Filtered Historical Simulation and RiskMetrics. All daily VaR models are then backtested from 1992-2009 using unconditional, independence, conditional coverage, and quadratic-score tests. It is found that the VDAX subsumes almost all information required for the volatility of daily VaR forecasts for a portfolio of the DAX30 index; implied-VaR models outperform all other VaR models. The fourth essay models the risk factors driving the swaption IVs. It is found that three factors can explain 94-97% of the variation in each of the EUR, USD, and GBP swaption IVs. There are significant linkages across factors, and bi-directional causality is at work between the factors implied by EUR and USD swaption IVs. Furthermore, the factors implied by EUR and USD IVs respond to each others’ shocks; however, surprisingly, GBP does not affect them. Second, the string market model calibration results show it can efficiently reproduce (or forecast) the volatility surface for each of the swaptions markets.
  • Ahmed, Sheraz (Svenska handelshögskolan, 2009-09-02)
    A growing body of empirical research examines the structure and effectiveness of corporate governance systems around the world. An important insight from this literature is that corporate governance mechanisms address the excessive use of managerial discretionary powers to get private benefits by expropriating the value of shareholders. One possible way of expropriation is to reduce the quality of disclosed earnings by manipulating the financial statements. This lower quality of earnings should then be reflected by the stock price of firm according to value relevance theorem. Hence, instead of testing the direct effect of corporate governance on the firm’s market value, it is important to understand the causes of the lower quality of accounting earnings. This thesis contributes to the literature by increasing knowledge about the extent of the earnings management – measured as the extent of discretionary accruals in total disclosed earnings - and its determinants across the Transitional European countries. The thesis comprises of three essays of empirical analysis of which first two utilize the data of Russian listed firms whereas the third essay uses data from 10 European economies. More specifically, the first essay adds to existing research connecting earnings management to corporate governance. It testifies the impact of the Russian corporate governance reforms of 2002 on the quality of disclosed earnings in all publicly listed firms. This essay provides empirical evidence of the fact that the desired impact of reforms is not fully substantiated in Russia without proper enforcement. Instead, firm-level factors such as long-term capital investments and compliance with International financial reporting standards (IFRS) determine the quality of the earnings. The result presented in the essay support the notion proposed by Leuz et al. (2003) that the reforms aimed to bring transparency do not correspond to desired results in economies where investor protection is lower and legal enforcement is weak. The second essay focuses on the relationship between the internal-control mechanism such as the types and levels of ownership and the quality of disclosed earnings in Russia. The empirical analysis shows that the controlling shareholders in Russia use their powers to manipulate the reported performance in order to get private benefits of control. Comparatively, firms owned by the State have significantly better quality of disclosed earnings than other controllers such as oligarchs and foreign corporations. Interestingly, market performance of firms controlled by either State or oligarchs is better than widely held firms. The third essay provides useful evidence on the fact that both ownership structures and economic characteristics are important factors in determining the quality of disclosed earnings in three groups of countries in Europe. Evidence suggests that ownership structure is a more important determinant in developed and transparent countries, while economic determinants are important determinants in developing and transitional countries.
  • Westman, Hanna (Svenska handelshögskolan, 2009-07-21)
    Banks are important as they have a central role in the financial system, where funds are channelled either through financial intermediaries, such as banks, or through financial markets, hence promoting growth in any economy. Recently, we have been reminded of the drawbacks of the central role of banks. The current financial crisis, which started out as a sub-prime mortgage crisis in the US, has become a global financial crisis with substantial impact on the real economy in many countries. Some of the roots to the current financial crisis can be sought in the changing role of banks and in bank corporate governance. Moreover, the substantial revitalising measures taken have been justified by the central role of banks. Not only are banks important, they are also very special. The fact that banks are regulated in conjunction with greater opacity, make bank corporate governance different from corporate governance in non-bank companies. Surprisingly little is, however, known about bank corporate governance, in particularly, in a European setting. Hence, the objective of this doctoral thesis is to provide new insights in this research area by examining banks from 37 different European countries. Each of the three essays included in the doctoral thesis examines a particular aspect of bank corporate governance. In the first essay the interaction between the regulatory environment a bank operates in and its ownership structure is explored. Indicators of the severity of the moral hazard problem induced by the deposit insurance system and implicit too-big-to-fail government guarantee, particular features of deposit insurance systems as well as legal protection of shareholders, legal origin of a country and level of integration to the European community are used in the analysis. The empirical findings confirm previous findings on the link between legal protection of shareholders and ownership structure. Moreover, they show that differences in deposit insurance system features can explain some of the differences in ownership structure across European banks. In the second essay the impact of management and board ownership on the profitability of banks with different strategy is examined. The empirical findings suggest that the efficiency of these two particular corporate governance mechanisms varies with the characteristics of the agency problem faced by the bank. More specifically, management ownership is important in opaque non-traditional banks, whereas board ownership is important in traditional banks, where deposit insurance reduces the monitoring incentives of outsiders. The higher profitability does, however, go together with higher risk. In the third essay the profitability and risk of commercial, savings and cooperative banks are compared. The empirical findings suggest that distinct operational and ownership characteristics rather than only the mere fact that a bank is a commercial, savings or cooperative bank explain the profitability and risk differences. The main insight from the three essays is that a number of different aspects should be addressed simultaneously in order to give the complexity of bank corporate governance justice.
  • Nyberg, Peter (Svenska handelshögskolan, 2009-06-02)
    Perhaps the most fundamental prediction of financial theory is that the expected returns on financial assets are determined by the amount of risk contained in their payoffs. Assets with a riskier payoff pattern should provide higher expected returns than assets that are otherwise similar but provide payoffs that contain less risk. Financial theory also predicts that not all types of risks should be compensated with higher expected returns. It is well-known that the asset-specific risk can be diversified away, whereas the systematic component of risk that affects all assets remains even in large portfolios. Thus, the asset-specific risk that the investor can easily get rid of by diversification should not lead to higher expected returns, and only the shared movement of individual asset returns – the sensitivity of these assets to a set of systematic risk factors – should matter for asset pricing. It is within this framework that this thesis is situated. The first essay proposes a new systematic risk factor, hypothesized to be correlated with changes in investor risk aversion, which manages to explain a large fraction of the return variation in the cross-section of stock returns. The second and third essays investigate the pricing of asset-specific risk, uncorrelated with commonly used risk factors, in the cross-section of stock returns. The three essays mentioned above use stock market data from the U.S. The fourth essay presents a new total return stock market index for the Finnish stock market beginning from the opening of the Helsinki Stock Exchange in 1912 and ending in 1969 when other total return indices become available. Because a total return stock market index for the period prior to 1970 has not been available before, academics and stock market participants have not known the historical return that stock market investors in Finland could have achieved on their investments. The new stock market index presented in essay 4 makes it possible, for the first time, to calculate the historical average return on the Finnish stock market and to conduct further studies that require long time-series of data.
  • Thurlin, Arto (Svenska handelshögskolan, 2009-05-25)
    Market microstructure is “the study of the trading mechanisms used for financial securities” (Hasbrouck (2007)). It seeks to understand the sources of value and reasons for trade, in a setting with different types of traders, and different private and public information sets. The actual mechanisms of trade are a continually changing object of study. These include continuous markets, auctions, limit order books, dealer markets, or combinations of these operating as a hybrid market. Microstructure also has to allow for the possibility of multiple prices. At any given time an investor may be faced with a multitude of different prices, depending on whether he or she is buying or selling, the quantity he or she wishes to trade, and the required speed for the trade. The price may also depend on the relationship that the trader has with potential counterparties. In this research, I touch upon all of the above issues. I do this by studying three specific areas, all of which have both practical and policy implications. First, I study the role of information in trading and pricing securities in markets with a heterogeneous population of traders, some of whom are informed and some not, and who trade for different private or public reasons. Second, I study the price discovery of stocks in a setting where they are simultaneously traded in more than one market. Third, I make a contribution to the ongoing discussion about market design, i.e. the question of which trading systems and ways of organizing trading are most efficient. A common characteristic throughout my thesis is the use of high frequency datasets, i.e. tick data. These datasets include all trades and quotes in a given security, rather than just the daily closing prices, as in traditional asset pricing literature. This thesis consists of four separate essays. In the first essay I study price discovery for European companies cross-listed in the United States. I also study explanatory variables for differences in price discovery. In my second essay I contribute to earlier research on two issues of broad interest in market microstructure: market transparency and informed trading. I examine the effects of a change to an anonymous market at the OMX Helsinki Stock Exchange. I broaden my focus slightly in the third essay, to include releases of macroeconomic data in the United States. I analyze the effect of these releases on European cross-listed stocks. The fourth and last essay examines the uses of standard methodologies of price discovery analysis in a novel way. Specifically, I study price discovery within one market, between local and foreign traders.
  • Hussain, Syed Mujahid (Svenska handelshögskolan, 2009-02-11)
    The increased availability of high frequency data sets have led to important new insights in understanding of financial markets. The use of high frequency data is interesting and persuasive, since it can reveal new information that cannot be seen in lower data aggregation. This dissertation explores some of the many important issues connected with the use, analysis and application of high frequency data. These include the effects of intraday seasonal, the behaviour of time varying volatility, the information content of various market data, and the issue of inter market linkages utilizing high frequency 5 minute observations from major European and the U.S stock indices, namely DAX30 of Germany, CAC40 of France, SMI of Switzerland, FTSE100 of the UK and SP500 of the U.S. The first essay in the dissertation shows that there are remarkable similarities in the intraday behaviour of conditional volatility across European equity markets. Moreover, the U.S macroeconomic news announcements have significant cross border effect on both, European equity returns and volatilities. The second essay reports substantial intraday return and volatility linkages across European stock indices of the UK and Germany. This relationship appears virtually unchanged by the presence or absence of the U.S stock market. However, the return correlation among the U.K and German markets rises significantly following the U.S stock market opening, which could largely be described as a contemporaneous effect. The third essay sheds light on market microstructure issues in which traders and market makers learn from watching market data, and it is this learning process that leads to price adjustments. This study concludes that trading volume plays an important role in explaining international return and volatility transmissions. The examination concerning asymmetry reveals that the impact of the positive volume changes is larger on foreign stock market volatility than the negative changes. The fourth and the final essay documents number of regularities in the pattern of intraday return volatility, trading volume and bid-ask spreads. This study also reports a contemporaneous and positive relationship between the intraday return volatility, bid ask spread and unexpected trading volume. These results verify the role of trading volume and bid ask quotes as proxies for information arrival in producing contemporaneous and subsequent intraday return volatility. Moreover, asymmetric effect of trading volume on conditional volatility is also confirmed. Overall, this dissertation explores the role of information in explaining the intraday return and volatility dynamics in international stock markets. The process through which the information is incorporated in stock prices is central to all information-based models. The intraday data facilitates the investigation that how information gets incorporated into security prices as a result of the trading behavior of informed and uninformed traders. Thus high frequency data appears critical in enhancing our understanding of intraday behavior of various stock markets’ variables as it has important implications for market participants, regulators and academic researchers.
  • Sandström, Annika (Svenska handelshögskolan, 2008-09-02)
    Financing trade between economic agents located in different countries is affected by many types of risks, resulting from incomplete information about the debtor, the problems of enforcing international contracts, or the prevalence of political and financial crises. Trade is important for economic development and the availability of trade finance is essential, especially for developing countries. Relatively few studies treat the topic of political risk, particularly in the context of international lending. This thesis explores new ground to identify links between political risk and international debt defaults. The core hypothesis of the study is that the default probability of debt increases with increasing political risk in the country of the borrower. The thesis consists of three essays that support the hypothesis from different angles of the credit evaluation process. The first essay takes the point of view of an international lender assessing the credit risk of a public borrower. The second investigates creditworthiness assessment of companies. The obtained results are substantiated in the third essay that deals with an extensive political risk survey among finance professionals in developing countries. The financial instruments of core interest are export credit guaranteed debt initiated between the Export Credit Agency of Finland and buyers in 145 countries between 1975 and 2006. Default events of the foreign credit counterparts are conditioned on country-specific macroeconomic variables, corporate-specific accounting information as well as political risk indicators from various international sources. Essay 1 examines debt issued to government controlled institutions and conditions public default events on traditional macroeconomic fundamentals, in addition to selected political and institutional risk factors. Confirming previous research, the study finds country indebtedness and the GDP growth rate to be significant indicators of public default. Further, it is shown that public defaults respond to various political risk factors. However, the impact of the risk varies between countries at different stages of economic development. Essay 2 proceeds by investigating political risk factors as conveivable drivers of corporate default and uses traditional accounting variables together with new political risk indicators in the credit evaluation of private debtors. The study finds links between corporate default and leverage, as well as between corporate default and the general investment climate and measeures of conflict in the debtor country. Essay 3 concludes the thesis by offering survey evidence on the impact of political risk on debt default, as perceived and experienced by 103 finance professionals in 38 developing countries. Taken together, the results of the thesis suggest that various forms of political risk are associated with international debt defaults and continue to pose great concerns for both international creditors and borrowers in developing countries. The study provides new insights on the importance of variable selection in country risk analysis, and shows how political risk is actually perceived and experienced in the riskier, often lower income countries of the global economy.
  • Rokkanen, Nikolas (Svenska handelshögskolan, 2008-06-09)
    The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.